Implementing a Winning Strategy – Practical Tips for Success

One of the key tasks of any Board in the private, not-for-profit or public sector is to create a strategy for their organisation. Crafting and implementing strategy is inextricably linked to good governance and effective risk management.

Strategy can be defined as ‘the direction and scope of an organisation over the long-term which achieves advantage in a changing environment, through its configuration of resources and competencies with the aim of fulfilling stakeholder expectations.’ (Johnson, Scholes). In an earlier post, we looked at how an organisation crafts a winning strategy by examining its core strengths and weaknesses, analysing market forces and conditions and then deciding how to differentiate its products and services. In this piece, we examine how to put the strategy into practice. And this is a critical area: research by McKinsey found that 7/10 of strategies are unsuccessful. According to Kiechel, successful implementation is even harder, with 9/10 failing at this fence! Given this large failure rate, the ability to successfully implement your carefully crafted winning strategy could easily be a real source of advantage.

Leadership is crucial

The strategic plan will be followed by a business plan which contains business objectives, functional plans dealing with the contribution of, and implications for, operations, finance, marketing, HR and technology. From this work stem targets, budgets, activities and detailed measurement tools.

Many implementations fail because leaders underestimate the scale of the challenge, take their eye off what needs to be done or simply run out of steam. Implementation marks the shift from thinking and planning into live action, managing resources and providing leadership. Do you understand and can your articulate clearly and concisely what you want your people to do differently, and why, as a result of a new strategy? If you can’t do this, don’t expect other layers of the organisation to follow! Leaders need to free up quality time and resources for the Herculean task of communicating a new direction and motivating their people.

Leadership is crucial to create the right conditions for implementation. The organisation must ensure it has the right people on the bus and in the right seats; leaders must clearly communicate the strategic objectives, create appropriate key performance indicators (KPIs) to measure the right things, align the organisation’s culture and behaviours to the strategy, if necessary re-designing internal and external processes and changing the way staff members are incentivised and rewarded to encourage the right behaviours. Progress must be reviewed regularly and the plan tweaked in real time in the light of feedback.

Develop a coherent plan

Successful implementation will require a comprehensive plan to guide action. The plan will contain an analysis of the organisation’s readiness, identify funding and resources and provide discipline and structure. There are various frameworks available to devise the plan. One of these is McKinsey’s 7S model which considers the alignment of the organisation across 7 areas Strategy, Structure, Systems, Shared Values, Style, Staff and Skills.

However, my favourite, which provides a very practical basis for planning and action is Robin Speculand’s Implementation Compass™. The compass examines 8 key areas across the organisation:

  1. People – Do you have the right calibre and type of people in the organisation to deliver the changes required? Do they have the skills and knowledge to execute the plan? Are they motivated? Speculand tells us that we should focus our efforts not on the people that resist change, but primarily on the 20% ‘mavericks’ who embrace it and become advocates and ambassadors for change and improvement.
  2. Business Case – Has the emotional and numerical rationale for change been captured? Has it been explained to staff and do they know why it is important? The use of visual images, branding, slogans and stories to capture and communicate the essence of the message can be very powerful.
  3. Communication – members of the organisation can only adopt a strategy if they know and understand it. Can it be explained in a simple, concrete and compelling way that creates emotional engagement? There are a multitude of channels that can be used nowadays to communicate the message and share success stories and best practice. Traditional media such as advertising, newsletters, as well as social media, videos, podcasts, webinars. Success should be celebrated through awards and bonus incentives.
  4. Measure – The Board will need to adopt the right measurement tools to drive the right behaviours and actions. Remember the maxim ‘what gets measured, gets done’ (some attribute this to the mathematician Rheticus, pupil of Copernicus as far back as the mid-1500’s!). It is likely that a bespoke set of KPIs  will need to be developed to give the Board visibility on progress. These might be quite different from those traditionally used to date. For example, they may track customer or service user satisfaction, staff satisfaction, learning and development, recruitment and retention, teamwork and motivation. Ideally, some form of dashboard report will be generated for the Board.
  5. Culture – This has been defined as ‘the way we do things around here’ (Handy). It is made up of the collection of traditions, values, policies, beliefs, and attitudes in an organisation. Culture is reinforced through rites and rituals, patterns of communication and expected behaviours across the organisation. Will your culture support and foster change? The key questions to ask would be, does your culture encourages teamwork, does it reward innovation, does it stifle initiative? Leaders will need to exhibit visible proof of the expected behaviours – it is no good expecting others to change if the leaders do not lead by shining example! The implementation plan may need to take into account the nature of the organisation’s culture in deciding the pace and style of activities.
  6. Processes – Do the organisation’s processes support the new strategy or do they need to redesigned? e.g. to focus more on the customer and adding value for them? A key consideration is the scope of freedom given to different parts of the organisation to take decisions. If unnecessary roadblocks exist, try calculating the financial benefit as a powerful case for removing them.
  7. Reinforce – Leaders need to continually reinforce the expected actions and behaviours – training and development initiatives may be required; recognition and reward systems may need to change radically to encourage and motivate progress.
  8. Review – The Board must continually review progress and draw upon the lessons learned so far. If necessary, the plan can be adjusted and recalibrated as you go.  Board meetings need to spend an appropriate amount of time on strategic matters, rather than operational items. In carrying out a review the Chair could usefully begin with a critique of his or her own performance to encourage self-reflection by others. One of the most powerful and simplest ingredients can be to start every meeting by checking that all actions from previous meetings have been implemented.

Good implementation of strategy requires the orientation of a series of decisions taken by different people at different times in different places across the organisation towards a common goal. The board needs to provide the leadership to ensure the organisation remains focused on that common goal.  A compelling vision, mission, values and the personal qualities of individual board members are vital to this process. Research shows that Boards are less effective in the field of implementation than they are in creating strategies. If the Board can extend and develop its competence in execution, the rewards can be substantial.

Mark Johnson is a solicitor and chartered company secretary with Elderflower Legal. He is a trusted advisor to SMEs, charities and social enterprises on strategy, governance managing risk and assuring legal compliance. elderflowerlegal.co.uk

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Why Managing Conflicts of Interest is Vital to Good Governance – Pt 2

How can conflicts of interest be managed?

In the first part of this article, we looked at typical scenarios where conflicts of interest can occur and their possible consequences. In this post, we examine practical strategies for managing them.

There are three steps to ensure conflicts are properly managed and undesirable consequences avoided.

Identify the conflict

Individual board members must be aware of what type of conflicts could occur and they must declare them. The organisation should have a Conflicts of Interest Policy and should arrange training or induction for board members. Declaration can be done verbally at the start of meetings through a standard agenda item, by notice in writing to other board members, or more generally by the board secretary keeping a register of outside interests. If a board member is unsure, it is better to err on the side of caution and openness and discuss the matter with the Chair.

Prevent the conflict from affecting the decision

Remember the Board has an overriding fiduciary duty to act in the best interests of the organisation. They must consider how they can prevent the conflict from affecting proper decision-making. Their approach is likely to depend on how serious the issue is. In very serious cases, the Board may take the view that the conflicted board member must resign. If a substantial number of board members are conflicted, it may necessary to appoint more neutral board members to allow valid decisions to be taken. Alternatives would be not to pursue the course of action or to proceed in a different way.

If the conflict is not completely removed in this way and it is not a fundamental one, the Board will have to follow any specific procedure for managing a conflict set out in the organisation’s constitution. The Articles or governing document typically require that conflicted board members must declare their interest, retire from the meeting and not participate in the voting or form part of the quorum for the meeting to be valid.

