This article was first published by Chartered Accountants Ireland, May 2012.
As Directors fight for their organisation’s survival, and regulators demand greater accountability of them, the importance of the humble board paper has been overlooked. It’s time to take a fresh look.
In this article, the dangers of poor board papers are described in light of new demands for so-called ‘Information governance’ and a framework for better board papers is outlined.
In a sweeping broadside of corporate governance following the recent economic crisis, Sir David Tweedie directed his criticism widely:
“Executive boards failed, non-executives were kept in the dark, audit committees failed, auditors fell asleep at the wheel, or let problems go, credit rating agents did not too well, analysts missed it, the SEC failed to regulate, and the investment banks and lawyers (and consultants) were part of the problem, helping companies with their questionable deals . . . it wasn’t just one little piece gone wrong. The whole system was collapsing.”
It’s hard to believe this could have happened if good board papers (essential for information governance) were being used and robustly discussed.
In practice, whether Manager, Director, Company Secretary or Chairman, the challenges around board papers can be all too familiar – both in relation to the papers themselves and how they are handled (see boxes below).
Box 1 - Your board pack?
Box 2 - How you handle your board papers?
If any three of the above, in either box apply to you, it’s time for an overhaul.
It’s often only when you examine some of these issues that the need for change becomes apparent. That’s certainly the message coming from independent surveys on the issue. In one study for example[i]:
‘Information governance’ – no place to hide?
In the past, weakness in board packs or the handling of board papers might have been little more than an inconvenience. Now it could be a major problem. Why? Because of a shift in expectations around so-called ‘information governance’.
It is commonly accepted that the FRC set the standards that board members need to address. Just about every code of governance refer to the FRC’s need for the board to be “supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.”
When the FRC revised the latest version of the combined code, they introduced some significant changes in relation to the provision of information. Some commentators speculated this change was precipitated by Non-Executive Directors who defended their performance during the recent economic crisis claiming ‘information asymmetry’ –because management allegedly presented incomplete (or, in some cases, misleading) information to the Board, they could not have acted any differently to the way they did. The FRC introduced provisions that profoundly impact all the key players: On the question of board effectiveness, the Chair of the board is now charged with responsibility:
“for ensuring that the directors receive accurate, timely and clear information”.
The Company Secretary’s role is spelt out too:
“Under the direction of the chairman, the company secretary’s responsibilities include ensuring good information flows within the board and its committees and between senior management and nonexecutive directors, as well as facilitating induction and assisting with professional development as required.”
It doesn’t stop there. A later paper providing guidance on how to assess the effectiveness of boards[ii] spells it out in even greater detail:
And to nail the point once and for all, the FRC insists[iii] that this dimension be specifically addressed in the evaluation of effectiveness. No escape.
Steps to improve board papers
Production of board papers is more of an art than a science. A typical pack is easy enough to define in general terms [iv](see box 3).
Box 3 - Typical board pack
An effective board will vary this basic pack according to a predefined board calendar that addresses all the routine and once-off activities in a typical year; it will also be adjusted for irregular items, as appropriate.
Many have enumerated the characteristics of good information in board papers. One such guide[v] provides a useful set of criteria (see box 4).
Box 4 - Board papers: Good practice
But a number of trade-offs must also be mastered to create a good board paper, notably:
A sample template for a board paper is set out in box 5. Board preferences will vary but the template contains the key elements of what is considered best practice[vi] Even if such a formal approach is not adopted fully, it will still provide benefits in refining the thought process that goes into board papers.
Even doing all this still does not guarantee the best decisions. Much has been written[vii] on cognitive bias in the boardroom:
While Walker insisted that appropriate boardroom behaviours are an essential component of best practice corporate governance, failure to prepare good board Papers will defeat even the best intentioned board.
Box 5 - Sample board paper format
|Agenda item no.||Agenda item||Paper reference|
|Sponsor||[Insert Name and Title]|
|Draft resolution||[Insert terse description (4-6 lines) summarising the intention of the paper and the requested action by the Board (for noting, discussion or approval/decision)]|
|Background||[Provide link to any previous board consideration of issue.
Provide key information to enable Directors to understand key issues.
Identify any subject matter expert reports and any other supplementary information available.
|Issues and options||[Describe relevant issues that Directors are asked to consider.
Provide details of the risk assessment undertaken in relation to strategy, financial, operational, compliance and reputation issues, including impact on budget, cash flow etc comment on emerging risks and on risk ‘velocity’ (how quickly a given risk has changed / is likely to change)
List the Options open to the Directors.
Explain the rationale for the option selected by management.]
|Recommendation||[State the recommended option.
Indicate who will take responsibility for the chosen option, including risk remediation measures (include the Executive and the Operational Manager).
Identify KPIs and proposed reporting, including timing]
|Signing of board paper||CEO
Srictly confidential to [organisation] board
Bob Semple, FCA is Partner, PwC