FEATURE
The State of Association Governance When
McKinsey and Company conducted a survey of corporate
directors in 2002, a number of  corporate
governance problems were highlighted. In this article,
we will take a look at those findings in the context of
association governance to determine if similar
governance problems exist in associations.
1. Staff CEO is also Chair of the
Board
The corporate practice of having the
staff CEO also serve as Chair of the Board has been
identified as the source of many governance-related
problems in for-profit corporations. More and more
for-corporations will be moving away from the practice
(whether by law or voluntarily). For associations it is
not an issue, as few associations and other non-profit
organizations follow this practice.
2. Minimal evaluation of Board and
governance processes
There is very little evaluation of
corporate boards and their governance processes, and
this has been a major shortcoming. In the survey,
directors rated 45% of their colleagues as average to
low performers. Inadequate governance processes would
contribute to both the quality of board candidates
selected as well as their performance.
While some associations do conduct
governance-related assessments and evaluations, others
do not. The
quality of assessment that occurs is not always
sufficient, and needs to be improved if performance is
to improve. While the corporate focus is on external evaluation,
associations primarily undertake self-evaluation – of
the board, of themselves, of their meetings. While
self-evaluation is a definite step in the right
direction, associations should have some external
evaluation done periodically.
3. Insufficient turnover of board
members
Another significant problem identified
with corporate boards is the lack of turnover on the
board. Some
associations have this problem as well, although not to
the same degree. Many non-profit organizations avoid
this issue completely through such measures as term
limits. Some non-profits may even have too much turnover, and
lose some board knowledge and corporate memory as a
result. It is critically important to enshrine reasonable turnover
provisions in bylaws, and to have strategies to recruit
and retain board members.
4. Conflicts of Interest & Lack
of Independence
Many corporate boards have too many
insiders…such as executives of the company or related
parties. This
leads to a greater potential for director Conflicts of
Interest, and what makes this worse, is that 1/3 of the
directors surveyed indicated that their boards have
ineffective or no processes for dealing with conflicts
of interest.
Some association CEOs are still too
involved in selecting board members, and this can create
similar insider-related problems. In addition, association
boards must also address a wide range of other conflict
of interest issues. Some have made progress, but many
have not. All associations and non-profits should have a
clear conflict of interest policy.
5. Inadequate knowledge about, and
focus on, potential risks the organization faces
Corporate directors are focusing more
attention on the risks faced by their organizations,
however any gains in this area have been primarily
related to financial risks.
Many corporate
boards are still unaware of the non-financial risks
confronting their companies.
In our experience, non-profit directors
are not typically familiar with non-financial risks, and
in some cases, potential financial risks.
This is also true of some association staff CEOs.
Some have come from the industry or profession
represented, and do not have the senior management
experience to effectively deal with risk management.
The number and scope of financial losses
following 9/11 suggests that many associations must
focus more attention on identifying and managing
financial and non-financial risks.
6. Substantial dependence on, and
dissatisfaction with, external auditors
This issue should not be a surprise to
anyone. We recently published an article in The
Canadian Association e-zine about what an
audit really is…in our experience many non-profit
managers and directors could not accurately describe
what an external audit provides. And, with the conflicts
of interest involving the audit and consulting arms of
the large firms, the potential for problems was clearly
there.
Non-profit organizations are overly
dependent on these external advisors, and yet the
board’s oversight, in the form of audit committee, is
often non-existent or lacking.
7. Because of the difficulty in
evaluating performance of the organization and
management, directors and Boards are leaning to
micro-management as the alternative
A significant problem with evaluation of
the organization and its management is the absence of
defined objectives and criteria upon which to base the
evaluation.
The solution that corporate boards are
leaning to, and which has been an ongoing problem in
associations, is to respond to the evaluation difficulty
by getting more involved in the operation and
micro-managing. That is not a substitute for proper
evaluation of the CEO, and in fact can cause performance
to suffer because the management is hampered by the
interference.
8. While Boards want CEOs to be more
responsible and accountable, that increases succession
vulnerability
Corporate boards recognize that CEOs
have a huge role in the effectiveness of the board, and
as a result many want the CEO to be more responsible and
accountable in such areas as the accuracy of financial
reports.
On the flip side, 60% of the boards had
no clear succession plan for the CEO. They are more dependent on the CEO, but as was noted in the
survey, if the CEO ended up “under the wheels of a bus
this morning”, they had no idea who would replace him
or her.
Unfortunately, in our experience,
neither do non-profit organizations. Very few
associations plan for CEO succession.
9. Boards do not have sufficient
oversight of CEO and senior management
While corporate directors may be
concerned about oversight of the CEO and senior
management, that is less common in non-profit
associations.
Under the policy governance model, for
example, the board has only one employee….the
CEO. The
oversight of senior management is the responsibility of
the CEO.
This model attempts to improve the
oversight of the CEO by monitoring compliance with
defined executive limitations and progress in achieving
the defined goals…which are referred to as ends
statements in the policy governance model.
10. Complexity of issues means that
Boards don’t know if goals are being met
If you cannot describe where you want to
go, and how to tell when you get there, how can you
determine if goals are met. Unfortunately, many
associations also have this challenge.
The verdict -- associations and
non-profits may have their governance concerns, but with
respect to these particular issues,
for-profit public corporations have more significant
challenges.
Wayne Amundson, president of Association Xpertise Inc. can be reached
at (403) 374-1822 (or admin@axi.ca). Wayne is a Certified Management Accountant and a Certified
Association Executive.
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