If the constitution allows it, the remaining non-conflicted board members may proceed to debate the issues and specifically authorise the proposed action in spite of the conflict. However, even if the constitution of the organisation contains machinery to authorise a conflict, it may be that the matter is so serious that the Board could still not in good conscience proceed to authorise because it would never be in the best interests of the organisation and they would not be discharging their overriding fiduciary duty by doing so.

For companies, Section 175 (3) of the Act states “This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company if, or to the extent that, the company’s articles allow that duty to be so disapplied, which they may do only in relation to the descriptions of transaction or arrangement specified in the company’s articles.”

So for example, Article 14 of the Model Articles for private companies says that a director who is interested in an actual or proposed transaction or arrangement with the company can be still be counted in the quorum and voting if:

  • the members pass an ordinary resolution to disapply the ban (calling a members meeting may not always be practical, of course. But certain transactions always need the shareholder/ members’ approval, such as large loans to a director, directors buying or selling significant assets to/ from the company, service contracts for directors with a notice period exceeding 2 years and ex gratia severance payments); or
  • the director’s interest cannot reasonably be regarded as likely to give rise to a conflict (a common sense test, which can be difficult to apply in practice, of course); or
  • the matter concerns a guarantee to be given by or to a director in relation to the company, the subscription for shares by the director, or which concerns employee benefits for current or former staff.

Where there is doubt about the eligibility of a director to participate, the Chairman’s ruling is final.

On the other hand in the Charity Commission’s model articles for a charitable company, there is a comprehensive and very strict scheme in Articles 7 to 9 regulating conflict situations. In summary, Article 7 permits limited benefits for directors (and their ‘connected persons’) if: they are themselves beneficiaries of the charity; if they are receiving rent for premises let to the charity, or interest on money lent (provided the level is reasonable); participation in normal fundraising and trading activities; or if they are supplying services or goods to the charity and specific conditions are satisfied (namely, there is a written agreement, the remuneration is reasonable, the directors are satisfied it would be in the charity’s best interests to use that particular supplier, persons receiving remuneration are always in a minority and there is no specific prohibition of the payment elsewhere in the constitution).  Also to supply goods, the director affected must not take part in the meeting, voting or quorum, and the reason for the decision are clearly minuted. The exemptions apply also to the same type of dealings with a charity’s trading subsidiary.

Similarly, under Article 9, the unconflicted directors of a charitable company may specifically authorise a conflict of loyalties, provided the conflicted director absents himself from that part of the meeting, does not vote or form part of the quorum and the remaining directors consider it is in the best interests of the charity to authorise, and the person does not derive any personal benefit from their involvement with the outside body.

If the constitution does not contain a procedure to authorise low level conflicts, it would be prudent to considering amending it to include one. In cases of doubt, the Board should take external advice on how to proceed. A court or regulator would be less likely to criticise a board which had acted on professional advice.

In extreme cases, the board may consider making an application to the court for authorisation to proceed, however this could be an expensive solution. In the case of charities, the trustees can seek guidance and authorisation from the Charity Commission under special procedures.

Keep proper records

The minutes of meetings should formally record any conflicts of interest and how they were handled. If a transaction or decision is later challenged in litigation or regulatory proceedings, the minutes form an important record to demonstrate that the Board gave the matter appropriate attention and reached a decision within their margin of discretion. The Board would be in a much better position to defend itself than if there were no paperwork or audit trail.

Remember also that certain types of organisation may be required to disclose ‘related party transactions’ or benefits paid to Board members in their accounts. Consider how it would look to external stakeholders when these details enter the public domain?

Conclusions

The proper identification and management of conflicts of interest is essential to maintain stakeholder confidence and protect the organisation’s reputation. Government and regulators have become very vigilant towards abuses, particularly where public money is involved. For example, in academy schools, the Education Select Committee recently investigated relationships between some academy sponsors and their commercial arms, who may supply paid for back office and curriculum support services into their schools. Similarly in the health sector, Parliament has legislated to regulate conflicts of interest between Clinical Commissioning Groups and their member GP practices who may supply services to them. With the right constitution and procedures in place and appropriate training and support for the Board it is possible to avoid the pitfalls.

Mark Johnson is an experienced solicitor and company secretary working with charities, social enterprises, SMEs and public sector spin-outs to manage risk and ensure sound governance arrangements. More at elderflowerlegal.co.uk

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Why Managing Conflicts of Interest is Vital to Good Governance

In this post we explore how to identify and manage conflicts of interest

An effective system of corporate governance for any organisation must be underpinned by the three pillars of transparency, accountability and integrity. The public’s faith in corporate institutions has been repeatedly shaken by wrongdoing, impaired judgements and undue influence. Perceptions can be just as damaging as events actually occurring in practice. At the heart of these questions of trust often lies a failure properly to identify and manage conflicts of interest.

What is a conflict of interest?

A conflict of interest occurs where an individual’s ability to exercise independent judgement, or to perform a role objectively, is, could be, or could be seen to be impaired or otherwise influenced by their involvement in another role or relationship. The individual does not actually need to exploit his or her position or obtain an actual benefit, financial or otherwise, for a conflict of interest to occur. There are two types of conflicts of interest:

  • Personal benefit conflict – the person could enjoy a potential financial or measurable benefit directly, or through a connected person (for example, a close relative, or a business in which they have a material stake). They may stand to gain personally from decisions made, or may exploit the knowledge gained from their role for personal gain;
  • Conflicts of loyalty – the person’s duty to the organisation may compete with a duty or loyalty they owe to another organisation or person (for example, where a director has been appointed to a board of a joint venture company by one of the joint venture partners by whom she is employed, or where she sits on the board of other organisations or serves as an elected member or officer of a public body). This may prevent her from acting properly or independently, in the best interests of the organisation.

Common examples of conflicts of interest situations include:

  • a board member sits on the board of another organisation which may be awarded a contract by this organisation, or which is in dispute with this organisation
  • a board member may wish to sell to, or purchase assets or property from the organisation
  • a decision is to be made on a contract or payment to a board member for their services
  • a proposal to employ a board member’s spouse or child in the organisation
  • paying a person or business closely connected with a board member for delivering services to the organisation
  • making a payment or awarding benefits to a person who is a close relative of the board member

Why are conflicts of interest so important?

The law takes a dim view of persons who place themselves in a situation where their interests conflict with those whom they are appointed to represent. The duty to avoid a conflict of interest derives from the duty of undivided loyalty which applies to someone acting in a fiduciary capacity. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a special relationship of trust and confidence. Company directors act in a fiduciary capacity when they take decisions and act on behalf of their company, charity trustees are fiduciaries, as are executors and trustees of a will, as well as investment managers, pension fund trustees, and solicitors and accountants in their dealings with clients.

The Courts have laid down clear rules for fiduciaries. ‘A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal’. (Bristol & West v Mothew 1998, Lord Justice Millett). These principles are supplemented by specific legislation which applies to particular types or organisations, backed up by a range of sanctions for behaviour which contravenes them.

Special Rules for Company Directors

Directors of any company (whether it be limited by shares, limited by guarantee, an academy trust or a community interest company) have specific statutory duties under the Companies Act 2006. These include a duty to promote the success of the company (s 172), a duty to exercise independent judgment (s 173), a duty not to accept benefits from third parties (s 176) and at section 175 we find: “A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”. The section goes on to state that this includes a situation where a director exploits property or information belonging to the company after he has left, even if the company itself could not make use of the material itself.

