Directors have always had to rely on what management tells them, but they have never been more concerned about the quality of their board packs.
“We’ve certainly seen increasing pressure on boards to perform and I think that’s made them think more carefully about the quality of the information they’re receiving,” says Steven Cole FAICD, non-executive director of Matrix Composites & Engineering and managing director of the consultancy Cole Corporate. “They may be wondering whether the information they’re receiving is as good as it should be or whether it could be impeding their ability to monitor organisational performance and risks and to make sound decisions.”
The primary source of directors’ information is the board pack.
“Boards are removed, as they should be, from the day-to-day management of an organisation so the board pack should give them a concise view of what’s happening in the business,” says Mark Licciardo GAICD, managing director of specialist corporate governance consultancy Mertons, chairman of the Melbourne Fringe Festival and a former company secretary.
“It’s frustrating that many companies take a lazy approach to putting board packs together. Instead of writing good, concise, summarised papers, there’s a tendency for management to put in far too much information – to throw everything at directors and leave it to them to sort out what’s relevant. Even worse, if it’s looking for approval for a relatively minor matter, it might put it in the whole, externally-sourced presentation pack.”
Laziness is just one reason for wordy papers.
“Boards ask a lot of questions,” says Kirsten Mander FAICD, chairman of the Victorian Assisted Reproductive Treatment Authority, deputy chairman of the International Women’s Development Agency and a former general counsel and company secretary. “Some executives present an encyclopaedia of everything they know on the subject because they don’t want to admit they don’t have an answer.”
Executives commonly forget that directors are not immersed in the day-to-day detail of the organisation. If they need to refresh their memories, it is not a sign of ineptitude or forgetfulness.
“They might also forget that the directors don’t always share their depth of knowledge on a particular topic,” says James Beck GAICD, managing director of Effective Governance. “This can be exacerbated if the writer uses unexplained abbreviations, technical jargon and financial or other information in a graph or table format that isn’t summarised.”
Meanwhile, many executives bemoan the fact that directors waste their time.
“Some directors don’t appreciate how much time and effort goes into a well-constructed board pack,” says Cole. “They frustrate management by asking for formal papers on matters which might be better dealt with another way. And some even turn up to a meeting without having read or properly considered the material they’ve received.”
Following up on directors’ queries can be distracting as well as costly.
“I think most boards are conscious of that, but younger, less confident or less experienced directors may feel they have to cover their bases by requesting a lot of detail,” says James Wynn FAICD, managing director of JWI Corporate Advisory Services (Twitter @jwiadvisory) and company secretary of the Penrith Lakes Development Corporation.
Some directors might make demands to demonstrate their engagement while others fail to articulate their needs.
“One board I worked with was receiving in-depth financial reports when all the directors really wanted was a dashboard-style summary page with the option of asking for more detail if they needed it,” says Licciardo. “But no one thought to request a change until a new director joined the board, looked at the board pack with fresh eyes and asked why they had all of that superfluous information.”
Ask for what you want
Directors have ultimate responsibility for the quality of information they receive. “The board has a statutory obligation to put procedures in place that ensure all directors have good notice of decisions they need to make and appropriate supporting information in the board pack,” says Stephen Howell, principal adviser at Effective Governance. “In the Centro judgment, Justice Middleton made this clear when he said that if there had been an information overload, it could have been prevented – that a board can control the information it receives.”
Those preparing the papers and those asking for them should both start with the end squarely in mind.
“The role of the board is not to make decisions about everything that’s going on in the company, but to focus on strategy and key risks,” says Mander. “It sounds obvious that directors and management should use that to guide what goes into the board pack, but it’s not commonly done.”
She believes most companies would benefit from a deep thinking exercise around what they want to appear on the agenda, how they want it to appear and what comprises a good paper for them, including how long is long enough.
“The brain isn’t endlessly permeable and directors don’t have endless time to read, so I believe in putting limits on the size of papers,” she says. “Of course that can’t be set in stone. Occasionally, something like a major acquisition will demand more detail.”
It is also important to look beyond the papers themselves. “Part of best practice is using the board’s calendar to identify upfront the key decisions it will have to make, the key areas it needs to oversee and how often it should revisit them,” says Mander.
