GOOD GOVERNANCE

On 1st January 1901, the six separate British self-governing colonies of New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia united to form the Federation of Australia. At that time, it made sense for new associations to form under a similarly federated structure – national organisations with individually incorporated state entities, each with their own separate duplicated administrative systems. Today, no national association would choose to establish under this inefficient operating structure, so why do some still hold onto this cumbersome, resource-sapping federated model?

Separate boards, CEOs and administrative functions create a duplicated and inefficient bureaucratic burden – wasting critical resources. Each separate silo dilutes the focus away from one clear, united mission and vision by prioritising state agendas over national requirements – making it harder to achieve key objectives. Interstate rivalries reduce the ability to respond with speed and agility to national market needs – enabling competitors to steal market share and influence. Conflicting objectives create internal friction, politics and fiefdoms keeping the association inwardly focused – reducing its ability to focus externally to serve members and markets. All of this adds an additional burden which is a big disadvantage in today’s fast and efficient network economy.

A contemporary unitary structure with associations governed as a single national entity can resolve most of these challenges. Centralising six or more state-based boards, CEOs and management functions such as finance, marketing, member services, IT, HR and business development into one lean national structure releases significant resources. It facilitates a single national governing body to oversee good governance, and enables a cohesive strategy towards mission and vision with a national value proposition that makes it easier to support staff, engage members, attract partners and sponsors, and advocate on national issues. It allows precious resources to be directed away from duplicated board and management functions into member benefits and into supporting state-based staff to perform their jobs more effectively. It overrides local rivalries to reduce internal politicking and focuses the association on better delivering its external objectives, tackling disruption and offsetting competitive forces. The case studies in this chapter outline some best practice strategies in going about this major structural change, and show that is possible, practical and positive.

It is a necessary transformation. Like a caterpillar’s journey in growing into a butterfly. The same transformation awaits federated association structures.

There is no one board size that fits all. However, there is increasing consensus that the optimum skills matrix can be achieved with a surprisingly small number of suitably qualified individuals. Average association board sizes are on the decrease and currently sit around 10 to 12 members, depending on the source of different data providers. Anecdotally, there is discussion in the sector about eight members being ideal. Another informal mantra puts the optimum board size at ‘Seven, plus or minus two’.

The key takeaway here is that the days of association boards running to 16 or more individuals are well and truly redundant. Historically, it may have made sense to have large boards when infrastructure or communications limitations made it difficult to form a quorum, or where multiple numbers of generalists compensated for a lack of highly skilled experts to manage risk and performance. Neither reason holds true today. Board meetings can be convened quickly, efficiently or even virtually. Greater specialist knowledge has reduced the need for a large number of individuals. Today, the optimum size is the minimum number of individuals to deliver the required skills matrix for the board to perform effectively.

Board sizes greater than the optimum number add an unnecessary administrative burden, avoidable financial costs and reduce the efficacy of decision making. Why have 20 directors if ten can do the job? The reality is that if two board directors have the same skills and perspective, one of them is redundant. One highly skilled director bringing the expertise previously shared among three other individuals can effectively replace all three. Associations are increasingly questioning the time, resources and financial costs required to service a large board. Preparing and distributing board papers, flights, accommodation and entertainment all come at a cost. In the same way that ‘too many cooks spoil the broth’ too many directors can make it harder for association boards to perform their roles effectively. The optimum number of individuals for efficacy is relatively small.

Members want to see efficient boards too. They hate to see member funds wasted, and an oversized board or large bureaucracy tells them that their association is inefficient. Their expectations are for associations to transform into best practice, contemporary structures that invest a greater share of funds into external member benefits, rather than on internal administration.

The formation of new committees is an alternative for associations to reduce large board sizes. These working groups can provide valuable advice in any number of specialist segments such as geographical areas, member groupings, product/service divisions or business functions. Voluntary committees eliminate the administrative burden and costs, but maintain the loyalty and contribution of past directors in an advisory role. They can be used as a conduit to provide feedback from members and to feed issues to the marketplace. They work exceptionally well in state-based formats, so long as they have a clear agenda to direct their activities. Committees can also assist formerly federated structures in their transition to a unitary model by providing past directors with an opportunity to continue making a valid contribution.

