Demystifying Policy Governance

Policy Type: Governance Process

Policy Title: Linkage with Owners

The board governs [the cooperative] in the interests of its ownership-[the cooperative] members. The board is committed to actively linking with its ownership to provide for accountability and to inform its policies.

Within reasonable cost constraints, the board's linkage will include, but is not limited to:

1. Seeking owners' values on what [the cooperative] should achieve and the limitations within which achievement should be accomplished.
2. Informing owners' about the board's governance work and educating owners on their role as owners.
3. Accounting to the owners about [the cooperative's] accomplishment of Ends within acceptable means.

In recent years, Policy Governance has gained quite a bit of recognition among retail food cooperatives across the United States. In June in Lexington, Kentucky I was thrilled to see so many cooperative board members attending the annual CCMA conference. Their commitment to govern their cooperatives effectively and to associate with and be inspired by others is an exciting accomplishment for the cooperative sector. In addition, it was good to see so many board members who not only knew about Policy Governance but also were eager to learn, share, and expand on their ability to work with it.

Within the sector, Policy Governance has become the thing for boards. If you know anything about it, you likely also have some opinion about it! Policy Governance has its advocates, critics, and skeptics. I've often wondered why Policy Governance has some people passionate, others struggling or wanting to fix it, and still others just not wanting to bother with it. Is it just difficult and obscure-or is it a brilliantly conceived governing system that's misunderstood? (See also "Practicing Policy Governance," in CG #106, May-June 2003 -ed.)

This article is about beginning to demystify Policy Governance-separating perception from reality and uncovering real pitfalls. This article is not intended to cover every aspect of Policy Governance. However, it is intended to provide an overall perspective and shine a light on some aspects that cause confusion. My intent is that even the most passionate advocate of this governing system will gain added insight and perspective and that even the most passionate skeptic will find a place to be with it!

A tool for owner accountability

To begin, Policy Governance is fundamentally a tool, designed to satisfy a specific purpose. When you view a tool with regard to the work it was designed to facilitate, the tool makes sense. With regard to screwing or unscrewing a cross-slotted screw, a Phillips head screwdriver makes perfect sense-in fact, nothing other than this kind of screwdriver will work! And although occasionally tools are used for other than their designed purpose (I'll use a screwdriver, even a Phillips head screwdriver, to wedge open a partially stuck drawer), a screwdriver's best use is screwing and unscrewing screws! Said another way, a tool makes best sense if you are clear about the work it does.

Returning to the tool of Policy Governance, what is the purpose that it was designed to facilitate? Policy Governance was specifically designed to ensure that an organization (in our case, a cooperative) produces value for its owners, consistent with owner interest. It was designed to satisfy an organization's accountability to its owners. The board of directors is the owners' agent, entrusted with seeing that the organization has produced specified value within ethical and prudent guidelines. Thus the board's focus is to think and operate in a manner consistent with what it is to own the organization-distinct from thinking and operating in ways that are consistent with what it takes to effectively run the organization. This is a subtle distinction in thinking yet one that produces a significant shift in the board's ability to be accountable to the owners. Owner accountability is a critical factor in cooperative success. Being accountable to owners is solely the board's responsibility. Policy Governance is fundamentally a tool designed to focus the board on its accountability to owners, distinguishing that work from other work it could be doing for the cooperative.

Thus, when Policy Governance is seen from the perspective of satisfying owner accountability, understanding and using its precepts makes sense. When a board thinks and operates from the standpoint of owning the cooperative, points of confusion can easily be clarified. Boards gain insights and an ability to create ways of working with Policy Governance. The context is decisive! Currently, Policy Governance is known for empowering management and for ensuring performance. It allows the board to focus on and define the future while being assured current operations are going well. It clarifies board and management responsibilities, allowing the cooperative to meet board-stated priorities. Policy Governance has shown itself to be the tool for strengthening the board/general manager relationship. Enhancing the working relationship between the board and general manager has reaped positive benefits for cooperatives, especially those that have dealt with internal conflict or confusion about the roles of board and management.

However, when viewed primarily from this purpose, other important aspects such as owner linkage and defining parameters of executive activity (Executive Limitation policies) can be overlooked. Let's explore these areas of possible confusion through the lens of owner accountability.

Owner linkage

As a whole, communicating with a large constituency is a daunting task, and it often is put off or not adequately addressed. It's an area that boards say they need to work on but lack clarity around how to accomplish. How do boards link with owners?

Certainly, finding out what others have done is useful. However, if a board begins by being clear about what it is out to accomplish in its role as the owners' agent, it can resolve a lot of questions on its own. This first requires distinguishing "linkage."

"Owner linkage" is a specific concept in Policy Governance identifying the connection between the board and the group to whom the board is accountable, the owners. From the view of communicating with someone you are accountable to, what would you need from them and what would they need from you? You'd likely need to know what they expected. They would want to know that their expectations were met.

