Board Communication with the Owners
The board chair called to order another not-so-exciting County Literacy Agency annual meeting. The room was populated with board members and a few special guests, but nobody was particularly thrilled to be there. The predictable sequence of events followed: the legally necessary auditor’s and nominating reports were presented, a slide show highlighted the year’s activities, appreciation was expressed to the retiring board members, and the special guests were thanked for attending. Fifty-five minutes later, the annual communication with the community stakeholders to which the board is accountable was over. It would be fifty-two weeks before the board would have to bother with owner accountability again.
Does this scene look familiar? Board members so often view connecting with the owners as a necessary evil, with the organizations these boards lead often limping along for decades as their communication practices deteriorate. Lets discuss the responsibility board members have to communicate effectively with the organization’s owners to build and maintain a healthy relationship of mutual trust and respect which can be the foundation for a dynamic future.
Respectful Communication with OwnersSince board members are chosen as trustees of the owners’ interests, it is the board’s role to have open communication with the owners (shareholders, members, or community stakeholders) of the organization. Effective board communication is an essential element of quality governance. Likewise, communication with the owners is one of the three top priorities for effective boards, according to John Carver.1
Effective communication between the board and the owners is two-way. Board members act at the will of the owners. They are chosen by the owners to make decisions on their behalf. The board members must clearly demonstrate accountability to these owners by sharing important information with them and receiving input from them. Let’s explore some elements of good board-owner communication.
Talking to the Owners
All incorporated organizations, be they for-profit companies, non-profit organizations, or industry associations, are required by law to hold an annual meeting at which the board reports to the owners. Publicly traded companies must share specific information with the owners between annual meetings. Open sharing from the board to the owners ideally includes financial reports, foundational organizational documents, strategic directions, actual results, and challenges.
A universal agenda item at annual meetings is the financial report. The board is accountable to the organization’s owners as trustees for their interests; this includes being good stewards of their financial resources. The financial report generally includes an Income and Expense Statement, a Balance Sheet, and, if the organization has its books audited, the letter from the auditor. These reports inform the owners about the money coming in and going out. They also indicate the current funds available, the outstanding loan balances, and the net worth (the estimated cash left over if the organization dissolved). The auditor’s report draws the owners’ attention to any items that are of concern to an independent, informed reviewer. A quality financial report provides enough detail that owners who understand financial statements feel informed, yet is presented clearly enough that it can be easily explained to those who are new to financial statements.
In healthy organizations, the board ensures that the owners have access to the current version of the organization’s foundational documents. This includes the articles of incorporation and the current by-laws, constitution, or government regulations that define how the organization will operate. In some cases, the board has authority to make changes to the by-laws; while in other organizations, such changes must be made by the owners as a whole. Adjustments to articles of incorporation, the constitution, or regulations need to be approved by the members as a whole and/or the appropriate level of government. In all situations, the owners should be aware of significant changes and know where they can get a copy of the documents. Again, board members are trustees on behalf of the owners, and must take their accountability to the owners seriously, ensuring that the investors have access to current information about their investment.
The strategic directions provided by the board could include the vision, mission, values, and strategic priorities of the organization. As such, it provides focus for the organization’s work. The board is responsible for making sure that the organization has an up-to-date strategic plan and for sharing such strategic directions. A condensed version of the strategic plan provides the owners with an understanding of the direction in which the board is leading the company. This gives the owners confidence that the board members are working for their interests — or alerts them to differences in philosophy that need to be discussed to optimize the organization’s results.
Successful organizations monitor their progress in each strategic priority, and they measure actual results to determine their effectiveness in all areas. A for-profit business may wish to have a net profit of 15% of total revenue and be the market leader in two of its five business lines; a non-profit may decide to increase membership by 10% and have a break-even cash flow. When the board advises the owners of the measurable goals for the year and the actual results achieved, it is being accountable for how it directs the organization’s staff and volunteers, as well as ensuring that available resources are used responsibly.