Associations no longer need to carry excess directors. Moving towards an optimum board size delivers cost savings, improves efficacy and conveys member expectations.

The majority of associations operating today inherited a certain board composition established sometime in the past. Some will have made changes or improvements to this over time. But very few will have created an optimum board composition based on pre-determined skillsets required for oversight of the organisation into the future. And yet, this is by far, the most effective way to ensure that the breadth and depth of board skills matches the needs of the association’s mission, vision and future strategy.

Numerous skills matrix templates are available, or a Google search away. There is no one matrix that fits all. The governance needs of a small association in a straightforward sector cannot be compared with the demands of a complex, multi-million dollar association in a highly competitive and fast changing environment. What they share in common is a need to identify the skillsets they require. For one, this may be a simple matrix of strategy, risk and compliance, financial and audit, and policy development skills. For another, it may be an exhaustive list of subject matter expertise such as marketing, law, mergers and acquisitions, government relations, workplace health and safety, IT, HR or more. It can also include behavioural competencies, industry exposure and strategic capabilities.

The next step is to decide on the skills required, and select which of these need to be represented on the board, and which can be managed elsewhere within the association. An assessment of the required skills against the current skills reveals the skills gaps in the board’s current composition. It enables a review of each of the current directors’ skills, and provides the basis for future board recruitment priorities. Knowing exactly what new skills the board needs makes the job of identifying relevant candidates much easier, and more strategically aligned with mission, vision and objectives. Attracting talent with different skills and perspectives encourages board diversity, which in turn sparks more robust debate through a diversity of ideas. This can increase board capability, and put appropriate pressure on all directors to perform.

Sometimes, this may mean associations need to look outside of their memberships for directors. Bringing in expert knowledge and mindsets from other sectors can provide both a fresh perspective and a competitive advantage. Potential directors need to be screened and interviewed with as much diligence as recruiting a new CEO. This includes a formal interview process based on clear written requirements, linking to the skills matrix gaps with particular attention to avoid any bias, such as service providers intending to use their positions to sell services, or individuals looking to use their directorship for networking or other purposes. The skills matrix enables a board to ensure the board composition is strictly aligned to the needs of the association.

Osteopathy Australia’s Chair led the charge for its board to move to a skills matrix, with a gradual, planned and communicative process that took two to three years to realise. ‘It’s surprising how quickly board culture can change for the better, when this happens’ says Osteopathy Australia CEO Antony Nicholas. Together, they mapped out a process to get skilled directors on the board from the start, and explained the rationale to members by explaining the benefits of what it means to them to have good governance within their association. They broke the process down into its constituent parts, and took small achievable steps regularly, rather than a sudden change. They engaged members directly, as well as through champions and webinars to explain the process and planned the timing carefully around General Meetings. They recognised that some directors might find the process threatening, and integrated outside directors one by one. They replaced the former state representative directors with new state committees to maintain continuity, and have a plan in place to ensure that successive boards are supportive. Antony’s key recommendations are to plan well, have the Chair lead and take achievable steps.

Beyond the skills matrix, the ultimate success of the board will be its leadership and chemistry through clearly defined roles.

It is a sense of unity and collaboration which distinguishes associations that thrive. The unity begins with the Chair-CEO relationship, and the chemistry between them is as critical as the clarity in roles and the separation of powers. The CEO is the only employee of the board, and all management and staff are the employees of the CEO. The Chair brings the board, and the CEO brings the management. Together, they drive the future agenda but it needs to be clear who the voice of the association is. It doesn’t matter who, so long as it is clear, just like all the other board roles.

