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The smart director.

Good decisions are based on good information. Here are some ideas for rethinking and enhancing the information flow to the board

The fast-paced, hyper-competitive, litigation-prone business environment that today's corporate directors operate in makes it imperative that companies have effective information flows to their boards and that directors do their homework.

Board members must be knowledgeable about the company itself, the industry the company is a part of, the competitive landscape, the management of the company, succession plans, the firm's long-range strategic plan, and its prospects for the future. The business judgment rule, common expectations of what the duties of directors are, SEC requirements, and legal implications are just a few of the reasons why today's directors must be enlightened about the specific issues they vote on and about their general oversight responsibilities.

I'm not sure whether there ever was a day when the "mushroom theory" of directors was acceptable. But if there was, its time has long since passed. This ill-conceived idea holds that if you keep directors in the dark and give them some food and water once in a while, everything will turn out fine.

Like anyone else in business, directors need information to do their jobs well. But directors are in a peculiar situation. If your company wishes to improve the flow of information to its board, you should remember that directors are not full-time employees wholly immersed in the day-to-day activities of the firm. They have other positions, other duties, other demands on their time. The information that flows to directors relative to their board obligations must be pertinent, crisp, and as informative as possible. Directors have a limited amount of time in which to digest information, analyze it, and use it as a basis for fulfilling their responsibilities.

Before I discuss these various matters at length, I should point out that in the past 12 years I have had the pleasure of sitting on 13 corporate boards as well as a great number of non-corporate boards. The ideas that I have concerning information flow to the board do not reflect in any way on the boards that I have been associated with in the past -- nor with those I continue to sit on -- since they have performed this task in an exemplary fashion. My thoughts stem from research conducted after I was asked to write on this subject, discussions with other directors, and my experience in having spent a considerable amount of time interacting with corporate boards.

My idea of a board's role is simple. It should provide independent oversight but it should be supportive. It should not be an "auditor." Nor should it be confrontational or feel that its mission is to provide "beneficial tension."

Each year when I went before the nominating committee that selected the board members at my old accounting firm, I stated, "The board's job isn't to run the firm; it's to determine that the firm is being run." Even though it's important for directors to be informed, they'll never know enough to make decisions on day-to-day operating matters that are better left in the hands of management. Boards can't micromanage.

There are many overall issues of corporate governance that are being addressed in today's environment that I could comment on, but I won't since this article is directed at information flow. I do believe, however, that as we continue to sort through certain of the "macro" issues of governance that we will never achieve effective corporate governance if we don't have knowledgeable directors who know what is going on in the company.

What Boards Need to Know

In a recent survey of corporate board practices by Korn/Ferry International, CEOs said the five areas their boards were most concerned about were: maximizing shareholder value; financial results; management succession; strategic planning; and long-term survival. All of these were ranked as extremely important (70th percentile+) by the CEOs of the 300 companies surveyed. All other concerns were not ranked higher than the 35th percentile in order of importance. Given these findings, I would suggest that information flow to the board should, at minimum, include coverage of issues the boards arc most concerned about.

Other information boards need to know include:

* Board members need information that will enable them to prepare for board and committee meetings.

* Directors need information on matters relevant to their oversight capacity. They need data to prepare questions and make sound decisions regarding critical issues. Hearing about something that has already happened at a subsequent board meeting that they should have been made aware of at the last meeting is a sure way to make board members grumpy.

* Boards should be kept abreast of important events involving the company. Board members don't like to be surprised by seeing something of importance in the newspaper about their company that they knew nothing about.

* Board members need general background information on the industry the company is in, on the competition, and on regulations that affect the firm.

How Boards Get Information

Information from board packages. Most companies send out some type of information package before the board meeting. These packages vary greatly. But, at their best, they should include a summary of information that will be directly pertinent to the board and the board meeting and include other supplementary information that may not necessarily be covered at the meeting but is important nonetheless. The material should, over a period of time, address the issues that are deemed of greatest importance to directors as previously listed. (It would be interesting, for example, if someone were able to determine how much current operating financial material is given to boards as opposed to material that deals with the organization's strategic plans. Both were listed as equally important in the Korn/Ferry study.)

Whatever the nature of the material being distributed, it should be summarized and supported in a fashion to enhance information flow. The material should not be simply a reshuffled compendium of internal documents originally prepared primarily for operating purposes. A stack of papers like this often serves to flood board members with materials they will have difficulty deciphering.