A breach of any fiduciary duty could have the following consequences:

  • The company, fellow directors or an aggrieved shareholder or member may begin court action for a breach of statutory duty and seek damages for any loss caused by events or actions which breach the duty.
  • Transactions entered into in breach of the duty may be set aside as void (for example, the transfer of property may have to be unwound or a contract may become unenforceable).
  • A director who benefits from the transaction may be ordered to repay the company its loss, or account for any profits he has made.
  • The other directors who authorised a transaction in breach of the duty, when they did not have the power to do so, can also be held liable.
  • A director’s failure to declare an interest in an existing contract or arrangement is a criminal offence making the director liable to prosecution and a fine.
  • The incident or transaction could attract the attention and intervention of regulators.
  • The breach could seriously damage the reputation of the organisation and erode the confidence of key stakeholders, including employees, customers and funders.
  • Serious breaches of duties can lead to a director being disqualified from holding office for up to 15 years.

Special Rules for Charity trustees

Charity trustees have a strict legal duty to act only in the best interests of their charity. They must not put themselves in a position where their duties as trustee may conflict with any personal interest they may have. In addition, charity trustees can only receive a personal benefit from their charity if there is explicit authority, obtained in advance. This authority can only come from one of four sources: a provision in the charity’s governing document, a power in the Charities Act, permission from the Charity Commission or an order of the High Court. ‘Benefit’ has a wide meaning here, including any payments, property, loans, goods or services received from the charity, but does not include genuine reasonable ‘out of pocket expenses’, which are excluded.

Special Rules for Charitable Incorporated Organisations

Specific rules have been developed for trustees of CIOs. Section 222 of the Charities Act 2011 says: “A Charity trustee of a CIO may not benefit personally from an arrangement or transaction entered into by the CIO if, before the arrangement or transaction was entered into, the charity trustee did not disclose to all the charity trustees of the CIO any material interest (whether direct or indirect) which the trustee had in it or any other person or body party to it.”

Regulation 36 of the CIO Regulations says that a trustee who would benefit from a transaction or arrangement which the CIO is proposing to enter into must not take part in the decision-making and cannot form part of the quorum for that decision.

In the second part of this article, we will examine how to manage conflicts of interest.

Mark Johnson is an experienced solicitor and company secretary working with charities, social enterprises, SMEs and public sector spin-outs to manage risk and ensure sound governance arrangements. More at elderflowerlegal.co.uk.

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Trustees’ Duties in Academies & Free Schools

Trustees’ Duties in Academies & Free Schools

‘The landscape of schooling in England has been transformed over the last five years. Academy sponsorship has encouraged and facilitated the contribution of individuals not previously involved in education provision and laid down a challenge to maintained schools to improve or face replacement by the insurgent academy model’– Education Select Committee Report, January 2015.

Academy schools are independent semi-autonomous schools funded by the Government. At the time of writing, out of 21,500 schools in England, there are over 4,464 academy schools, made up of 2,385 primary schools and 2,079 secondary schools. The first academies were born out of the City Technology Colleges: schools outside of local authority control, introduced by the Conservative Government in 1988. The policy was continued by New Labour from 2000 under the ‘City Academy’ label. The momentum really began with the passage of the Coalition Government’s Academies Act in 2010, which paved the way for any school to convert to academy status, including secondary schools, primaries and special schools. The momentum continues under the new Conservative administration. Today, many academy schools are part of multi-academy trusts (federations or clusters of schools supported by a common sponsor). This brings economies of scale, can attract more teaching resources and enhanced funding opportunities.

Free schools are usually new schools formed as academy trusts. Whenever a local authority plans to establish a new school to meet demand for more school places, they must now run a competition and promoters of free schools (often parent-led groups) can put in a bid to establish a free school. This will be a completely new school, often in new or converted premises. There are now more than 400 free schools either open or approved. The new Government has said they will approve 500 more by 2020. Some private fee-paying schools have chosen to become free schools to ensure their continuing viability.

Further types of academies have developed over time, such as studio schools, university technology colleges (UTCs), and cooperative schools. Essentially, these are all variations on the same academy trust model, but with different sizes and a specialist curriculum.

An academy trust is a company limited by guarantee with charitable status. As a company, it has an independent legal identity, can enter into contracts, employ staff and be sued in its own name. It enjoys a fair degree of autonomy (within the constraints set by the Department of Education’s Funding Agreement and Financial Handbook), but the trade-off for this is more responsibility on the managers and trustees to run the school’s affairs prudently and professionally. As a company with ‘exempt charity’ status, the trust and its managers must also comply with duties laid down by company law and charity law.

Converting a school to an academy, setting up a new free school and running the new organisation once it is set up, bring a series of opportunities and challenges. Operating under these new arrangements can be quite a daunting experience at first. Following several recent scandals and press coverage there is now an increased focus on good governance and propriety controls in academies, in particular the need to avoid conflicts of interest and to ensure the proper stewardship of public money. It is important that academy promoters, managers, trustee directors and governors understand their responsibilities and duties.

‘Our particular interest is on leadership in relation to financial management and governance...We must respond to increasing calls for greater transparency. This means we must all be open about who is involved in the governance of our public bodies, including academies and free schools, and how they are run‘ – Peter Lauener, CEO, Education Funding Agency, Sept 2015’

Academies often point to the increased freedoms and financial resources that independence from local authority control brings. With those freedoms comes additional responsibility and accountability. Despite the label of being independent state-funded schools, academy trusts are in fact quite heavily regulated by means of the Funding Agreement with the Secretary of State, OFSTED inspection regime, the extensive accounting and reporting requirements, as well as by general company and charity law. These issues are not insurmountable, but they do require a watchful eye on governance and compliance tasks. Elderflower Legal has produced a new concise guide intended to provide an overview of the key points to be aware of, based on our extensive experience of acting as trusted advisor to academies and free schools.

“Academy trusts should be required to appoint a part-time Company Secretary to ensure probity in decisions around the constitution and powers of Boards and governing bodies.” – Education Select Committee Report, September 2014.

As a trusted advisor to academies and free schools, Elderflower Legal can help guide you through the maze of regulation and compliance and help you to put in place effective governance arrangements which ensure the organisation fulfils its mission effectively, as well as providing reassurance to Board members and wider stakeholders that the academy trust is well-managed. Find out more about services for Academy trusts..

Download your free copy of our Concise Guide to Academies & Free Schools. Please feel free to get in touch to discuss any of the issues raised.

 Mark Johnson is an experienced solicitor and company secretary helping academy trusts, charities and social enterprises to manage risk, ensure good governance and protect their legal position. elderflowerlegal.co.uk
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The Rights and Responsibilities of Members

What is the Role of Members in Ensuring Good Governance?

In a limited liability corporation, as well as unincorporated associations, the members can play an important constitutional role, acting as a check and balance on the powers of the board. Unfortunately, the rights and responsibilities of members are often misunderstood.

In our work with companies, social enterprises and charities, we find there is often confusion or a lack of clarity about the precise role of the members. But the relationship and balance of power between the board of directors/ trustees and the wider members of an organisation is really a vital fulcrum at the heart of the system of governance for any enterprise. In this piece, I attempt to explain and demystify the position.

Who are the members?

‘Members’ here are the persons who have a form of relationship with the organisation that enables them to exercise some right or power in relation to it. The nature of that relationship will vary for different organisations, depending on the way they are constituted and, specifically, what the constitution says about membership rights.

In a profit-making company, the position is usually clear-cut. The members are the shareholders who have invested their capital in the enterprise in return for certain rights (e.g. sharing in profits and voting on key decisions). However, in non-profit distributing organisations, the position can be more complex. In a company limited by guarantee, there will be no shareholders, but instead there are members who pledge to contribute a nominal sum (usually £1 or £10) if the company is wound up and unable to pay its debts. In the case of charities or unincorporated associations, there may be various types of member who expect to have some say or involvement in the way the organisation is run – these might include beneficiaries and service users, supporters who pay subscriptions or volunteer their time. The constitution may talk about full members, associate members, and supporter members, for example.

