By James Beck
If you asked the senior management team whether they saw value in attending board meetings, what would their response be? All too often, from our experience, senior management teams get treated as though their time is limitless; with all board requests for information receiving high priority regardless of the managers’ capacity to action them. Similarly, senior managers may have to devote considerable time each month not only to attending board meetings, but also compiling papers and/or presentations for the board. And then there are those situations in which board meetings are fraught with dysfunction: the directors are at war with each other or with the CEO and management team—hardly encouraging for the management team.
None of these situations is ideal and, in most cases, they can be solved if the board is committed to providing the organisation with value-adding governance. This article will provide some tips and hints on what the board can do to handle these scenarios before they become a major issue for the board, the CEO and the senior management team.
Dealing with information requests
Section 180 of the Corporations Act 2001 (Cth), the duty of care and diligence, includes the directors’ duty to take affirmative steps to inform themselves before making a business decision. 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.
In the first instance, directors receive the information they need to make informed decisions from management supported by the company secretariat. However, as one senior executive commented to us during the course of a board review: “at times the board expects a lot and management resources can be stretched to meet the board’s requests”. Indeed, one of the common problems many organisations face is frequent requests for information from the board or individual directors. Where data is not readily available such requests can cost unreasonable amounts of employee time and money.
While we would never suggest that boards should not ask for more information where it is necessary for the directors to fulfil their fiduciary duties, there are many situations in which directors are delving into micromanagement, i.e. the job of the CEO and senior management or the information they have been given does not meet their requirements. Micromanagement usually occurs when directors do not understand the difference between governance and management. This situation can be particularly bad where there are no policies or procedures in place that outline appropriate roles for the board and management, which is why we strongly recommend the inclusion of, at the very least, the board’s role and that of the chair and CEO in the organisation’s board charter.
If the board offers “push back” on the information provided by management and always want more before directors are prepared to make a decision, the chair should give constructive feedback to the CEO on what the board expects. Management should be made aware that directors would consider the following questions about the information they are receiving:
- Is the data trustworthy?
- Does the paper cover all necessary aspects of the issue?
- Is the information up to date?
- Is it presented in such a way that I can digest it quickly?
- Is the level of detail, language and content appropriate to a board member?
- Are the risks, if any, considered?
- Are options/alternatives discussed?
Following is an example of one director’s response when asked about the quality of the board papers:
“A more fundamental issue is that virtually all the papers are binary—yes or no—the board is not given options. The papers hardly ever articulate choices or options. There is an automatic mindset. It is ridiculous not to get options, even if they are discounted in the paper. This causes the board to question the thought processes behind the recommendations, which can delay decision making.”
In the case of the director who made that comment, his board had never discussed its information requirements with the CEO—an oversight that was addressed when we advised the board to do so. Overall, 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.
Getting the board papers the directors need
The board papers are the chief source of information for directors. As such, it is critical that the board gets those papers in a format that is easy to read and comprehend, and containing the appropriate content. Effective papers should have the right balance between data and detail, analysis and insight, drawing on expertise from relevant managers. However, as one frustrated director once confided to us: “Getting the key point into the paper appears to be a mission impossible for some people on the management team.”
The board led by the chair is responsible for:
- Setting expectations and providing directions to management on:
- The content and format of reports;
- The timing and timeliness of board papers;
- The amount of information provided;
- Ensuring it has sufficient information with which to make decisions;
- Ensuring there are processes and controls to ensure the integrity of the information provided; and
- Setting KPIs for management to report against.
To clarify the board’s expectations in relation to the board papers, we would recommend that a specific policy and procedures be developed—either as a standalone document or for inclusion in the board charter—that sets out the format, content requirements, paper writing and distribution time frames, etc. Having a properly structured process that gives direction to management and assigns roles and responsibilities including how papers will be reviewed, timings for delivery, feedback and revisions where a paper does not meet the board’s criteria.
A policy and procedures on board paper preparation will help to avoid situations where the company secretary is conflicted over what to do with a suboptimal paper submitted for the board pack, as evidenced by the comment below:
“My responsibility is to read the papers like a board member, but I have limited time to change things as well as the ‘diplomatic thing’ of going back to a member of the executive and requiring changes.”
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 the senior management team.
Having a calendar of board and committee meeting dates along with timelines for paper submissions lets board paper writers know when papers must be prepared. For each board or committee meeting, we recommend a due date be set for the submission of draft papers, e.g. ten working days prior to the date of the meeting, to allow for revisions.
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. Where the request for a paper is rejected, the CEO or company secretary should advise the chair of the reasons why.
We would recommend that paper selection 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; and
- resource requirements and capacity.
As a final point on the board papers, while the board papers should be as error free as possible, it is unrealistic to expect that there will be no grammatical or spelling errors—what cannot be tolerated are incorrect facts or figures. Directors caught up in pointing out every typographical error in the board papers are hindering meeting processes.