What about the volume of material sent to the board? Again, practices vary. Some companies send nothing except a notice of the meeting -- without even an agenda. Others feel obliged to ship a six-inch-high mound of documents. But a director can assimilate only so much. A good 30-page summary is only one-quarter of an inch thick. If you had to choose between that and six inches of resorted operating materials, my guess is that you would opt for the 30-page summary. I doubt that you would opt for simply a notice of the meeting.

Materials sent to boards are too often smothered in jargon. Even though operating managers use "code speak" every day as they go about their business, directors probably use some different language as they go about theirs. Even though management may know exactly what it's talking about when saying "the Moffett project combined with the Tiger group to launch the Satirious effort in the TDZ and PBY areas," the director probably will be left with a furrowed brow. Acronyms and jargon are nice, but board members just don't live with them everyday.

Material that compares the company to its peers is extremely useful. If the director receives material with regard to the company's performance, that's good; if the material compares the company with its competitors, that's even better.

Minutes need to be circulated and should probably include the minutes of all committees. This is a good way for board members to get a focus on what's happening in the committees they are not on and to review what transpired at the last meeting.

Tips on Presentations

Information disseminated at board meetings, principally from management Oral reports to the board are better if they are supported by visuals and graphs to assist in the presentation. Companies should be wary of "busy charts." How many times has a board member heard "this is a busy chart"? If it's so busy, why hasn't it been changed? With regard to charts and graphs, it should be noted that studies have shown that the average person can only assimilate four separate pieces of information at one time. Therefore, a single slide should contain at most four "chunks" of information.

The presentations to the boards should not simply be a re-hash of what was sent out in the advance board package, which one must assume the board members have already read. Presentations work best when the presenter elaborates on the material, analyzes particular issues, and discusses likely outcomes. Put another way, since the board members have already studied the income statement, you don't have to add it up for them. Tell them what's behind the figures.

Reports should be concise. This will not only enable the board members to comprehend what is being said but will leave time for interaction. Some communication experts have stated that people can only listen for 10 to 15 minutes continuously and maintain a high degree of comprehension. After that, comprehension declines. Most board members cannot listen to a 40-minute report and be expected to maintain a high comprehension level throughout, let alone three 40-minute reports in a row.

Time for Interaction

Time should be left at the end of each report for board interaction. On the audit committees and other committees that 1 chair, for instance, I try to have the meeting set up so that no more than two-thirds of the allotted time is devoted to reports and other details. At least one-third is left for questions and discussion. I seldom find that we have too much time. If the meeting is filled with reports with little time for interaction, the board members' time will not be utilized to the optimum and they will obtain less information than would otherwise have been the case.

Which brings me to the timing of the meeting. It can be set up so that there is barely enough time for each report to be completed, with the board being reminded that "we're a little behind schedule." Or, it can be set up to promote interaction and discussion. Perhaps one way to accomplish this is to have a filler subject, so that if you finish early, that subject can be covered as an agenda item or carried over to the next meeting. In other words, I think it is to the CEO's benefit to encourage interaction among board members and they, in turn, will learn more about issues that will enable them to do better jobs. Board meetings are often essentially listening exercises. They should be participative endeavors.

Handing out detailed material at the meeting is a way to provide information to the board members so that they can take it away and study it. Obviously, you cannot hope to hand something of any complexity to board members and expect them to study it on the spot and be prepared to give a thoughtful reaction.

Finally, one of the primary things a board member wants to learn at a meeting is what is on the CEO's mind. An off-the-cuff session in which the CEO gives his or her thoughts about various matters and board members ask questions is most valuable.

Role of the Committee

Information obtained through committee work. More detailed information is given out in relation to committees than the board. And committees get into the areas covered in greater depth.

Often, the chairperson of a committee is briefed by the CEO or others before the meeting. That's a good idea, but committee chairpersons should remember that they have an obligation to committee members to see that they are informed on the details as well. It isn't enough for a committee chairperson, having been convinced of a proposed course of action, to merely elicit votes of committee members in the most expeditious fashion and move on.

One of the things that boards should be sensitive to is having the full board cover a major issue instead of first covering it in committee -- even though the issue is directly relevant to a committee's charge. Often, these are important matters and should generally be covered in committee before being exposed to the full board. Not only will the committee have more time but it will be more knowledgeable about the area under discussion and will be able to delve into it in greater depth if need be. I think it's a time for caution when a committee hears that this item is so important, even though it's directly related to their area, that it's going to cover it with the full board and not in the committee. Very seldom should items of great importance circumvent the appropriate committee.