Effective boards are transparent with the ownership; they don’t hide the truth but rather advise the owners of current challenges. Is the demand for the organization’s services growing faster than the supply of trained employees? Is a non-profit at risk because of reduced charitable donations? Has a public company been relying on outdated products for its revenue stream? Is a serious competitor entering the market or modernizing its strategy faster than your organization? The members, shareholders, and stakeholders have a right to know the issues in the organization to enable them to make decisions about where they will invest their money and time. Boards that demonstrate their understanding of board member accountability tend to gain more owner trust. When boards keep owners informed of the critical issues facing the organization, the owners are more confident that the board members really do have the owners’ best interests at heart.
Listening to the Owners
Great board members build mutual understanding and trust, by seeking out and listening to the owners’ ideas and opinions. They do not deceive themselves that “their own perspectives adequately reflect the interests of the people they represent.”2 Helpful input from the owners to the board can include feedback on board policy and owner perspectives on current issues. If board members do not listen to the views of the owners, their decisions will not consider the wisdom and preferences of the ownership at large. It is faster for a small group to make decisions, especially if they are like-minded. But whenever the ownership is diverse, a board that does not listen to its owners risks acting contrary to their will. Because one of the board’s primary responsibilities is to protect the owners’ interests, acting contrary to the owners’ wishes is acting outside the board’s mandate. Since the wishes of each individual owner cannot be satisfied, the board then has the challenge of determining which decisions are in the best interests of the ownership as a whole. As a result of the board’s listening, both the organization and the community prosper through its informed choices.
Listening to owners requires being approachable. The owners need to know who the board members are and how they can contact them. When board members welcome owner comments, they gain the trust of the owners and the breadth of understanding to make quality decisions on behalf of the owners. Listening to owners does take time, and owner feedback will include hard-to-swallow criticism. But taking time for this important element of governing yields better results, and thus is a common habit of great board members. If owners are frustrated with board decisions, wise board members will try to understand their concerns. Some of the concerns will be due to owners not understanding the implications of their preferred option. The board will then know some of the gaps in board-owner communication and can therefore respond by enhancing its next newsletter, updating its website, or initiating new communication vehicles. Other concerns raised by the owners will alert the directors to matters that influence the organization’s effectiveness. This knowledge will help the board make better future decisions.
Listening to owners is not intended to be just a passive activity for board members consisting of simply listening to owners when they approach you. Board members also need to be proactive by asking a variety of owners to share their views on issues currently being considered by the board. Great boards consult a cross-section of the ownership during the strategic planning process. This provides board members with a broader understanding of the owners’ interests and thus enables them to better direct the organization to serve the shareholders’, members’, or community’s needs. Since most owners never take the initiative to contact board members, the board members must reach out to the ownership. Unless these steps are taken, the vocal minority can inappropriately sidetrack the board from what the ownership as a whole really wants.
Confidentiality
It is important to not interpret open communication as telling all; in the course of their board work, directors do learn information that is best not shared. In most cases, negative information about individuals should be kept confidential. Occasionally, the sensitive information is so critical to the organization’s future that key points need to be shared with the owners. In such cases, what gets revealed must be carefully considered—and only the items the board as a whole decides to share should be communicated. Board members often discuss future possibilities, such as possible acquisitions and down-sizing, that need to be kept private until adequate research is completed and appropriate decisions are made. Release of information prematurely can make it harder for an organization to close a deal and can cause unwarranted worry among the owners and staff. The board needs to make deliberate decisions about what meeting discussions will be kept confidential and how the owners can be appropriately informed of matters that impact current operations. Boards that regularly communicate effectively with the owners are more apt to be trusted when there is a need to withhold confidential information.
