5Qs for Every Corporate Professional: CimplyFive’s Five Qs to Separate Governance from Management

Separating governance and management is essential for effective and efficient functioning of companies. While the Board of Directors are responsible for Governance, the CXO leadership team is responsible for management. Where Executive Directors are members of both the Board and the CXO leadership or where non-executive directors are or were CXO leaders there could be a blurring of roles. However, clarity between the two roles is vital in fixing accountability that ensures appropriate rewards are provided while at the same time highlighting best practices that can be emulated.Where distinction between Governance and Management is blurred and the roles get mixed up, it is an ideal recipe for disaster. Given the sever implication, we believe these five questions could help the readers separate Governance from Management thereby contributing to better corporate governance and performance.

  1. How does the role of Governance and Management differ in Goal Setting?

Goal setting has the inherent element of selecting the risk profile for the operations. Representing the shareholders who provide risk capital, the board of directors have the primary task of goal setting considering shareholders risk appetite, environment conditions, capability of the management team and the resources available. The management on the other hand, has the role of identifying the execution plan to realise the goals set and where required to interact with the Board to re-calibrate the defined goals. Nevertheless, the ultimate responsibility for goal setting remains that of the Board.

  1. How does the role of Governance and Management differ in realising performance?

The role of governance is primarily advisory and like that of a Coach, while the full credit for successful performance goes to the management team, who like players are on the field and have full discretion to take any decision within their delegated authority as they think appropriate without any restraint. Except in very isolated cases of crisis or scandals like that of Satyam episode, the Board remains in the background and lets the management run the company. Only in these exceptions, for a limited period, the board plays the dual role of both the governance and management and steps back into their traditional role once the crisis is resolved.

  1. How does the role of Governance and Management differ in enhancing performance?

As most of us know, back-seat driving is quite problematic and can result in accidents. Likewise, the role of the board is that of an interest passenger, who wants to ensure that they reach the goal, safely and in time. To ensure this the board should share its guidance and instructions to the management team that is driving the corporate vehicle without disrupting them when they are engaged in driving. Where the management team does not perform to the expectation of the board in realising the set goals, the board has the right to change the leadership but at no point should co-drive or take charge and drive the vehicle to realise the goal, as it would dilute accountability when the results are not in line with the expectations.

  1. How does the role of Governance and Management differ in making appointments?

Regarding personnel appointment, the role of governance is to pick the leadership team and where required the second level that may succeed the leadership team in the medium term. At the operating levels it is the management that has the full autonomy to make all appointments, without any interference from the governance leadership. This ensure that the management is solely responsible for execution and this accountability is not diluted in anyway thereby retaining their total accountability for realising the goals.

  1. How does the role of Governance and Management differ in ensuring Compliance?

Like in a cricket match, where the role of on-field umpire and the match referee is clearly demarked, in the corporate world too, the role of management is akin to on-field umpire and the directors are the match referee. Despite watching the match proceedings, match referees do not act unless an issue is placed before them for their decision. Likewise on the compliance front, the role of Directors like a match referee is not to run on to the field or act on their own, but to wait for reports from the on-field umpires and act decisively on it. The on-field umpires on their part, need to highlight all the non-compliances in their match report without any bias to the match referee and they can also share their opinion on what needs to be done. This differentiation is essential for fixing accountability for performance as the Directors as custodian of governance need to have a sense of detachment.

In short, other than while setting the goal or appointing the leadership team or acting decisively on governance issues brought to its notice, the role of the board is reactive and effective governance mainly involves providing the confidence and assurance to the management leadership to lead while the board remains in, the background, except when compelled to step up during crisis or scandals.

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