• Chair or President – The title of Chair or President are often used interchangeably within Australian associations, and will be treated as one and the same for this book. The Chair ensures the board of directors fulfils its responsibilities for the governance and implementation of its policies and procedures. He or she is the main link between the board and the leadership team, and works in partnership with the CEO to achieve the association’s mission, vision and objectives. The separation of powers between the Chair and the CEO must be exactingly defined. So much of good governance comes down to clarity.
• Vice President – The Vice President serves a practical role in filling in for the Chair when required. The role can also be useful in succession planning, although care needs to be taken not to set this in stone either. The individual filling the role needs to demonstrate a capability for the Chair’s responsibilities. A long-serving Vice President is not necessarily the best choice as a future Chair, if he or she does not display the required attributes. The role of Chair is to be earned through merit, not through time.
• Secretary – The Secretary is an outdated board position, used historically to take minutes of meetings, and sometimes verbatim. This role does not need to be a director for it to function, and is best delegated to an administrative officer instead. This frees up a board position for more appropriately skilled directors. Companies limited by guarantee require a Company Secretary, but that is a different role altogether and one that can also be performed by the CEO or another qualified executive.
• Treasurer – The Treasurer is another outdated role. Ostensibly responsible for oversight of financial management and reporting, the danger with this position is that the rest of the board can come to rely on the Treasurer’s say so, rather than on their own diligence. Every board director is liable for the financial health of their association, and this responsibility cannot be abrogated. For this reason, many associations have already moved to replace the role with audit and risk committees.
• Past President – Immediate Past Presidents or former Chairs appointed to the board as friendly wise old counsel to support the new team carry potential risks. All directors are liable, so there is no role for ‘wise counsel’ on a board. Advisory roles outside of the governance structure are more appropriate to harness historical experience and advice.
• Board Directors – Individual directors share overall responsibility for the association, but only maintain powers which have been given to them by the board and can report on their particular areas of responsibility. They do not need board-specific titles to fulfil their roles which are ideally based on the appropriate skills matrix. However, the title director correctly conveys more leadership and responsibility than the passive alternative title of board member.

The overall role of an association board is to supervise both compliance and performance. Some boards may see themselves as more aligned with statutory boards, prioritising compliance over performance. The reality is that performance is equally important. Just because an association may be defined as a nonprofit entity does not mean it should not be financially successful. Thorough board and director evaluation across all areas of responsibility can help manage the effective contribution of the directors to the success of the association. While the board retains accountability for the association developing effective strategies to achieve mission, vision and objectives, it must delegate the management and implementation of this process to the CEO. Its role is to support and monitor the CEO’s progress towards these objectives.

There is no single rule that states how long directors should sit on a board. The guiding principles of board tenure are framed around value delivery and perceptions, rather than a specific length of time.

Firstly, it is a director’s role to add value. So long as he or she is delivering value by making a worthwhile contribution, the actual length of tenure is less relevant. However, this raises another question of how long can a director reasonably give their best? How likely is it that he or she has already done this in (say) their first 10 years?

Secondly, when directors sit too long, it can look bad. Having one long-standing director of (say) 15 years tenure may not be cause for concern, but if the entire board is ageing, it creates problems with succession planning and their ability to engage younger prospects. Too many long-timers restrict the board’s ability to open up to diversity and can make it appear unattractive to fresh, young contemporary thinkers.

Boards can become stagnant and complacent. They need regular turnover to inject new thinking and ideas and to avoid groupthink, where a desire for harmony or conformity can result in irrational decision making.

Ageing boards increase the dangers of a dominant Chair overriding the checks and balances and transforming an association into a personal fiefdom. Directors need to be able to act against the Chair in these instances, and this becomes less likely where there are long established relationships.

Concurrently, ageing boards tend to accumulate the burden of a large bureaucracy that can increasingly weigh down an association. Groupthink and out-dated bureaucratic processes are anathema to millennials, and make not only boards but associations themselves unattractive to modern thinkers and members. Associations with excessively long-tenure boards risk missing out on attracting the talent they need for the future.

One option can be to move veterans into new roles such as patrons or advisors, or into committees and working groups to harness their long-standing experience – enabling boards to create an effective balance between experience and fresh thinking.

