Firms can learn from charities and schools
Typically, firms, charities and schools are staffed by paid employees headed by a CEO, MD or Head Teacher. That ‘chief executive’ then assembles a band of managers who they make responsible for various functions. This group of ‘C-suite’ individuals (named after the American custom of naming senior managers ‘chief’ of this or that) form the Executive, the Management Team, the Senior Leadership Team, or whatever. We’ll refer to them generally as the management team.
This management team is responsible for the day-day-day running of the organisation.
In large firms, charities and English schools, a second group is assembled to supervise this ‘management team’. The second oversees the first. The two teams – the management team and the supervisory team work jointly on strategy, but otherwise the supervisory team, or board, leaves the management team to get on with achieving it.
The supervisory board, then, holds the management team to account.
For most small and medium sized firms in the UK this is a completely alien concept. But it does have merit. Let’s consider how the supervisory board works.
In public companies (where members of the public can own shares), the supervisory board is assembled from the shareholders. In private companies (where a number of private individuals own shares), significant shareholders appoint supervisory board members. In English schools, the supervisory board is made up of parents, staff and appointees from significant stakeholders. In charities, the supervisory board is often made up of elected representatives from the membership, augmented by co-opted individuals.
Where shareholders elect or appoint directors, they join the supervisory board to look after the shareholder’s financial interests. When charities and schools assemble supervisory boards, the board responsibility is broader, with responsibility for the beneficiaries’ total interests, insofar as they matter to the organisation.
The supervisory board members (referred to in charities as trustees, in schools as governors, and in firms, non-executive directors) are often appointed or elected for the specific and considerable skills, knowledge and experience they offer. Those skills, knowledge and experience may include representation and their understanding of specific stakeholder groups like employees of customers. They are often volunteers, or are paid a stipend. We refer to them generally below as trustees.
In all cases the chief executive is responsible to the supervisory board.
This setup means that the management team is accountable to others for the actions they take. The supervisory board provides governance while the management team lead and manage.
As we note, whilst prevalent in charities and schools, UK firms have yet to adopt the structure. Not so abroad.
French and German firms have supervisory boards. In France and Germany it is a legal requirement to also include employee representation. This is replicated in other European counties too, for example in Austria, Norway and Sweden. In Sweden the supervisory board is made up of one third employees in all organisations over 25 employees.
We noted that sometimes supervisory board members are selected for their specific knowledge of, or access to, key stakeholder groups. By having employees on the supervisory board, the organisation will be more aware of the impact of their decisions on their employees. They will also be able to gain buy-in more easily, since the workforce will know that employees have been part of the decision making.
This is maybe a step too far for many UK business owners and directors.
So how do UK firms get the benefits of having high skill, knowledgeable and representative individuals to advise the management team and guide that team in its strategy and key decisions? Picking up the model used by charities and schools, the organisation can create its own non-executive supervisory board. The senior managers and owners can appoint their own supervisory board members – people they respect for their skill, knowledge and representation; people they know will hold them to account when it’s needed.
The non-executive supervisory board then acts as a sounding board and critical friend to the management team. It’s not a common structure in the UK, but it is one with immense value.
TimelessTime has clients who have understood this value and, even though they are small organisations, they have created non-executive supervisory boards to provide scrutiny and challenge. By having a small group of people to hold the executive team to account, the management team is never alone. There are always impartial others to take an interest in their decisions.
As we noted, those non-executive directors in private organisations may be paid a stipend. Some may even be listed at Companies House as a Director. Charity Trustees and School Governors are, however, all unpaid volunteers. In all cases, the supervisory board members are not employees and no employer-employee relationship should be formed or implied by any of these setups.
Since having good governance is important to all organisations, whether profit-focussed or not, it begs the question as to why more firms don’t adopt the two-board model in the UK. It does happen when required by law, and also in a few cases where the MD is enlightened. Are you one of those enlightened few?
- Scottish schools, for example, operate differently, with the Head reporting to the Local Authority. In Scotland there is no supervisory board.
- We acknowledge here the various UK Corporate Governance reforms from 1992 to date that focus on larger firms. These reforms started with the Cadbury Report in 1992 that recommended that the role of Chair (of the Board) and CEO should be separate – in effect triggering the notion of the management team and the supervisory board. These focus substantially on the financial probity of corporations and are distinct from discussions here. We would refer anyone interested in an overview of UK Corporate Governance to this excellent research paper https://core.ac.uk/download/pdf/157817189.pdf.