The attendance of key executive managers augments the meeting process. Having the CEO’s direct reports such as the CFO present to respond to questions posed by directors relating to their areas of expertise enables directors to not only get details of the matter under discussion, but also to learn more about the organisation by getting a different perspective from that provided by the CEO. The CEO may also invite other key managers or employees to attend meetings at which the CEO believes they can meaningfully contribute to board discussion.
In particular, the heads of the organisation’s business units/functions can assist the board with its deliberations and provide critical insights and analysis. The attendance of such personnel allows the most knowledgeable and accountable managers to communicate directly with the board. It also provides the board direct access to individuals critical to the organisation’s succession planning. The following comment shows that directors recognise the benefits of such interactions:
“I’d like to have a bit more direct involvement with some of the business unit heads. They’re all very good in their fields and it would be good to know exactly what issues they’re dealing with regularly and tell them that we think they’re doing a great job and that sort of thing … if you have that direct involvement from someone whose business unit they’re from, they’ll be able to talk to you with a little bit more immediacy about things. And I can relate to things a lot better that way.”
Conversely, having busy executives and managers spending hours, or even days, sitting in the boardroom or waiting outside the room to be called in to present is adding to the cost of governance rather than enhancing the organisation’s bottom line. Even more annoying from an executive’s perspective would be to have their report or presentation cut short or dropped due to lack of time. As noted by one director:
“We rarely manage to get through the agenda, so you need to have a good idea of which parts can be hurried before the meeting starts.”
The key to avoiding this is to have a well-designed agenda, which has a number of benefits. The agenda directs attention to what needs to be done before the meeting (i.e. reading/preparation), during the meeting (it acts as an objective control of the meeting’s progress) and after the meeting (it is a measure of the meeting’s success because all participants can see how thoroughly they have achieved the items on the agenda and whether sufficient time was allocated for discussion). Allocating times and sticking to them unless there is a compelling reason not to do so will give senior managers assurance that their attendance at the board meeting is not in vain and the board does recognise that their time is valuable.
An important part of designing an agenda is the screening process. Given the range of issues and limited time that most boards will have to deal with them, it is important for an agenda to include only those items that are ripe for productive discussion, and where some decision can be reached. If management has not developed the item enough for productive discussion, and more information is needed, it may be appropriate to delay inclusion until a later meeting. Similarly, if there is insufficient time for management to prepare accompanying documentation to aid decision making, it is often better, if at all possible, to leave the item until another meeting.
Overcoming boardroom dysfunction
A sound relationship between the board and management is essential to good governance in any organisation. Boards rely on senior management for accurate, timely information on the organisation’s strategic initiatives, risks, controls and challenges. In turn, management relies on directors for wisdom and judgment gained over years of business or other experience. None of this will be possible without a good working relationship. Managers and directors who aspire to good governance must commit to communicating openly, even about issues that make either or both sides uncomfortable. Indeed, the root cause of much board dysfunction is lack of communication.
It is important to note that the relationship between the board and management is symbiotic: the board is responsible for the actions of the management and hence not only does the board need to monitor management, management needs to take the board into its confidence about the complexities of day-to-day operations and apprise the directors of the nuances and subtleties of running the organisation.
The key is to establish trust by:
- Being truthful—tell it as it is;
- Being forthcoming—deliver bad news as well as good news;
- Communicating frequently in the case of the chair and CEO;
- Socialising, e.g. boardroom lunches attended by the board and senior managers;
- Showing respect—thinking through the other person’s point of view shows respect and respect builds trust; and
- Being responsive to the other person’s requests, ideas etc.—you may not agree with them, but you must show respect.
With regard to the final two dot points above, directors should be sensitive to those managers in attendance who may be committed to a project they have put forward for decision and refrain from disparaging remarks that will only serve to alienate management from the board.
Critical to improving boardroom dysfunction is the chair/CEO relationship, which requires respect for differences in roles, responsibilities and personal styles. It requires clarity of mutual expectations and regular communication. The frequency and form should be discussed and negotiated by the chair and the CEO. Even if they have personality types that put them at odds with each other, this does not mean they cannot establish a good working relationship. The ultimate outcome of a situation in which the chair and CEO cannot establish a professional working relationship, because they simply do not get along, should be either the removal of the CEO or resignation of the chair for the benefit of the organisation.
For productive board meetings, the following behaviours should be encouraged:
- Respecting the agenda—directors being mindful of management’s time and focusing on the issues of importance to the organisation;
- Asking the tough questions—directors should question management in a respectful manner, management should understand that directors have the right to question them;
- Creating friendly, constructive dissention—dissent or expressing an alternate opinion is critical to avoiding conformity, but it must be done in a balanced way to avoid conflict;
- Directors and managers listening and learning from each other.
Challenge is clearly essential to ensure that complacency is avoided and a culture of continuous improvement is fostered. But challenge also needs to be coupled with support. At its best the relationship between the board and the management team is a partnership where each accepts its different roles and works together to drive performance.
Dysfunctional boards can become quite accustomed to underperformance by directors and/or managers and discontent in the boardroom. Hopefully, early warning signs such as those presented here will serve as a good starting point for governance improvement on the board and give senior managers a more positive opinion of the board and board meetings.