Models of Corporate and Board Governance

Governance can be defined as the combination of policies, systems, structures and strategic and operational framework which a governing body puts in place to ensure that the leadership of the organization makes appropriate decisions, and takes appropriate actions, to deliver services in an effective and accountable manner. That definition carries a second clause which is easy to skip over and should not be: it includes the transparent and equitable stewardship of the resources that will sustain the organization and keep it relevant, both to the community in which it operates and to the people it serves.

When people talk about a model of governance, what they mean is an approach to combining those elements. Beyond the attention paid to processes, policies and structures, there are considerable differences between the kinds of governing body operating in the world, and those differences drive genuinely different applications of the same ideas. A publicly traded company's board, a hospital board, a municipal council, a professional association and a family enterprise's board are not variations on one template.

Five models are commonly identified: Traditional, Carver, Cortex, Consensus and Competency. Each has advocates, and advocates tend to argue for their own model to the exclusion of the others. That is the mistake. The models are not mutually exclusive. Each addresses an element of governance that a board needs working properly, and in practice most boards adopt some blend, weighted to the particular features of their organization and the composition of the board itself. None of them, on its own, amounts to a comprehensive prescription for the work.

1. The Traditional, or structural, model

This is the oldest of the five, created in the earliest corporate structuring of the eighteenth century and handed down through charitable and not-for-profit organizations and into government corporations. It is still the template most law firms reach for when drawing articles of incorporation, and legislatures follow the same approach when bringing a specific enterprise into existence.

Its foundation is the idea that the board is the legal ownership entity - in some senses more than that, the body corporate itself, a legal person in the eyes of the law. That holds whether the entity is a for-profit, a not-for-profit, a charitable corporation or a society. The structures have evolved considerably since their earliest forms, particularly to limit the liabilities of both corporation and directors, and they have evolved differently in different traditions: the Anglo-American model of accountability to widely held shareholders sits some distance from cross-ownership structures elsewhere, and both sit some distance from family-owned enterprises with minority partners.

The model's substance is that the structure of the board, the way it makes decisions, how it holds meetings and the parameters within which it must operate are all set into an approved and formal shape. A second fundamental principle is that the board speaks only as a board. Individual members carry the board's voice outward but have no separate voice of their own, and the chair, though usually designated as the board's voice, may only speak in terms the board as a whole has authorized.

The structural model will normally define the delegation of responsibility from the board to the chief executive and management, and to board committees including any executive committee. Its recurring weakness is that it is largely silent on what happens next: it says little about accountability mechanisms or reporting-back expectations once the board has delegated its powers. That silence is where a great many governance failures begin.

2. The Carver, or policy, model

Popularized over several decades by John Carver, and described by him as a rigorous approach to a practice area that had seen very little research, this model has two fundamental concerns. The first is that boards should focus on defining the ends of the organization - what it exists to achieve, and in some cases what it would have to accomplish in order to put itself out of business. The second is the creation of policies by which both board and management must abide in pursuit of those ends.

The board's principal role here is policy: policy to guide management in its operational work, and policy to guide the board in its own governance work. Carver's preferred instrument is the statement of limitation. Rather than instructing management how to act, the board defines the boundaries within which management may act however it judges best. It is a disciplined and internally consistent approach, and it is unusually good at stopping boards from drifting into management.

Its limitation is the mirror image of its strength. A board that has perfected its policy architecture has not thereby determined the outcomes it wants, evaluated its own performance, or built the competence of its members.

3. The Cortex, or outcomes, model

The Cortex model pushes the board to look outward: at the people it serves, at the community and marketplace it operates in, at legislation, at the best practices of comparable organizations, and at the knowledge held by its own employees. From that scan, the board defines the standards, expectations and performance outcomes to which the organization will aspire.

The board's main job under this model is to clarify and set the measures of success, which requires the board genuinely to understand the value the organization provides. Having set them, the board builds an accountability framework around those measures and identifies who is responsible for leading action in each area - board, chief executive or staff. With the framework in place, the board turns to whether each group actually has the capacity and resources to deliver, and to how each will report.

The strength here is that it forces a board to answer the question most boards avoid: what would success actually look like, and how would we know. Its weakness is that outcomes thinking can float free of the structural and policy discipline that makes decisions stick.

4. The Consensus, or process, model

This model is anchored in the understanding that all board members are equal - equal vote, equal responsibility, equal liability for decisions, equal accountability for the actions of board and organization. It also recognizes that members bring different expertise, knowledge and judgement to the table, and it therefore concerns itself with how decision-making actually happens in the room.

It addresses how issues will be discussed and how differing experience will be drawn out; how disagreement and concern will be handled; how agreement is reached, and specifically whether each member is in favour of a decision, able to support it, holding reservations but unwilling to block, or holding objections too serious to support it at all; and how timeliness and agenda management are maintained in an environment that could otherwise talk indefinitely.

Boards that adopt this model well produce decisions that hold, because the dissent surfaced before the vote rather than afterwards. Boards that adopt it badly produce decisions slowly, or not at all.

5. The Competency, or skills and practices, model

This model is essentially developmental. It sets out to ensure that every member of the board has the appropriate knowledge, skills and attitudes to be a good board member. It treats the board as a team, attending to communication, trust and working relationships, and it seeks continuous improvement in the board's performance over time.

It can also prescribe behavioural expectations through board assessment, whether external or self-administered, and it gives members a common context for their work together. It is the strongest of the five for recruiting and developing directors, and it is the only one that treats the board as something that can get better. What it does not do is drive policy creation, set strategy, or establish the ends the organization is pursuing.

Putting the models to work

Read side by side, the pattern is obvious. The Traditional model settles authority and form. Carver settles the boundary between governing and managing. Cortex settles what success means. Consensus settles how the board decides. Competency settles whether the people around the table are capable of any of it. A board missing any one of those five is missing something real, and no single model supplies all five.

The practical question for a board is therefore not which model to adopt but which element is currently weakest. A board with excellent policy and no outcome measures should borrow from Cortex. A board with clear outcomes that cannot get through an agenda should borrow from Consensus. A board with all of it in place and a recruitment problem should borrow from Competency. Types of board differ, and the blend should differ with them: a regulated corporate board carries obligations a community board does not, while a volunteer-led association board depends far more heavily on process and development than on policy architecture.

There is much more to good governance than adopting a model. The models are tools for thinking about the work. They are not the work. Contemporary codes make much the same point in different language - the G20/OECD Principles of Corporate Governance set out what a governance framework should achieve rather than prescribing a structure to achieve it with, and readers comparing the models against a national code will find the UK Corporate Governance Code a useful counterpoint.

The companion argument to this one is Issue 16, on rules-based versus principles-based approaches, which asks not which model a board should use but which kind of instrument improves governance at all. The rest of the library is at the Leadership Acumen archive.