Information from outside sources. Reading newspapers, business periodicals, and public relations clips from the company is also important to information flow. Many companies make it a practice to send out the PR clips on a regular basis since board members typically do not see newspaper articles about the company from all parts of the country.

Information often comes from outside sources -- auditors, consultants, and environmental experts -- who are retained by the company and at certain times interact with the board. This is helpful. I am generally against using consultants who work directly for committees, including the compensation committee, except in very special circumstances. If management isn't doing its job, boards have a greater problem than consultants can solve.

Consultants should be exposed to boards as management deems appropriate. Obvious exceptions to this are the auditors and internal auditors who have to interact on a regular basis with the audit committee. It is also becoming increasingly common for regulators to meet directly with the audit committee or the board, particularly in banks, savings and loans, and other regulated industries.

Information via telephone and teleconferences. Board members also get information by telephone -- either in the form of calls from the CEO or management or teleconferences of committees or the full board. It's a good idea to use the phone and have teleconferences when necessary. This can save time and still keep board members informed and involved. During a teleconference, it's a good idea to bring the board members up to date on general areas of the company's business in addition to items specifically on the agenda. I would note, however, that board members probably shouldn't be given a full board meeting fee for a 15 minute phone call, as is now the custom. Perhaps there should be a two-tier payment structure.

Since information flow is a two-way street, board members should be encouraged to call the company when they have something important on their minds. The CEO may wish to designate one or two senior people to also interact with the directors so that the CEO does not have to handle every call.

How Much Information?

Generally, how much information does a board need? There is no one answer to that question. But it is clear that both too little and too much information can be bad.

Good decisions cannot be based on scanty, incomplete data. But being bombarded with too much information can be equally dangerous. Information that is top-heavy with detail can cause information overload. Likewise, anything that impedes or clogs up the information flow to the board should also be avoided. It might just be a good idea to take a few minutes at a board meeting each year to ask the board what information they need to do their job, as well as when and in what form they need it.

It is often a good idea, as many companies are doing, to have an annual board meeting that covers only certain issues of great importance. These might include organization issues, succession, human resources considerations, and the strategic plan. These meetings often take place away from the company and in a setting that is different than the typical board meeting room.

Such a meeting might precede the annual budget submission by one or two months. A comparison of success or failure regarding last year's plan may be appropriate.

Other Initiatives

In addition, an evaluation of key management members may be made by the CEO, and in some cases the CEO may leave the room so the board can discuss his performance. The chairman of the compensation committee can meet with the CEO later to cover details of the session.

I also think it's a good idea to have occasional board dinners where board members and senior managers interact. Here, they can meet in an informal setting, ask questions, get to know other members of management better, and discuss issues in a relaxed setting.

Another important issue concerns information flow from directors to the outside world. My belief is that there should be none. I can't imagine a director interacting, for instance, with members of the press without first determining whether management wishes for him or her to respond to the press inquiry. Often, management does want them to speak to the press. But in other cases the director should simply say, "I think if you want to know those types of things you should call the management of the company."

Companies and boards also need to be sensitive to the issue of inside information. Most boards are now using window periods with regard to the purchase and sale of stock to protect directors from being accused of having inside information, even if they don't.

I also understand that some boards take the attitude that directors should be informed of certain sensitive information on a need-to-know basis. This approach is apparently based on the fear that directors can know too much. I couldn't disagree more; the board of directors must have all information relevant to a firm's health and future prospects.

I also believe that companies need to be concerned about faxing information to board members. Often, fax machines are in public locations and cannot be assumed to be confidential.

In sum, boards of directors should be independent, supportive, and knowledgeable. Knowledge cannot come without a thoughtful, effective information flow and a sense of responsibility on the part of board members to assimilate that information. Boards in the United States today fulfill their responsibilities a lot better than some people -- who aren't knowledgeable about boards -believe. But, as with most things, a better job can always be done. Rethinking, on a periodic basis, how directors get their information might just be a way to be sure that you are getting the most out of your boards.

Russell E. Palmer is Chairman and Chief Executive Officer of The Palmer Group, a corporate investment firm based in Philadelphia. He was Dean of the Wharton School of the University of Pennsylvania from 1983 to 1990, the first dean to come from the private sector. Previously, he had spent 27 years in the accounting and consulting profession, rising to Managing Partner and CEO of Touche Ross International (now Deloitte & Touche). He currently serves as a director of nine New York Stock Exchange companies.
COPYRIGHT 1993 Directors and Boards
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Title Annotation:corporate director
Author:Palmer, Russell E.
Publication:Directors & Boards
Date:Mar 22, 1993
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