Now factor in that the group you are communicating with, the cooperative owners, may not know or agree on what you are reporting. You'd then want to educate them on 1) your role, 2) what you need from them, and 3) what and when they can expect to hear back from you. This then encompasses owner linkage, the board's relationship with owners, and satisfies the board's owner accountability. (See attached sample policy.) From there, the board can create how to satisfy its link with its owners. The primary focus of owner linkage is the communication between the owners and the board as the owners' agent. This linkage is distinct from other relations the cooperative may have with owners, such as their benefits, educating them on the cooperative and cooperative values, increasing sales to owners, membership drives, etc. Now, the board may be interested in getting owner input via owner linkage activities about the underlying values that will shape these other relations. This owner input would then inform board discussion in crafting policy to empower those other relations to owners.

The important point here is that by viewing its relationship to the owners from the perspective of owner accountability, the board clearly knows what relationship will satisfy its accountability to owners, distinct from any other relationship with them.

Executive limitations

Another potentially confusing area in Policy Governance is developing Executive Limitation policies.

Executive Limitation policies define those conditions that are not acceptable amidst all that could be done in the course of cooperative business to produce value (Ends). These policies are generally seen as the constraints or boundaries on operations in the pursuit of Ends.

(In Policy Governance, constraints are stated negatively in policy. Basically, telling someone what to avoid is more empowering than telling them what to do. By stating the conditions to avoid, what should not occur, all other conditions are pre-approved as acceptable.) However, in crafting Executive Limitations policy, boards will often unwittingly craft policies that stray from conditions to be avoided and instead state something that needs to be met. For example: "The general manager shall not fail to gain staff input on personnel policies."

A pitfall occurs when a board focuses on making the general manager's actions effective: "Here's what you shall not fail to do in this situation." Look closely and you will see in such a statement a particular directive disguised in negative language. The message sent is, "You are empowered to make all further decisions, but in this case here's what you should do." It's always tempting to tell someone what to do-we love to instruct!

The pitfall in crafting Executive Limitation policies in this way is that it blurs the line of accountability between the board and the general manager. The board risks limiting management's choices unnecessarily and perhaps limits them in a way that could jeopardize the results to be achieved. Another pitfall in this situation is that by stating points of view rather than stating the conditions to avoid, the board is essentially saying that the point of view will be successful and contribute to the result. The board becomes responsible for that part of the outcome, drawing the board into operational choices, rather than staying focused on its role of assuring that value is produced within ethical and prudent guidelines.

As the owners' agent, the board is concerned with ensuring that the Ends are accomplished within acceptable guidelines. Since the owners, thus the board, are at arm's length from operational decisions, they would want to allow management the freedom to have every opportunity to find successful ways to achieve the Ends. From an owner's perspective, the only reason to interfere with the choices that management makes is to set lines of acceptability. If the Ends are produced, whatever was done must have worked as long as all actions stayed within these lines of acceptability. The board does not need to control for effectiveness.

However, the board would want to control any activity, decision, situation, circumstance, method, technology, or practice that the board deems not ethical or prudent, even if any of these would produce a successful result. That is, the ends cannot be justified by any means. Executive Limitations are solely the conditions to be avoided to satisfy prudence and ethics. (An ethic is a principle of right or good conduct. Prudence is careful management, exercising good judgment. It implies caution and wisdom with the capacity for judging the probable results of one's actions in advance.)

Approaching Executive Limitation policies from the owners' perspective can challenge a board's strong desire to support and work with the general manager, to help the cooperative be successful. Board members, as committed on-site members with direct connection with the broader ownership, can always be used by the general manager as a resource to talk, partner, and provide support on any aspect of cooperative business. However, the appropriate place for that is separate and apart from the board's job in satisfying owner accountability.

Executive Limitation policies are not the way to get the general manager to do something in a particular way. Rather, the question becomes:

What is not acceptable, even if it works?

If the board finds it cannot state what it does not want to happen, then leave the matter alone. This signals that the issue is a point of view rather than a legitimate ethic or statement of prudence. However, usually underlying a point of view is an ethic or unacceptable condition. When a point of view arises, explore what's underlying the board wanting that preference. What condition is it looking to avoid? Then consider that in policy.

Afterword

Again, this article just scratches the surface on aspects of Policy Governance. Yet as board members view their job and Policy Governance from the perspective of owning versus doing, they can begin to clarify areas that in the past may have resulted in confusion.

In closing, I offer some additional thoughts on owner accountability and effective boards in the cooperative sector.

We may not know what would be possible if cooperative boards were truly owner accountable. Generally in our experience, other organizations, businesses, and institutions are not as keenly attuned to that. If owner accountability is to be distinguished and put into effective practice anywhere, the cooperative sector is a fertile arena.

With Policy Governance, owners have the opportunity to have a say on fundamental values common to the whole. They can be confident that their agent, the board, is fully serving them-synthesizing their diverse views, defining the common elements, allowing the broadest opportunity for success, and then ensuring that success happens. People in our communities are left with a new experience of democracy.

If cooperative boards mastered the tool for owner accountability, Policy Governance, such a future could be realized. What else could be possible? Imagine the impact across sectors and in all aspects of our lives.