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Delegation of Authority: Where the board draws the line

Delegation of Authority: Where the board draws the line

By Chisom Obiudo. *

One of the areas of tension between boards and CEOs is simply misunderstanding whether the CEO has the power to decide something between board meetings or whether they need the board’s approval.

Perhaps the CEO has fired one of the executives, or maybe the CEO has entered into a lease or agreed to sell a division, shut down a branch, or cut off relationships with a significant customer or supplier.

Whatever the case, if there isn’t clarity between your board and your CEO about the level of authority that the CEO has between board meetings, there can be friction and tension. Even worse, it could potentially lead to dismissal or resignation.

Boards should avoid such unpleasantries and create a Delegation of Authority document that they can review and approve annually. This approach is more explicit and complete and ensures that all parties know what delegation of authority has taken place.

In practice, the board and the CEO agree on the demarcated “bright line” between the board’s and the CEO’s approval. They establish this bright red line in the delegation of authority document, and the board approves it. If something is not in the delegation of authority, then, by default, the power and the approval are the board’s and not the CEO.

Matters to include in a Delegation of Authority document:

1. Operational expenses:

The delegation of authority should be clear on the extent to which the CEO has any mandate to exceed the budgeted expenditure amount, whether it’s the line items or the aggregate operating expenses in the budget.

Some CEOs are delegated a certain percentage (e.g. 5%) over and above the approved budget items. If you’ve got an experienced CEO and you’ve got confidence in them, and you’re a governing board, this would not be an unusual level of authority.

If you have a new CEO in an economic recession and you are uncertain whether you will be successful financially, you may choose not to delegate any excess. In other words, the CEO has to come back to the board even if an operating expenditure is a few dollars over budget. All these items should be clarified and written down in the delegation of authority.

It may also be worth asking, who has the authority to approve the expenses of board members? Or of the CEO? Or of employees below the CEO? It may be material because of the reputational risks attached. We’ve seen public naming and shaming because of executive expenses that were not appropriately handled, even though the amount may be small.

Also, consider whether you need a travel expense policy in addition to your delegation of authority. A travel policy will cover all the eligibility and the required documentation for approval of the said claims.

2. Legal action:

Who has the authority to commence legal actions or litigation within your organisation?

Who has the permission to settle them or negotiate settlements? Who has been delegated to write off bad debt accounts?

The focus here is on decisions beyond the expenditures for legal fees and the impact on the liability side of the enterprise that could have a significant material impact on the financials.

3. Hiring human resources:

Does the CEO have the authority to hire a new member of the C-suite? The board often considers three or four “internal control officer” positions as “red-light” positions in the organisation. They’re not exceptions to the rule of the board only being the employer of the CEO, but they are positions that the board would consider differently.

The chief financial officer (CFO), the internal auditor (especially), and the corporate secretary are the three central positions where the board of a large organisation would be interested in who is appointed to occupy that position and the budget allocated.

While you should not take the direct line authority away from the CEO, there is a shared authority here. With shared authority, there is shared decision-making around the hiring, firing, scope, budget, resources, and potentially the performance evaluation and compensation of the “internal control officer” positions: the chief financial officer, the internal auditor, and the corporate secretary in a large organisation.

These three functions play a crucial role in the corporate governance of the organisation, not just the day-to-day management. Dual accountability positions have a dotted line up to the board and a direct line to the CEO.

The board may want to cover these areas in the delegation of authority, even if it’s just a few lines to describe what’s been agreed on, a one-up check for critical or red-light positions.

Finally, a delegation of authority may even include who has authority when the CEO is away from the office. Whom will the CEO deputise when they are away on vacation or at a conference? What happens with the CEO’s authority in the office when they’re not there? Is there a designated person who has all their authority, or to what extent has the CEO’s authority been re-delegated to someone acting as the CEO in the CEO’s absence? These are issues to be discussed between the board and the CEO.

Therefore, review your delegation of authority document as part of your annual planning activities. It usually goes to the audit committee because it typically has the primary interest and the closest control over operational expenditures, capital expenditures, litigation, contracting, procurement, write-offs, and investments and borrowing.

You want to be clear about where you’re drawing the bright line between the board and the CEO. You are reducing ambiguity, and you’re making sure that both the board and CEO are clear as to what decisions the CEO can make between board meetings and what decisions the CEO needs to bring back to the board.

As good fences make good neighbours, a good delegation of authority keeps the board on the beach and the CEO safely surfing on the water!

  • Chisom Obiudo is a legal and governance professional with a passion for helping governing bodies embed a culture of good governance through her thought leadership and corporate governance training.

She is currently a member of the Institute of Directors South Africa and serves as the Deputy Chairperson of the Governance Committee at Namibia Investment Fund. She holds an LLB degree and a Masters degree in corporate governance and specialised certificates in compliance, non-executive directorship and legislative drafting. She writes in her personal capacity. Reach her at [email protected]

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