The power of members depends on the precise structure and wording of the governing document. At one end of the spectrum is the ‘oligarchical model’ where the members are the same people as the directors/ trustees. These people have absolute discretion to control the organisation. (Many academy trusts have historically been set up using this model, but the Department for Education has recently encouraged schools to appoint a wider group of members who can ultimately hold the board to account). At the other end of the spectrum is a wide membership model, where the members can exercise oversight and control over the board. The members may act as custodians of a particular ethos or values and may take action, if they feel the board is not acting in the best interests of the organisation. There are also hybrid models in between, where members enjoy certain limited rights, such as the right to attend the AGM, receive information or have privileged rights of access to facilities, but no legal right to control any aspect of the organisation’s governance.

Rights of members

The typical rights that members enjoy, either in the constitution or under relevant statute law, include the following:

  • to appoint and dismiss the whole board or individual board members
  • to change the organisation’s constitution
  • to wind up the organisation and distribute the remaining surplus after settling the liabilities (unless there is an ‘asset lock’ in place to prevent this, as with a community interest company or charity).
  • in a private enterprise, the shareholders expect a financial return on their investment, usually in the form of a dividend and/or a capital gain. However, shareholders cannot force the company to declare a dividend. Capital gain is achieved by allowing membership rights (shares) to be transferable (which is usually not allowed in not-for-profit corporations).

The members exercise these rights by calling a general meeting. The organisation’s constitution will lay down the conditions for calling a valid meeting and passing valid decisions (such as the minimum notice, quorum and required majority to pass resolutions). For example, a resolution to change the constitution usually requires a special resolution, which may require a 75% majority. Remember though, that may be 75% of those present at the meeting, rather than the whole membership. So in an organisation with say 500 members, the constitution might state that a valid quorum for a general meeting to proceed is 10% of the membership (i.e. 50 members). To pass a special resolution would require only 38 of those present to vote in favour. For that reason, some organisations choose to set the bar higher for fundamental changes. Sometimes the constitution may permit a decision of members to be made by circulating a written resolution for signature by a minimum percentage of members, rather than calling a meeting.

The constitution forms the basis of a contract between the organisation and its members, and between the members themselves: as such, it can be enforced by the courts. Proper running of general meetings is important: if the organisation is prospering, the members may leave the board alone to run the organisation. However, once problems and disagreements arise, then members may start to flex their muscles. If notice and quorum requirements are ignored, there is a risk that resolutions and decisions reached can be struck down as invalid, which could entail significant costs and embarrassment to unwind the situation.

If the organisation is a company (limited by shares, guarantee, or a community interest company) the Companies Acts also provide certain minimum statutory rights. These include the following rights:

  • to receive notice of, attend, ask questions of the board and vote at general meetings; to inspect minutes of the same and request copies.
  • to appoint a proxy to attend, speak and vote at general meetings if the appointor cannot attend.
  • to requisition a general meeting and to require that a resolution be put to the meeting (if the support of 5% of the members can be achieved). The members can also require the company to circulate a statement of up to 1000 words to other members. If the directors fail or refuse to call the meeting within 28 days, the members can proceed to call the meeting themselves and the costs of doing so are deducted from the directors’ remuneration! (Sections 303-305, 292-295 Companies Act)
  • to propose a resolution (with special notice) to dismiss a director
  • to be provided with a copy of the Articles of Association
  • to receive a copy of the annual accounts
  • to inspect the company’s register of members and other statutory books
  • to inspect copies of directors’ service contracts
  • to appoint and remove auditors or require the company to obtain an audit of its accounts, if it would otherwise be exempt
  • to bring a ‘derivative claim’ in the name of the company against directors or a third party for default or breach of duty
  • to bring an ‘unfair prejudice’ petition to request the court to intervene in the company’s affairs.

Under company law, the definitive test of whether someone is a member is whether their name has been entered into the register of members. Many companies, especially companies limited by guarantee, can be quite lax in keeping this up to date – which can cause problems later. By contrast, the new Charitable Incorporated Organisation set up under the Charities Act 2011 is obliged to keep a register of members and to keep it up to date.

Duties of members

Members also have certain duties, again depending on what the constitution says. Typically, they will be required to:

  • Contribute the agreed sum for their shares if not already paid, or for a guarantee company the nominal contribution of £1 or £10.
  • Sometimes members are required to pay a recurring annual subscription towards the running costs of an organisation, in addition to their upfront capital contribution.
  • Interestingly, the Charitable Incorporated Organisation specifically requires that members are obliged ‘to exercise their powers in good faith in a way which would be most likely to further the purposes of the CIO’. No such explicit rule applies to other types of legal format, however.

Stakeholder members

Sometimes organisations have corporate members such as local authorities, public bodies or other charities who have some interest in what the organisation does. The stakeholder member may often appoint an individual to act as its authorised representative. Sometimes they may have right to nominate, or even directly appoint, a board member. Problems can often arise where this representative (who may be an employee or officer of the authority) wishes to give priority to his appointor’s interests over those of the organisation. If the representative sits on the board, they will usually be obliged to put the interests of that organisation first and exercise independent judgment, rather than being fettered by their appointor. They are allowed to consult with their appointing organisation, however. A possible solution might be to limit the role of the authorised representative to that of observer – with a right to attend and speak at board meetings, but no voting rights.

Problems for not-for-profits

The Charity Commission looked in detail at membership issues after analysis showed that more casework was opened for internal disputes in membership charities than any other type. Their report found that there were clear benefits from membership structures, including enhancing the board’s transparency and accountability, providing better understanding of the needs of beneficiaries, improving the charity’s advocacy role, providing better fundraising opportunities and access to a source of new trustees. However, the most common reasons for problems were:

  • Trustees are often not clear about their role and their responsibility to the members
  • Members were not clear about their rights and responsibilities
  • There were insufficient or inadequate governance structures in place to manage the relationship with members
  • The board puts up barriers to member involvement either deliberately or inadvertently
  • The membership lacks diversity, so the board is change resistant and self-perpetuating group
  • The board deliberately or carelessly disregards proper procedures for calling valid meetings and passing resolutions, leading to disputes.
  • Weak administrative arrangements lead to problems such as invalid elections held on the basis of inaccurate membership lists or inquorate meetings.

How to manage the relationship with members

The following best practice tips could help your organisation to avoid problems:

  • Keep membership registers and contact details up to date – get specific written approval from members to communicate with them via email to keep costs down.
  • Include a provision in the constitution that if the member fails to keep the organisation informed of their current contact details, they forfeit their rights. A practical illustration of this problem is recent attempts by football clubs to move to a community membership model, only to be hampered by the need to trace and obtain approval from numerous shareholder members whose whereabouts are unknown.
  • The constitution should clearly set out the mechanics for a person to become a member, to leave or to be expelled (subject to a right of appeal). The board may usefully have an explicit power to determine conclusively whether a person is a member, if the position is uncertain.
  • Ideally, the detailed mechanics about categories of members and relevant criteria could be set out in a set of standing orders, regulations or a handbook, which can be amended from time to time without the need to pass a resolution to change the whole constitution.
  • New board members should receive an explanation about the various categories of member and their rights, as part of their induction.
  • The organisation should communicate regularly with its members to inform then about developments and keep them engaged.
  • Consider including specific mechanics to resolve disputes involving members without recourse to the courts, such as mediation or expert determination. Judges are reluctant to interfere in the internal workings of membership organisations and have been scathing about the dissipation of funds to pursue litigation relating to internal disputes.