“This enables the board and management to plan for the type and level of information needed and takes care of a lot of the spadework regarding the board agenda.”
Normally the chairman works with the CEO and company secretary to establish the agenda. “Theory tells us it’s good practice to have directors looking forward for at least a third of their time and that’s reasonable,” says Wynn. “Most directors are high-calibre individuals and it makes sense to ensure their talents are being put to work on strategic thinking rather than wasted on reviewing what’s already happened.”
Directors need their board packs to be predictable, well-structured and easy to navigate and while technology is changing the way they are presented, the formatting requirements remain the same. “You need to be able to find a relevant paper easily and navigate through the pages efficiently, so they must be properly indexed, with all pages labelled, good executive summaries and with any secondary information annexed, not interwoven in a meandering narrative style,” says Mander.
Beck recommends using bullet points rather than lengthy paragraphs and highlighting key points, options and recommendations. “And any complex technical terms should be explained, preferably in a glossary,” he says.
Management should also tell the unvarnished truth. As Beck points out, board papers sometimes focus on the positives and gloss over the negatives. But, first and foremost, directors want to know what is expected of them.
“The purpose of every report, presentation or agenda item in the board pack should be upfront and clear, along with the response that’s being sought from the board,” says Cole. “Is the item for background information only? For discussion and feedback? For noting? Or for resolution or decision-making? No director should reach the end of a paper and be left wondering what he or she is being asked to do.”
Licciardo points out that without a strong chairman, the board pack can take on a life of its own.
“If different directors are asking for different things to be included and nothing gets thrown out, you can end up with a dog’s breakfast,” he says. “I’m seeing more and more boards taking time without management at the end of a meeting to discuss management issues and review the performance of the board in terms of decision-making and agenda management. It would be a good idea to include an assessment of the quality of that month’s board papers and a quick review of its contents.”
Board papers are a formal record of the decisions taken by the board so directors must have confidence in the board’s decision-making processes.
“This is an enormously complex issue as the quality of the decision-making is heavily dependent on the experience of the board, the nature of the issue under discussion, the quantity and quality of information provided to support the process and the amount of time available to make the decision,” says Howell. “The content and quality of board packs are often highlighted as an area for improvement in the board reviews we conduct and we recommend that boards review the packs they receive at least once a year.”
Wynn believes that directors should see the board pack in a broader context of information-gathering and observation.
“I think best practice goes beyond getting together for board meetings and working through the agenda,” he says. “In my experience, directors with a deep understanding of the organisation are a bit more hands on – they go on plant tours, speak to management and draw information from various indirect channels. However well it’s presented, there’s only so much you can get from the written word.”
Vital questions about your board pack
Effective Governance’s James Beck believes that in order to fulfil their fiduciary duties, directors should have appropriate answers to the following questions about their board packs. “If they don’t, they need to make sure changes are made immediately,” he says.
- Can I trust the data?
- Does it cover the critical issues?
- Is it sufficiently up-to-date?
- Is it presented in such a way that I can digest it quickly?
- Is the information purely historic or does it assess future risks?
- Do I receive only summarised information or data?
Avoiding frustration on both sides
The best board packs are created when the board and management have mutual trust and respect, engage in a mature dialogue and feel confident they are all playing on the same team. Cole Corporate’s Steven Cole summarises behaviours that can impede this relationship.
Members of Management:
- Provide too much or too little information.
- Have little respect for the board’s needs and role.
- Fail to understand the function and purpose of board packs.
- Fail to provide information in a timely manner.
- Fail to put the information or its purpose in a proper context.
- Delegate upwards, leaving directors to make decisions which should have been made by management itself.
- Overburden the board with operational issues.
- Do not understand that one role of directors is to satisfy themselves of management’s competence by putting it to the test.
- Do not fully appreciate that boards only meet periodically on organisational business and are dependent on the executive for a flow of relevant information.
- Do not make it clear what information the board requires, and in what form.
- Dwell too much on operational matters.
- Ask for formal papers when they are not necessary or appropriate.
- Underestimate the time and effort involved in putting together an effective board pack.
- Increase the number of meetings so that more board packs are required.
- Arrive at meetings poorly prepared and without having read the material supplied.
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