AICD facilitator, Dr Judith MacCormick FAICD, gives some tips on effective board reporting.
In the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services, Commissioner Hayne critically stated that “Boards cannot operate properly without having the right information from management.”
So, what is the ‘right’ information and how should it be presented? Commissioner Hayne said, “there is no single answer to how boards can ensure that they receive the right information”. Board reporting is inevitably part ‘art’ and part ‘science’; a ‘tick-a-box’ approach is likely to hamper development of a culture that is both performance and accountability/ethically-oriented.
From my experience consulting on governance and organisational effectiveness across most sectors in Australia and overseas, I regularly see the impact of quality board reporting. Excellence in board reporting is not about management taking advanced writing courses. What distinguishes organisations with excellent reporting is the board and management’s mutual understanding of their respective roles in the governance ecosystem, as well as a willingness to challenge each other and have constructive dialogue.
Here are my tips for effective board reporting:
1. The board should make clear what it needs from management
In looking at board-effectiveness, there is a common tension: from management’s perspective, the board gets too deeply engaged operationally; from the board’s perspective, management doesn’t provide ‘the right information’ from which insights can be generated and robust decisions made.
If the information provided by management to the board is not sufficiently analysed and evaluated, it is difficult for the board to provide valuable strategic insights. Directors can be drawn into questions around operational issues and their ability to add value is diminished as they are buried beneath mountains of information. Management, on the other hand, can feel disempowered as director questioning focusses on the micro data provided.
It is important directors make it clear to management what they need to know to make sound governance decisions. It is also important boards provide frank and honest feedback to management about the information they are receiving. Reporting to the board is an opportunity for productive dialogue rather than adversarial policing or fault-finding.
2. Information should be presented clearly and simply
Directors need clarity around key messages from management. Managers are steeped in a wealth of information and are so familiar with the material they are writing about, it is often easy for them to assume that everyone else shares the same level of knowledge and that key messages are self-evident. Directors do not have the same depth of operational understanding as management.
Directors should encourage management to provide a considered interpretation and explanation of what is significant. Albert Einstein once said, “If you can't explain it simply, you don't understand it well enough.” It is important management takes the time to refine information and removes detail that doesn’t contribute to the board’s greater understanding of the key issues affecting the organisation. Boards should ask management to provide a complete picture (perhaps through the use of charts and dashboards) and draw out interconnections. Governance is complex; exemplary thinking by management can help make it simple, but not simplistic.
3. Measure what matters
High-quality financial and non-financial reporting helps provide a clear line of sight back to the vision, purpose, strategy and values of the organisation. What is meaningful to measure, monitor, and report to the board needs to be driven by dynamic dialogue between management and directors. In order to be useful, information in board reports must be material, relevant, reliable, comparable, understandable, and, importantly, calibrated against the strategy and risk appetite.
As a director, in considering what measurements to seek out from management, or focus on in reports, some questions you might ask include:
- How does this metric reflect and support our strategy?
- Does this metric reflect a key performance driver for our company?
- What aspects of performance does this metric drive?
- Is this metric used in executive compensation plans?
- How is this metric calculated and why is it used?
- Is this metric commonly used in our industry? Do our competitors use this metric, and if so, how do we compare with them?
- What other metrics does our industry use?
- Do we have information about this metric for past performance periods, and if so, what is the pattern?
- Is the company required to disclose this metric to investors, and if so, what message does it send?
- Will a low score on this metric bring us negative media and/or shareholder attention?
- Is there good news that the company could promote through its website and media channels1?
The most effective boards collaborate with management to create well-defined key performance indicators (KPIs), comparisons, and benchmarks to monitor performance, continuously refining and enhancing financial and non-financial metrics that include both lag (historic) and lead (predictive) indicators. Importantly, a clear line of sight needs to be drawn between what success from delivering on the strategy looks like and these KPIs.
4. Avoid reporting creep
Boards should be conscious of not treating management as having limitless time. Board decisions, or requests, for information receive high priority, regardless of the manager’s capacity to drive them forward. Provision of this information often adds to the already considerable resource required to compile papers and/or presentations for the board. Additional requests may ultimately become another element to be routinely reported, all leading to ‘Reporting Creep’.
To optimise management’s time and ensure quality reporting, the board should consider the following issues when requesting information:
- Is it a board issue?
- What are the resource and capacity requirements to deliver on this request?
- How important and urgent is the issue, and what is the implication/relevance for the company?
- Is this a new issue, or is existing information or reports sufficient?
- What is the underlying question we are seeking to better understand? Is there different information we should be requesting?
In the interests of continuous improvement and reinforcing collaboration between directors and management, it is useful at the end of every meeting for boards to provide management with feedback on what was valued, as well as what could be improved, added or deleted.
The objective of the board is to deliver good governance decision-making. Directors should seek from management the information they need to meet and enhance their decision-making role, which in turn will lead to better compliance and organisational performance. This requires directors, who come from multiple backgrounds, to be clear about the messages in the reports. It’s also important management deeply understands the detail of organisational matters in order to communicate them simply and effectively.
The key is the quality of data and information from management, not the quantity. Only data and information relevant to the strategy and risk appetite should be reported and measured. Ideally, at the end of each board meeting, directors and management should be able to agree that value was added to both sides of the governance-operational divide. Reporting should be seen as a dynamic activity – one that can, and should be, continuously improved.
1 Adapted from: Director Essentials: Understanding Nonfinancial Metrics by the National Association of Corporate Directors (NACD)
Already a member?
Login to view this content