Members can be a vital, but often a missing piece of the jigsaw, in a system of sound governance. Ignore them at your peril. Organisations as diverse as NHS Foundation Trusts, Network Rail and cooperative schools and academies have all sought the benefits of giving wider stakeholders a say in the running of their organisation. The move to create more mutuals for public service delivery, employee-owned organisations and growing interest in community share issues (where member investors contribute start-up capital) will increasingly throw the spotlight on an organisation’s relationship with its members.  The board should have a clear understanding of the role and rights of these members and the constitution should be kept up to date so that it is fit for purpose. Both the Chair and the company secretary can play an important role in ensuring harmonious relations with members and keeping them informed and engaged.

Mark Johnson is an experienced solicitor and company secretary helping SME businesses, charities, social enterprises to manage risk, ensure good governance and protect their legal position. elderflowerlegal.co.uk
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The Pivotal Role of the Chair in Ensuring Good Governance

How can the Chair perform the role effectively to maintain accountability and high performance from the Board?

Last time we considered the conditions for a high performance board. A critical player in making the Board effective is the Chair. He or she has a crucial role to play both inside and outside the boardroom. The Chair should be a team-builder: ensuring the Board understands the strategy and common objectives; promoting open and two-way communications, facilitating participative decision-making and providing visible leadership.

Managing meetings is critical

The Chair’s role is to create a safe space in which constructive inputs from all board members can occur. The Chair runs the Board and set its agenda. Meetings should be held in conducive locations and should start and finish on time. Agendas should focus on strategic matters, value creation and performance, rather than operational details, which are better delegated to executive managers.

The Chair should ensure that all members of the Board receive accurate, timely and clear information. This should cover both financial and non-financial indicators. This will enable the Board to make decisions based on evidence and properly to discharge their duty to promote the success of the organisation. Information should generally be circulated in advance of meetings to allow reading time.

For each item, the Chair should invite the person leading on it, often an executive manager, to introduce the subject and report, then open up the subject for discussion and debate. Vociferous members of the Board should not be allowed to dominate, particularly if this discourages quieter members from contributing. The Chair’s primary role should be to elicit the views of others and not to manipulate the discussion so that it goes their own way. The sense of the meeting must be ascertained and the outcome documented in the minutes. The Chair must ensure that actions are followed through.

The Chair should manage the Board to ensure that sufficient time is allowed for discussing complex or contentious issues. Board members should not be faced with unrealistic deadlines for decisions. All Board members should be encouraged to participate and offer constructive challenge. One Chair I know always sets homework for individual board members in advance of the next board meeting!

A skilful Chair should encourage feelings to be openly expressed and create a climate of trust and candour. Conflict should be surfaced and handled, with constructive negotiation, rather than personal attacks. Contrary views should not be glossed over. One technique to avoid ‘group think’ and ensure proper debate is to assign the role of devil’s advocate for unpopular alternatives, to stronger members of the group. Or occasionally the Chair could divide the board into two groups to evaluate options.

If consensus cannot be reached on a particular decision, the Chair should consider adjourning the discussion and returning to it at the next meeting. In the meantime, the Chair should attempt to identify the concerns of dissenting directors and reduce differences of opinion. Resisting contrary views may only serve to entrench the dissenter in his views, or even polarise the Board. If agreement cannot be reached, it may be appropriate to go to a vote: this should draw a line under the debate and allow the Board to move on.

The Chair should make certain that the board decides the nature and extent of the risks that it is willing to tolerate in implementing strategy. Sufficient attention should also be given to the composition, skills mix and succession planning for Board roles.

Chair’s role outside of the Board room

A newly appointed Chair should make a special effort to get to know the other board members through one-to-one phone calls or meetings. Valuable insights can be gleaned by drawing out fellow directors’ perceptions of the strengths, weaknesses, opportunities and threats facing the organisation. The Chair may help to facilitate social time in advance or after meetings to enhance teamwork within the group, by encouraging Board members to get to know and understand each other’s background, skills and perspective.

The Chair should take the lead in providing a proper induction programme for all new appointees to the Board (assisted by the Secretary, where appropriate). The Chair should also lead on evaluating the performance of the Board as whole, as well as individual directors, preferably on an annual or biennial basis. The Chair’s performance should be subject review by fellow directors too.  Following the review, the Chair should follow through on any training and development needs which have been identified.

The Chair has a crucial role to play in managing communications with the organisation’s stakeholders and ensuring that board members develop an understanding of the needs and desires of customers and employees, investors, funders, as well as regulators. There is a key role to play in dealing with the media, particularly during a crisis, to protect the organisation’s reputation.

What makes an effective Chair?

An effective chair needs self-confidence, usually acquired through experience, good listening skills and charisma, which arises from being simultaneously in control, yet still open to contributions. To lead the board effectively, the Chair must know the directors, their strengths and weaknesses, so that they can be drawn out on relevant matters, or reined in when they are becoming too long-winded. A visible presence, walking the floor, motivating and talking to staff, as well as meeting and presenting to external stakeholders, is important.

The Higgs Review of 2003 found that an effective Chair:

  • Upholds the highest standards of integrity, probity and good governance, leading by example
  • Sets the agenda, tone and style of board discussions to promote debate and discussion and sound decision-making
  • Ensures a clear structure for running board meetings, including starting and finishing on time and spending proportionate amounts of time on thorny and complex issues
  • Promotes effective communications, inside and outside the boardroom
  • Builds an effective board by initiating change and succession planning for board vacancies
  • Ensures that Board decisions are implemented effectively
  • Establishes a close relationship of trust with the senior executives, providing wise counsel, advice and support, but at the same time being careful not to interfere with operational management decisions
  • Provides coherent leadership of the organisation, including representing the organisation to the outside world and understanding the views of all the organisation’s key stakeholders.

Chairmanship is a challenging role. A good Chair will have a clear vision and focus on strategy, bringing together the disparate skills, qualities and experience of other board members. The Chair should foster a positive culture of corporate governance which then permeates down through the organisation and delivers positive results.

I hope you enjoyed reading about The Pivotal role of the Chair in Ensuring Good Governance.   Next time we look at The Board’s role in identifying and managing risk.

Mark Johnson is an experienced solicitor and company secretary helping charities, social enterprises and SME businesses to flourish. His company Elderflower Legal offers a range of support packages to help organisations with legal compliance, managing risk and good governance. For more resources check out elderflowerlegal.co.uk.
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How to Create a High Performance Board

How can you put in place the right systems, structures and processes to ensure that your Board drives success?

Any organisation, whether in the private, third sector or public sector is only as good as the people who lead it. Board members have a vital responsibility to define the vision and mission of the organisation, to decide its strategy and objectives, to manage the risks and to fashion the ethos and culture of the organisation.

The Board is the epicentre of any system of corporate governance, by which the organisation is directed, controlled and held accountable to achieve its purpose and create value over the long-term; it must balance the needs and interests of different stakeholders, whilst at the same time providing the entrepreneurial drive and leadership to succeed. Sound governance should be seen as a source of competitive advantage, not a brake on progress.

Four key tasks of the Board

An effective Board has four main strands to its work:

  • To establish and maintain the vision, mission and values of the organisation (the vision should be an inspiring picture of the organisation’s potential, the mission is a statement of how to achieve the desired state, whilst values are the principles and deeply held beliefs and standards of conduct embedded in the organisation’s way of doing things).
  • To decide the strategy and structure – the Board should continually review and evaluate the strengths, weaknesses, opportunities and threats and consider how best to play to the organisation’s strengths, or bolster the required competencies. (More on strategy here).
  • Delegate authority to managers and then monitor and evaluate the performance of the strategy and business plan, whilst maintaining appropriate monitoring and controls over risks; determine the appropriate KPIs to be used for effective monitoring.
  • Communicate with all the stakeholders in the organisation (such as customers, employees, funders, and members): maintain a continuous dialogue to understand their needs, promote their goodwill and support.