The Impact of Poor Board-Owner Communication
Unhealthy consequences can arise from poor board communication with owners. When the owners feel out of the loop, their trust level drops. As Patrick Lencioni says, the absence of trust is the foundational barrier to effective teams.3 When the board is deliberate about keeping the owners informed of key decisions, the owners see the board members as more trustworthy. When this open communication is missing, owners may question the board’s honesty and/or motives. Board members might then feel that their positions are in jeopardy, resulting in a continual downward spiral. Incorrect assumptions can lead to suspicion, and damage control takes resources that could be focused on serving, making the whole organization suffer. When the owners learn of decisions that do not seem to reflect the values of the organization, distrust can start to permeate the air. Decisions that stem from long-time challenges of which the owners were unaware only magnify the situation. Organizational health depends on the board regularly communicating organizational realities to the owners. Otherwise the owners may be surprised by significant board decisions, and such surprises can lead to owner mistrust of the board. Owners begin to wonder how long the board was aware of the problem. Could the problem have been addressed sooner or more effectively? What else is the board holding out on? This absence of trust grows and organizational health suffers. It is wise for the board to have a clear plan for regular communication with the owners and to diligently consider the content of each message.
Communicating with Different Types of Owners
The specifics of the board’s owner communication plan will depend on the type of organization. Let’s consider two different situations: one in which the owners are individual shareholders or members, such as for-profit or membership-based organizations; and one in which the organization serves a public interest, with the ownership interests including people or organizations that wish to see certain community issues addressed.
In for-profit and membership-based organizations it is ideal for the board to have a clear and diverse strategy for communicating with the identifiable individual owners. This enables the board to be — and to be seen to be — an open leadership team that serves the owners and the organization. Effective board-owner communication can include personal one-on-one or small group meetings, email releases, web-site announcements, and printed newsletters. Board members can also maintain a network of a variety of owners with whom they discuss future possibilities to get a feel for the preferences of the ownership. Some organizations ask board members to talk to owners who represent the organization’s diversity to gain insights beyond their own personal perspective. Board members are then better equipped to make decisions in the best interest of the owners as a whole. Publicly trading for-profit organizations must communicate with their shareholders as directed by the regulations of the stock market on which their shares trade.
Other non-profit or governmental organizations are purpose-centered. They exist to serve a community need such as functional literacy, rather than an identifiable shareholder or member base. Their legal owners may be just the board members, but they are expected to consider the interests of many stakeholders in the community. The whole community is better off because the organization exists. And if tax dollars are the main source of funding, as may be the case with a library, it follows that the whole community also has a financial interest in the organization’s work. We say that these organizations have a purpose-centered ownership because there are stakeholders in the community that justifiably have ownership feelings and expectations regarding the organization’s purpose, but there is not a specific list of the individuals who represent that ownership interest. The organization’s image and future success depends on the ongoing goodwill of these stakeholders, who are essentially purpose-centered owners. However, because the ownership interests of a purpose-centered organization can include everyone in the community, personalized communication as previously discussed is seldom possible. In such cases, the board is wise to have a communication plan that includes media releases and website updates. Targeted direct mail may also be helpful to get specific messages to various segments of the stakeholder base. Focus groups or town hall meetings can provide opportunities for the board to get ideas from the extensive purpose-centered ownership.Benefits of Board-Owner Communication
Studies have shown that quality board-owner communication yields bottom-line benefits. For example, a key success factor of strong cooperatives is strong member loyalty that is cultivated by good board-owner communication and an owner-centred approach to business. Also, stock market returns have been found to be higher to those companies where transparency and accountability are evident.4 In review, effective board-owner communication is two-way and has three key elements: listening to owners who come to the board, seeking input from the owners, and keeping the owners informed with information relevant to the organization’s effectiveness. Boards that show utmost respect for the organization’s owners by communicating with them appropriately will have a more rewarding experience. They will experience healthier leadership teams and healthier organizations. May your board experience a healthy and respectful relationship with its owners!
Article from The Board Advisor, ©2006 STRIVE!
1 See Boards that Make a Difference by John Carver, pages 140 and 141. 2 See The Imperfect Board Member by Jim Brown (to be released Fall 2006), application notes. 3 This is a foundational principle in Pat Lencioni’s best-selling book, The Five Dysfunctions of a Team. 4 Information from Canadian Agricultural Co-operatives: Critical Success Factors in the 21st Century, by Daniel Côté, Murray Fulton, and Julie Gibbings. 2000.
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