How can striving boards move from governance as compliance, to fully embrace the performance benefits of good governance?

One lever is effective risk management, which is a link between compliance and performance. Risk is inherent in every activity. Zero risk equals zero progress. If there is no risk tolerance, an association is paralysed and cannot progress.

Risk taking is becoming more important for boards in order to tackle the disruption of markets, to counter new competitors threatening traditional membership offerings and to deliver on heightened member expectations. These threats are in addition to the everyday vulnerability of associations to adverse impacts.

Boards need to learn how to assess risk and determine their risk tolerance. The risk spectrum covers options from risk averse, to minimalist, cautious, open or aggressive. Boards can determine how to manage risk through a strategic risk management framework that identifies and sets the risk appetite, even when risk combinations of adverse events occur concurrently. For example, a perfect storm of a membership decline at the same time as a cut in government funding and the arrival of a new competitor in the market. In today’s dynamically changing market, the reality of this actually happening is more than hypothetical, and boards need to be prepared. At times like this, a high risk strategy may be unavoidable, but it needs to be managed all the same.

Associations can end up simply spinning their wheels in uncertainty if boards have not identified how much risk they are prepared to take.

Governance is more than the board.

It needs the right CEO, and recruiting one requires the very tenets of good governance itself – a diligent process, strategic thinking and effective risk management. Ultimately, the performance of the association is at stake so the board’s choice of CEO is one of its most important decisions.

Nikki Beaumont, CEO at Beaumont Consulting offers some advice for boards.

• Plan Ahead – Accrue a budget for recruitment costs ahead of time, and link this to the notice period of the existing CEO. That way, cost pressures are alleviated and funds are available as soon as you need them. Ideally, plan for a handover period.
• Know What You Want – Be honest and upfront on what the challenges and expectations are. Be clear if you want the same skillsets as the previous CEO, or need something different. Evaluate this objectively against specific criteria.
• Take Your Time – Don’t rush, even if you feel pressure from staff or members. The cost of making a wrong appointment is high. Fast turnovers of CEOs can ignite negative member perceptions. If you’re hesitant, don’t make the appointment.
• Comprehensive Process – Reach beyond the membership by advertising in multiple channels such as AuSAE or CEO forums in addition to SEEK. Go out to existing networks and use referrals to establish an effective base of interested candidates.
• Search Expertise – Boards are often not trained to hire a CEO for an association. The need happens infrequently so the Chair or board selection committee may not have prior experience or best practice recruitment skillsets. Fill the gaps with search expertise.
• Commercial Skillsets – The nonprofit status does not mean an association shouldn’t make a surplus, and a CEO with commercial skillsets can relieve financial pressure. Value appropriate commercial expertise.
• Governance Training – Look for candidates who have completed the governance course at the Australian Institute of Company Directors or the Governance Institute.

Mark also outlines some of the most common errors boards can make.

• Sector Expertise – Boards that assume candidates must come from their sector limit the talent choice unnecessarily. For most associations and peak bodies, this is not essential. It is better to have a CEO who knows how to run an organisation, but it certainly helps if he or she has an interest in the sector.
• Cost Savings – The recruitment process may be cheaper to do internally, but the cost of getting it wrong is high. Business critical damage to member relationships, staff and the brand can be inflicted quickly.
• Skillsets First – Boards that assess the budget to see who they can find for the price may miss out on the critical skillsets they need. It is better to identify the required skills to lead the association and pay a bit more for an ideal candidate. If there are cost pressures, put in Key Performance Indicators or look for a commercially savvy CEO who can pay for himself or herself through revenue growth.
• Empower the CEO – Once appointed, manager expectations on both sides by setting clear roles and objectives and give the CEO authority to do the job. Let go of operational items, don’t micro-manage and keep the board focus on good governance.

‘Sometimes it helps to use third parties to recruit an engaged CEO,’ says Nikki. Agencies can also assist boards write effective ads and clear job descriptions, as well as advising on what’s worked before to avoid the common pitfalls.