In carrying out these tasks, there needs to be a dynamic dialogue within the Board. As the Walker report into the behaviour of bank boards during the financial crisis found, many boards ‘lacked a disciplined process of constructive challenge’. They had descended into ‘group think’ and had focused on conformance with rules, rather than thinking laterally and strategically. The Financial Reporting Council in its 2010 Guidance on Board Effectiveness tells us, ‘An effective Board should not necessarily be a comfortable place. Challenge, as well as teamwork, is an essential feature’.

The role of the Board

One of the Board’s first tasks is to decide how it will function and identify the key issues and decisions which it must tackle collectively and which cannot be delegated – a schedule of reserved matters. Following that, there will be a scheme of delegation of powers to executive managers, committees and subsidiaries. Typical matters reserved for decision-making by the Board, include:

  • Approval of the annual report and accounts
  • Approval of dividends (in a profit-distributing organisation)
  • Approval of communications with members and the public
  • Appointment or removal of auditors
  • Developing, approving and reviewing the strategy
  • Approval of operating plan and budgets, review of progress against budgets
  • Approval of expenditure and contracts in excess of delegated limits
  • Approving the prosecution, defence or settlement of any litigation
  • Approval and ongoing monitoring of risks – the board should set appropriate risk management policies and seek regular assurance that the system is working effectively
  • Appointment and removal of Board members and senior executives
  • Succession planning for key roles
  • Ownership of health and safety policies
  • Approval and ownership of ethics codes and CSR policies
  • Setting terms of reference for delegation of powers to executives and committees

Practical steps for success

There are several practical organisational steps which will contribute to success of any Board:

  • The Board must be properly constituted with the right skills and have the resources to undertake its duties, such as a good company secretary. Board members must dedicate sufficient time to their role.
  • The number of meetings should be sufficient to deal with the business effectively.
  • Agendas should be properly planned and sent out in advance, together with supporting papers to allow for prior reading and preparation.
  • There should be enough time to devote to the items on the agenda, with the right focus on the most important topics – especially strategic issues, rather than mundane operational detail.
  • Minutes should be accurate and available promptly to aid follow-up actions. (Minutes also form a legal record of decision-making that must be kept for up to 10 years).

The organisation’s governance framework should be implemented in a way that is proportionate and realistic. However, as the Financial Reporting Council commented in 2009, the quality of corporate governance depends ultimately on the behaviour of individuals, not on procedures and rules. That leads us to consider what are the desired qualities and skills of valuable Board members?

Desired attributes of Board members

The late Neville Bain, former Chairman of the IoD boiled it down to ten attributes:

  1. Ability to understand issues and identify central points for decision
  2. Sound judgment – probes facts and assumptions, weighs evidence to arrive at decisions
  3. The ability to provide and accept challenge in a constructive way
  4. Ability to influence through clear communication and persuasion
  5. Good interpersonal skills and ability to manage conflict
  6. Forward thinking – anticipating new trends and events, alert to the need for change
  7. Ability to think strategically, to understand the role of risk analysis and control
  8. Financial and commercial skills to understand how well the organisation is progressing against its goals.
  9. Integrity and high ethical standards – which they live by in practice.
  10. Good self-awareness – a thirst to improve personal knowledge and performance.

Boards must strive for continuous improvement

An effective Board should aim to be a learning organisation. They should continually review their collective performance as well as the performance of individual members. A useful way to approach this is through a structured external board effectiveness review, such as BoardCHECK360™ offered by Elderflower Legal. The review will examine various aspects of the Board’s operating procedures, composition and succession planning, induction, meetings management, internal controls and risk management, delegation and will highlight good practice, as well as areas for improvement.

As Bob Garratt tells us: ‘Directors are there to ensure that at the cybernetic centre of the enterprise, there is a heart and brain. This heart..creates an emotional temperature appropriate to that specific organisation. This is the essence of that organisation’s climate or culture”.

Next time: the pivotal role that the Chair plays in developing a successful Board.

Mark Johnson is an experienced solicitor and company secretary helping charities, social enterprises and SME businesses to flourish. His company Elderflower Legal offers a range of support packages to help organisations with legal compliance, managing risk and good governance. For more resources check out elderflowerlegal.co.uk.
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What Makes a Successful Joint Venture?

Joint ventures can be a useful route to combine resources and skills, to secure greater market power or better access to markets for SMEs, charities and social enterprises.

A new corporate entity can be used to ring-fence more risky trading activities or to develop a distinct brand or business culture outside the strictures of the host participants (such as borrowing controls, pay scales or corporate overheads).

Partnering with an outside organisation may bring access to new technology, lean business processes and technical know-how. A joint venture arrangement in which partners each hold a shareholding provides an opportunity for ‘value capture’: as the business takes off their shareholding should increase in value. A shareholding and directors on the board provide a ‘seat at the table’, visibility and transparency on the money flows and activities of the business: areas of obscurity, which have been frequently criticised in more arm’s length outsourcing and licensing arrangements.

A joint venture is ‘an arrangement between two or more parties who pool their resources and collaborate in carrying on a business activity with a shared vision and a view to mutual profit’.

Analysing the elements of this, we find several main ingredients:

  1. There is a contribution of resources, assets and skills from both parties. Participants need to consider carefully the terms on which they make their staff and assets (land, equipment, brand, intellectual property rights etc) available to the new venture. Do the partners have the necessary powers and approvals to set up the arrangements?
  2. A joint venture is usually about starting a new business. There must be clarity about the business plan and risks, whether there is a demand for services or products supplied by that new business. Is there a wider market beyond the hosts’ areas that can be exploited to generate more revenue?In many cases, the joint venture will involve establishing a new limited company in which the partners each take a stake. The terms of the joint venture agreement are very important. Important areas to consider will be the agreed strategy and business plan for the venture, relative shareholdings and capital contributions, policies on reinvestment of profits vs. distributing them as dividends, decisions for which unanimity is required vs. decisions taken by majority and, crucially, what are the exit provisions if things don’t go according to plan or if one party wants to leave and sell its stake? Some enterprises with long-standing joint ventures have recently found it difficult to extricate themselves from arrangements which are no longer fit for purpose or perceived as too expensive. For example, Liverpool City Council had a long-standing JV with BT plc. It to come to an end after it was reported that BT would not agree to cutting the cost of the £70m-a-year deal any further than the £5m a year over three years they had negotiated so far.
  3. There must be genuine joint working around a shared vision. A lot of joint ventures have come unstuck because the partners have not invested enough time at the outset in considering explicitly what both parties’ objectives are from the arrangement. For one partner, the objective may be to achieve a step change in products or service levels by levering in new investment, technology and improved business processes; for another, the objective may be to achieve a defined level of profit and to use the contract as a springboard to capture more market share and new distribution channels. Open conversations about how each partner can help the other achieve these goals are important.
  4. A good joint venture has an appropriate balance of shared risks and rewards. The parties should ensure that they negotiate an appropriate share of future rewards, but equally it must expect to shoulder its share of the risks of making the business successful

Joint Ventures with the Public Sector?

Joint Ventures are increasingly of interest to public bodies too. They are experiencing a paradigm shift as they move to become smaller enablers and commissioners of services, rather than direct providers. They are looking for new ways to work with private and third sector organisations to ‘do more for less’. Over time this is leading to a diverse landscape of provider organisations, such as joint ventures, spin outs, arms length trading companies. Participants need to think carefully about the governance and accountability arrangements over these more exotic arrangements. All participants need to have appropriate mechanisms to monitor the performance and risks of joint ventures. Are they provided with timely financial information, performance reports against defined KPIs and, the figures for staff turnover, (always an interesting barometer of internal culture)?

So What Makes a Successful Joint Venture?

Here are my top tips for success.

