The importance of firm governance and how it can be improved
This issue of DesignIntelligence has a focus on organizational leadership and the leadership in the field of sustainable design. In numerous cases we are hearing from firms and organizations that the pace of change and related stress on leadership is putting pressure on traditional partnership structures, including governance. Firms are wrestling with the best ways of organizing themselves and on models that instill excellence in governance.
There are firms who are finding enjoyment during this period of change in part because they are always stretching to be better, always trying to re-invent themselves to get to the next levels of achievement. They know that it is impossible to ever get to the finish line. They know that they can always do better. One of the areas of their focus today is on their firm governance and how it can be improved.
According to our recent surveys and interviews, professional practice governing boards are not infrequently underperforming their own expectations. Some believe that they are not keeping up with current trends, shifts, and technologies and that this makes it difficult to develop timely policies that embrace evolution and change. And there is another problem that is more structural. Some firms lack successful experience in the governance of the organization and are repeating mistakes other firms solved years ago.
Governance design is a priority now because firms are going through generational changes and experiencing not only linear innovation — that which leaders can more easily plan for — but also significant non-linear and unexpected changes. For this reason, governing bodies are being called upon to make sense of it all and to do so with resiliency. Let’s examine a real life situation in governance design.
A most impressive and still youthful managing partner/CEO in her late 40s recently called to ask about how to get the most value from their governing board. Her questions included: “What is the best size for our firm? How often should we meet? What typically goes on the agenda? What is the right number of owners; how do we determine this? What about outside non-executive directors? How do we get younger partners more experience with governance? How do we best use the talents of the partners and how do we achieve clarity on delegation of responsibility? How many committees should we have?”
Together we developed a lean consulting agenda that would roll out over about three months and would require two on-site visits and coaching of the partnership toward successful resolution. This firm decided that one of their priorities of 2015 would be to develop a plan for governance that suited their situation. The following decisions were made after weighing advantages and disadvantages for each of her concerns and to further establish a governance model designed specifically for this firm.
They set the size of their board at seven members. Initially, board members have staggered three-year (renewable) terms. The CEO/managing partner (who owns 15 percent of the firm), is a voting member of the board. She agreed to a renewable term of four years. If she wishes to renew the term, she will inform the board one year in advance. The new board now consists of five veterans and two younger shareholders. They were selected/elected at the annual meeting last February and are regarded as future leaders. There are no outside directors yet, but there is interest in bringing in one (or possibly two) policy advisory public director(s). They have discussed that one could be the dean of a local business school, and if there is another they have their eye on a bank president. In this instance they decided that the non-executive board member would receive an honorarium of $20,000 per year.
In the new model there are only two committees. This ensures that there is no committee-itis. The first is the Performance and Compensation Committee, with three senior members. This is the group that ensures that there is a quality evaluation process of the CEO and partners. This committee also recommends salary and bonus amounts with total cash compensation and incentive analysis to the board on an annual basis. This firm has decided to use a modified LEAP® system as well as a 360 degree system that is nonbureaucratic. All evaluations of the partners and the next level associate partners will take place over approximately three weeks in December. Partners are evaluated using a seven zone process. It is both efficient and non-political, in part thanks to the independent, third party record keeper.
The second committee of the firm’s board is the audit committee. In this firm, audits are conducted every other year. Both of these committees have a chairman with a staggered three-year term.
The partners have decided to invite all of the firm’s staff to their annual meeting to experience the election of partners and to engage in a conversation about the action plan for the next three years. A state of the firm address is of foremost importance and is given by the managing partner/CEO.
They have decided on a system of updating their “living strategic plan” each year and they delegate all process oversight to the managing partner. Strategic planning is not done by a committee of the board, but the plan does get adopted by the board. They have defined what the board does compared to what management does. Delegation and controls are understood even though they are finding it hard to stick to their own rules. Nonetheless, steady and consistent progress is being made.
This firm of 160 now has clarity about both the role of the board and of management, and tend to manage themselves pretty well on these distinctions/definitions. They often stress that it is the managing partner/CEO who is charged with running the practice day-to-day and not the board. The practice unit heads (market segments) along with the managing partner form the executive management team, which is not to be confused with the governing board. The designated heads of the practice areas are selected by the managing partner. They are selected primarily because of their evolving managerial and leadership skills, not tenure. They understand that a firm cannot be successful without good management. Now the management team is accountable to the managing partner, not to any other fuzzy definition or group that might unintentionally foster mediocrity or lack of accountability. Their hope is to be an eternally successful professional practice and to do so in part because they have a solid governing board that has the confidence of the firm’s partners, senior staff, and employees.
We have come to understand that it can be energizing to put in place an organizational design that supports both the future vision and business model. Moreover, we have learned that governance design makes a hugedifference in the ongoing success and growth of the organization.
Thus, governance is an essential characteristic of today’s best practices. Governance requires informed and visionary leadership. Good governance results in the formulation of policies that nurture and protect the organization and to hold leadership accountable for establishing growth, prosperity, and relevance.
Governance doesn’t just happen. It can and should be designed. Governance is a constitution forming process at the heart of the DNA of both the C-suite leadership and the owners/ partners of the organization. Good governance has characteristics that fosters clarity of policies, delegation of responsibility, control and retention of core values, fostering a culture of collaborative thinking, and putting n place clarity of priorities that have a fighting chance at creating and sustaining human resource self-actualization.
When good governance is absent, processes misfire and cause unnecessary confusion and waste of time. Creative opportunities can be lost.
Sometimes boards are called partnership board, corporate board, board of directors or board of trustees, etc. The governing board is at the top of the ladder of responsibility. It has accountability for the success of the total organization and it is the entity that has decision responsibility for the selection of the firm’s managing partner/CEO. In some firms this is ratified by the partners depending on structure and culture. There are exceptions of course such as when a firm or organization is owned not by partners but a single individual, a family, or a smaller group of investors. But even in these cases a board of directors (or advisors) should be established that captures the best inside and outside thinking to the quality of policies that will lead to future success.
Some firms report that their governing process is not working well. There are boards who tell us that they are legally, morally, and ethically not fully doing what they believe they are supposed to do. Some boards too often spend their time on the trivial and unimportant or they confuse management and governance. This is why there is a shift going on in many organizations to achieve excellence in governance as a critical piece of being a best practice.
Taken together there are seven focus areas that seem to be most important to successful governing:
1. Establishing the organizational core values
2. Setting policies that enable an outcomedriven performance culture
3. Establishing vision with accompanying strategy adoption
4. Forcing a future focused culture
5. Selecting inspired leadership along with clarity of delegation
6. Evaluating the performance of the executive leadership and setting incentives that encourage long term performance
7. Possessing risk intelligence along with smart action policies that create ongoing relevance
The architecture, engineering, and design professions are changing rapidly and this includes how they are being governed, not just managed. It’s a challenging but fun time to be a leader in a professional practice. Best practice firms see how the future is brimming with opportunity. Governance too can be highly satisfying.
Today, many firms are governed well and have inspired leadership. They are developing a coherent, positive point of view. As we say from time to time here at DesignIntelligence, no professional practice outperforms their own aspirations. Increasingly, firms are developing points of view that are expansive and motivating. In this regard, governance can be an enabling power. This power can extinguish inertia. That is to say, they co-opt and neutralize the anti-change forces around them.
It is essential to keep governance lean, fresh and yet still with mature and strategic continuity. Best practice governance isn’t a matter of rocket science; it is simply a matter of knowledge, resolve and follow-through.
James P. Cramer is the chairman and co-founder of the Design Futures Council. He is chairman of the Greenway Group and author of three books on professional practice