Limits on President/CEO’s Fiscal Discretion

Do boards set a dollar limit on the president/CEO’s fiscal discretion?

The chief executive should have  complete discretion as long as he or she works within the budget and budgetary  guidelines.  However, if any major changes are needed, the board must approve them.  For example, if the president/CEO finds resources budgeted  for capital improvements are not needed, he or she cannot simply move these funds to the salary account without board approval.

Many organizations need to borrow money on a short-term basis to meet cash-flow requirements.  The CEO needs to have complete discretion to act quickly in such situations.  Consequently, the board needs to pass a formal resolution authorizing a fiscal limit for bank borrowing.  In practice, this limit is typically dependent upon the needs of the organization and the level  of confidence the board has in the CEO.

Source: Eugene Fram with Vicki Brown, Policy vs. Paper Clips, Third Edition, 2011, pp. 225-226.

See also: Eugene Fram & Bruce Oliver, Want to Avoid Fraud? Look to Your Board,  Nonprofit World, September/October 2010, pp. 18-19.

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2 comments

  1. In principle, I find this wisdom difficul to dispute or even question. At the same time, many boards, particularly those connected with politicians, have demonstrated the ability to abuse this principle. But I suppose a simple firing is the correct response but that also suggests that a board has in place both good systems and reports and the ability to review and understand these reports. This is of course where the need to question every potential situation along these lines arises. While this will fly in the face of the father of policy vs. paperclips, I am afraid I do not have total trust or faith in boards, particularly in their earliest stages of development, to practice this principle effectively.

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    1. I agree that it may not be a viable approach for an early stage organization, or boards under significant political influence. But every mature board, which is not dysfunctional, should be able “trust but verify.” The reports and processes should be reasonably transparent and the senior management’s actions need to be reviewed periodically for being trustworthy ones. It involves following well established board processes and critical thinking by the board’s leadership.

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