  • Establish the commercial rationale for the arrangements – capture it succinctly in writing and then share and obtain buy-in from all your stakeholders.
  • Set clear objectives for the joint venture – what are the expected benefits and what contribution needs to be made by each partner? Set out the assumptions clearly.
  • Identify the possible partner(s) and select the most appropriate using clear selection criteria – remember cultural and behavioural factors can be just as important as infrastructure and know-how.
  • Carry out a due diligence process – each partner should share key information (under a confidentiality agreement) and introduce their team members.
  • Establish an appropriate legal format for the joint venture – this could range from a contractual arrangement, through to a full-blown new limited company in which each partner takes a stake.
  • Negotiate an agreement that reflects the goals of all partners, but at the same time includes a clear exit strategy (which describes the consequences of leaving), and clear agreed strategies for resolving disputes.
  • Create an appropriate structure for the management and ownership of the JV. Ideally, the principals shouldn’t get involved in the day-to-day issues and decisions, but leave it to a dedicated management with the capability and freedom to get on with the job. The JV management team should have clear control parameters and reporting lines.
  • Put in place proper project management arrangements and get the back-office infrastructure, systems and processes working well.
  • Make time to manage cultural issues – make sure that key personnel get to know each other on a social and professional level – teams that play together, stay together!
  • Be aware of the likely tension points– these include a perceived loss of control by one partner, a change of regime in one partner brings in new personalities, or the external environment changes and the reasons for the joint venture become less compelling.

Joint ventures can be a powerful medium to achieve growth, enter new markets, share and ring-fence risks. However, they need to be properly tended to bear fruit. Leaders need to make time and resources available to promote and defend the partnership, if it is to succeed. Cultural and behavioural factors can often be the most difficult issues to get right. The documentation needs a clear exit plan in case things don’t work out.

Mark Johnson is an experienced lawyer and company secretary working with SMEs, charities, social enterprises and public bodies to create successful collaborations and partnerships. elderflowerlegal.co.uk
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Crafting a Winning Strategy: What’s the Secret Sauce?

One of the key tasks of any Board in the private, not-for-profit or public sector is to create a strategy for their organisation. Strategy is inextricably linked to good governance and effective risk management. The UK Corporate Governance Code at C.1.2: “Directors should include in their annual report an explanation of the strategy for delivering the objectives of the company.” Strategy has been defined as “the direction and scope of an organisation over the long-term which achieves advantage in a changing environment through its configuration of resources and competencies, with the aim of fulfilling stakeholder expectations[1]”. For businesses, a winning strategy should provide a sustainable competitive advantage. For other types of organisation, the strategy provides a mechanism to seek an increased share of limited resources, with the aim of advancing a mission, whilst balancing the interests of different stakeholders.

What is an effective strategy?

Creating a successful strategy is not an easy task. It is completely different to operational management. It requires board members to set aside proper creative thinking time, question assumptions and develop a critical enquiring approach. It can’t be achieved by a solo actor working in an ivory tower: it requires contribution and buy-in from a wider group of leaders and senior managers. The statistics show that most boards do not get it right. Studies published by Harvard Business Review show that at least 70% of strategies fail. Some research has found that 85% of directors don’t know what their organisation’s source of competitive advantage is.  In his 2011 book, Good Strategy, Bad Strategy, Rumelt tells us that a winning strategy contains three elements: a diagnosis, which defines the nature of the challenge, a guiding policy to overcome the obstacles identified which builds on or creates some form of advantage and (iii) a set of coherent actions coordinated with each other to accomplish the guiding policy. Typically, insufficient time is spent on diagnosis, as managers rush to action; sometimes the actions are not coherent because of a lack of alignment.

Why do most strategies fail?

Rumelt identifies four hallmarks of bad strategy, which we can all recognise: the use of ‘fluff’ (gibberish and buzzwords masquerading as strategic concepts to give the impression of intellectual thinking!); failure to define the real challenge, mistaking a long list of aspirational goals for strategy (e.g. we will grow our revenue by 20%, we will delight our customers etc, without saying how); setting objectives which are just impracticable in the context of the organisation, or which fail to address critical weaknesses in resources and capabilities.

So how do we avoid falling into this trap? Here I offer a ten point plan from my experience which could be used to help develop a winning strategy.

  1. Start with why?

Simon Sinek has developed a whole business methodology around this question. We first need to understand the motive force behind the enterprise. Why are you in business, what is your core purpose and mission? Has this been explicitly captured and communicated to all your stakeholders? When did you last review it?

  1. Values matter more than ever

Identify what the values of the organisation are and how these reflect your culture (the beliefs, traditions and habits shared by your people). Capturing the values requires input from across the organisation.  Values can be used to set the ethical and legal boundaries for the activities you undertake and to set the emotional temperature of the organisation. However, it is no use articulating a charter if those at the top do not lead by example! Studies show that the Generation Y millennials and Generation Z among your customers and employees are particularly attuned to corporate values- ignore them at your peril.

  1. Assess your current position

Use a SWOT analysis to assess strengths, weaknesses, opportunities and threats facing the organisation. Strengths and weaknesses are normally internal factors, whilst opportunities and threats are external forces. Strengths might include specialist knowledge, a highly skilled workforce; weaknesses might include a lack of working capital or inefficient operating procedures. In looking at external forces, it is useful to employ the PESTEL analysis to identify the political, economic, sociological, environmental and legal factors that could, or do already, impact on your business environment. From this analysis, identify the top 3-5 critical success factors – the essential factors which the organisation must absolutely get right to succeed and keep these front of mind.

  1. Where else could you play?

Having identified your strengths and some opportunities, in which markets (existing, new or adjacent) could you operate? For example, if you were an enterprise with strengths in residential care for the elderly, could you move into caring for learning disabilities? What discontinuities could occur which could open up new avenues of opportunity for you?

  1. What is the structure of competition in your markets?

Use Michael Porter’s Five Forces model to assess the structure of competition in your chosen markets. Porter identifies 5 forces which influence market position:

(1) current competitive rivalry – if there is strong competition this will drive prices down and increase costs for businesses trying to compete

(2) Is there potential for entry of new competitors? How easy would it be for new competitors to emerge – are there factors under your control which could prevent or delay this, such as a well-defined brand identity, differentiated products or services, exclusive IP rights that you own?
(3) Power of the customer – the customer tends to have power if their purchasing power is concentrated (e.g. through buying frameworks), or if the product or service is seen as undifferentiated;
(4) Power of your suppliers – they may enjoy power over you because of high switching costs or because there are few alternatives;
(5) The threat of substitutes – are there other ways of solving the customer’s problem besides coming to you? Being alert to innovation that could be a complete game-changer is important. If competitive pressure is becoming too great, it may be time to move into more attractive markets where demand exceeds supply, margins are better and the pressure is manageable.

  1. What are your distinctive competencies and capabilities?

Your capabilities are derived from your people, financial capital, materials, technology, information and knowledge, buildings and intangibles such as brand, reputation, IP rights and leadership. Barney tells us that to provide real competitive advantage capabilities should ideally be valuable, rare, inimitable and non-substitutable. This allows you to differentiate your products and services from the competition.

  1. How do your activities create value for the customer?

A useful tool to examine the value added in each stage of your operations is Porter’s value chain. In essence, he divides an organisation’s activities into strategically relevant activities and supporting or ‘back office’ activities. In the strategically relevant activities, we find inbound logistics, operations, outbound logistics, marketing and sales and ‘after sales’ service. These labels can be adapted to suit the particular context.

For example, in a service environment, instead of inbound logistics, we may find customer enquiries, brochures, whitepapers etc. Operations would be the way projects are managed and delivered. In the supporting activities we find HR management, technology, procurement and the general infrastructure of the enterprise.

