By James Beck
All too often the senior management team gets treated as though its time is limitless; with all board decisions or requests receiving high priority regardless of the managers’ capacity to drive them forward. Similarly, senior managers may have to devote several hours each month to attending board meetings as well as spending time compiling papers and/or presentations for the board. This paper provides advice on what boards can do to satisfy their information requirements while not overburdening the management team.
Non-executive directors must remember that management has a depth of information about the organisation not available to them. There is the potential to misuse that information, if management:
- Fails to disclose information because of its impact on staff or themselves
- Uses information to control or manipulate the board, e.g. providing selective or excessive/irrelevant information in the board pack
- Knowingly uses the non-executive directors’ fear of appearing ignorant to avoid questioning by use of complicated or jargon-based information.
Importantly, information presented to the board should be in plain English, not overly technical and pass the ‘reasonably intelligent person’ test of comprehension.
The board must ensure it has a proper flow of information from management to enable directors to comply with their statutory duties. Management must be rigorous and consistent in presenting information to the board. In particular, directors must understand the company’s business drivers, operating environment and major risk factors, if the board is to fulfil its role successfully. In doing so, the directors rely on the CEO and senior managers to provide them with appropriate information about the company and what it is doing. However, a board’s information needs will differ from that of management, so papers put to the board should prioritise issues and pay attention to the key matters of substance, rather than on operational detail. It is important for the CEO and senior managers to distinguish board meetings from management meetings. The CEO, together with the chair, plays a key role in ensuring that board meetings do not become too operational.
The statutory obligation on directors to have informed themselves about the subject matter in relation to their decision making cannot be complied with unless directors have before them the relevant material upon which to base their decisions. Furthermore, getting information from a wide perspective of views – including views external to the company – is essential to reduce the likelihood of the board making a wrong decision. The board must put in place procedures that enable all directors to have good notice not only of decisions that need to be made by them, but also of the relevant supporting information in the board papers.
Where a full agenda to accompany notice of a meeting is provided prior to board meetings it is easier to ensure that the proper material is available. However, the late provision of papers, particularly if it involves complex financial material, can lead to decisions being made without any real consideration or understanding of their consequences. Directors who make decisions in this way will not be complying with their statutory duties.
Where decisions are made outside board meetings, it may be more difficult to demonstrate that a director has complied with the relevant statutory duties. Management must therefore ensure that directors – non-executive and executive – are kept aware on a continuing basis of the company’s financial position and its social and environmental impacts. It is the CEO’s role to ensure the organisation has a culture of preparing and disseminating such information to all decision makers.
To avoid any conflict, it is vital that the board be in control of the reporting of information and actively determine what needs to be reported and by whom. This point is made clear by Justice Middleton in the Centro judgment (ASIC v Healey (2011) FCA 717 at 226):
A board can control the information it receives. If there was an information overload, it could have been prevented. If there was a huge amount of information, then more time may need to be taken to read and understand it. The complexity and volume of information cannot be an excuse for failing to properly read and understand the financial statements. It may be for less significant documents, but not for financial statements.
As far as practical, the amount of documentation for circulation should be limited, to ease the burden on busy members. Further, the writers of board papers are often so familiar with the material they are writing about they assume that everyone else shares a similar level of knowledge. They do not appreciate that board members may not have their depth of understanding on the topic. This can be made worse if the writer uses unexplained abbreviations, technical jargon and financial or other information in graph or table format that is not summarised. Thus, documentation prepared for board members should conform to the following guidelines:
- Dot point format is preferable to lengthy paragraphs.
- Lengthy documents should contain an executive summary, table of contents and section and page numbering system, for easy reference.
- Key points, options and recommendations should be highlighted, bolded or underlined.
- Any complex technical terms should be explained, preferably in a glossary.
- Be well written – the paper should be checked for spelling errors, bad grammar, rambling sentences, etc.
- Tell the unvarnished truth not just the ‘good news’ – board papers can sometimes focus on the positives and skim over the negatives.
Standards Australia has developed a standard for board reporting (HB 403-2004), which sets out board and management reporting responsibilities and provides guidelines on how to present information in board papers. There is also training available for managers from a number of sources including that offered by Effective Governance.
Uniformity and consistency can be achieved by using a board paper template. A sample board paper format is available here.
Board paper selection
While the choice of papers to be prepared for each board meeting will be dictated by the board’s oversight responsibilities and the board calendar (e.g. statutory reports; performance reviews; audit), the preparation of specific papers will be the decision of the chair and/or CEO in consultation with each other and the company secretary in response to:
- a director’s request, or
- a need identified by the CEO, company secretary or member of senior management team.
Before deciding whether to assign responsibility for a board paper to a manager, the CEO and company secretary should consider the requirement for and categorisation of the paper (i.e. whether the paper is for approval, discussion or noting). Unnecessary time and expense should not be incurred producing papers that add little value. Therefore, paper selection should be based on:
- whether the matter is reserved for decision by the board in accordance with the delegation of authority policy
- the importance and urgency of the issue, and its implication/relevance for the organisation
- whether it is a new issue, or if there is potential to consolidate a response from existing information, reports, etc.
- the scope of the task and time available
- resource requirements and capacity.
Finally, the timely receipt of the board papers allows directors to form an opinion prior to a meeting and to ask questions of the CEO and management about what will be discussed or decided at meetings or to discuss issues among themselves. The provision of timely and accurate information can be critical to the board’s ability to appropriately challenge and scrutinise management. Further, the information provided in the board papers builds trust between the board and management where it is accurate, timely, written for directors not managers, and well organised. Thus, expectations as to the delivery and content of the board papers are an important component of the board’s policy framework. As such, it is always wise for the board to have board paper policy – either as separate document or as part of the board’s charter.