By taking each element, and forensically considering how it is performed and how it can be improved, you should be able to reduce cost or add more value for the customer and differentiate your offer. This is where ideas and innovations from front-line staff can really come to the fore. Do you have mechanisms to encourage and capture these ideas?

Having analysed the areas above, we should by now have a set of choices to consider. It is time to…

  1. Carry out a sense check

Applying the test formulated by Johnson et al, are the options suitable, feasible and acceptable? Suitability tests whether the strategy fits the vision and mission of the organisation. Does it leverage the strengths and minimise the weaknesses? Feasibility is concerned with whether the organisation has the right financial, human and information resources, culture and structure to pursue the strategy. Finally, acceptability tests whether the strategy fits with the risk appetite of the organisation and whether it is likely to find favour with your stakeholders, such as employees, suppliers and funders?

  1. Set Objectives

Having formulated the strategy, embody this in a set of concrete objectives which should be SMART objectives (specific, measurable, agreed, realistic and time-bound). Ensure the high level objectives cascade down to business units and individual performance goals across the organisation. Make sure there is clear ownership of and accountability for the agreed objectives.

  1. Align the organisation

The chosen strategy will have implications for every function in the organisation, including finance, operations, marketing, HR and technology Alignment is crucial to achieve success. It is no good setting high level objectives which are completely at odds with teams’ or individuals’ performance and remuneration criteria or which run counter to the existing culture of the organisation.

Once the plan is developed and resources are committed, be tough and persistent in applying it. Ensure there are consequences for not delivering. The methodology behind successful implementation will be the subject of a future piece.

Of course these tools and models alone do not give directors the right answer, but they do provide the means to have a better conversation, which leads on to the agreed answer. By using these techniques, you can create an effective planning process, build a realistic business direction for the future, and should greatly improve the chances for successful implementation of your strategy.

In Part 2:  how to implement your strategy successfully to differentiate your organisation from the competition.

[1] (Johnson, Scholes et al, 2011).

Mark Johnson is a legal and governance specialist with Elderflower Legal. He is a trusted advisor to SMEs, charities and social enterprises on strategy, managing risk and assuring legal compliance. elderflowerlegal.co.uk.

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Ten Top Tips for Effective Governance

How can you set up your governance systems to achieve results?

Corporate governance has received increased attention in recent years as a result of high-profile scandals involving abuse of corporate power and, in some cases, unlawful activity by corporate officers. Governance is all about the way the organisations are directed, controlled and held accountable to deliver their purpose over the long-term. The organisation’s practices and procedures should be organised so that the organisation achieves its mission and goals, whilst complying with the law and sound ethical practice.

Putting in place a well-defined and enforced governance structure can provide a structure which works for the benefit of everyone concerned, by ensuring that your organisation adheres to accepted ethical standards and best practices, as well as formal laws. However, it is important that the systems are proportionate to the size of the organisation and the risks it faces. We set out below our ten top tips for effective governance.

Positive benefits of good governance include:

  • People will trust your organisation (including members, service users, funders, suppliers and the public), leading to improved trading terms
  • The organisation will know where it is going
  • The board will be fully connected with members and wider stakeholders
  • Good and timely decisions will be made
  • The Board will be better able to identify and manage risks
  • The organisation will have greater resilience to cope with problems
  • The organisation should enjoy improved financial stability

In our experience, there are common areas that often cause difficulties for organisations. Here are our ten top tips for effective governance.

  1. Mistakes at the start

When setting up a new organisation it is important to have a clear shared view of the vision and mission for the organisation. It is important to plan ahead and bring your supporters with you. Think carefully about your strategy from the start and articulate the vision continually to all your stakeholders. (A stakeholder is any individual or group who depends on the organisation to fulfil their needs and on whom the organisation depends).

  1. Choose the right legal format and corporate structure

Think about what you want your organisation to achieve and choose the right format. Take professional advice and learn from what others have done. Don’t let the tail wag the dog. When selecting a legal format, form should follow function, structure follows strategy. First decide what you want to do, then choose the right structure which facilitates this. Don’t rush into setting up one particular format without understanding what the choices and implications are. It can be expensive to unravel the wrong choice. Professional advice is a sound investment.

  1. Clarity of roles

There may be many roles in a complex organisation. It is important to have clarity about the responsibilities of the Board, individual directors, officers and managers. Write down the key responsibilities and draw up a structure chart and scheme of delegation so that everyone knows who is responsible for what and who has the authority to take decisions. Role descriptions should be easy to understand and new joiners to the organisation should be offered an induction. Roles and responsibilities should be reviewed annually, perhaps as part of an individual appraisal.

  1. Poor Board performance

Board members may fail to perform effectively unless they have the right training and skills and a proper understanding of what their role is (in a documented role description). This can have a knock-on effect on the rest of the organisation, if it is not tackled effectively. There should be regular skills audits of the Board to ensure they are performing well. Group training session can be run to remind the Board of their role and continually improve their skills. A regular formal review of the Board’s effectiveness facilitated by an independent observer can be a useful tool for improvement

  1. Recruitment and succession planning

You need to attract good people onto your board with a wide range of skills. If you have skills gaps and vacancies this can lead to ineffective performance or lack of scrutiny. Cast the net wide in looking for new and diverse talent and plan ahead to refresh the Board at regular intervals. Proper training and induction should be provided to would-be recruits to the Board. Allow them to attend a few meetings as an observer before taking the plunge.

  1. Ineffective meetings

Regular meetings to enable a proper exchange of views are very important to good governance. In a fast world, where digital communication is becoming the norm, some of the nuances of physical meetings, body language and interaction can be lost. Meetings need to be properly run, with a clear agenda and board papers circulated in advance, at regular times and accessible venues. Attendees should not leave feeling unclear about what has been decided; concise minutes should be prepared and circulated promptly after the meeting. The Chair plays a vital role in running effective meetings, supported by a good company secretary.

  1. Dominant founders

Sometimes the original founder of the organisation, a long-serving Chief Executive or Chair may have undue power or influence. Sometimes they may take on too much responsibility and spread themselves too thin. It is important to document the roles and responsibilities of key officers, including the limits on any delegated authority to make decisions (e.g. financial limits on payments, requirements for second signature etc). It is a good idea to write into the constitution a requirement for certain appointments to be refreshed every few years.

  1. Mission drift

If an organisation starts to drift away from its core mission or principles, this can cause a sense of confusion and disengagement for board members, employees, members and customers. There could be a variety of reasons for this. Funding streams or contracts may encourage managers to move into new areas of activity. It is important for the Board to continually review whether the organisation is still fulfilling the objectives written into its constitution. The constitution may need to be reviewed and refreshed to cater for change and this will usually require the members to vote in favour of the change.

  1. Engagement with members and stakeholders

Members and stakeholders need to feel that their voice counts and need to be kept regularly informed about the organisation’s activities. The board must be accountable to and represent the interests of the membership and service users effectively, otherwise a division can arise. This relies on transparent rules and reporting lines, as well as effective regular communication by the Board to keep all stakeholders informed. Members’ meetings should be appealing and easy to attend – think about possible incentives to get people to attend. Cadburys used to give away free chocolate to shareholders who attended its AGM!

  1. Deal with conflict swiftly and decisively

Conflicts occur in most organisations from time to time. Unfortunately, disagreements can quickly escalate and cause rifts within the organisation as positions become entrenched. Conflicts are not always a bad thing- they can help to bring issues to the fore and lead to better debate. The Board, usually through the Chair, needs to deal with conflicts diplomatically, mediating between the different parties to achieve a positive outcome.

Mark Johnson is an experienced solicitor and company secretary helping charities, social enterprises and SME businesses to flourish. His company Elderflower Legal offers a range of support packages to help organisations with legal compliance, managing risk and good governance. For more resources check out elderflowerlegal.co.uk.

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