Flow of information for better governance

A Board needs to be provided with important information in a timely manner to enable it to perform its roles.

The above statement looks a ‘no brainer’ for many today. However, in the Enron situation, the directors were pleading ignorance to escape liability. The Special Investigating Committee report says: “The board was denied important information that might have led it to action, but the Board also did not fully appreciate the significance of some of the specific information that came before it.‘ Moreover, if they did not have sufficient information, they should have gone seeking it. Reports suggest that Enron operated about 3,500 Special Purpose Entities, that is, partnerships that shifted debt and losses off Enron’s balance-sheet. If the directors did not understand what was being reported to them, it was their job to educate themselves more about it by asking the right questions and getting more information. This they failed to do.”

A Board of Directors cannot fulfill its fiduciary duties to the shareholders, without proper flow of appropriate and timely information to the members. Reliable and timely information increases confidence among directors and enables them to make good business decisions. There should be a process to allow directors to contact individuals in the management, independently, if they feel the need to know more about operations than what they are being told.I’ve heard how companies try to mislead non executive directors (NED) by giving them irrelevant data that is bulky to dissuade them from understanding an issue.

Therefore, directors should know to separate the signal from the noise, in relation to information received. If you’re a NED ask for relevant information to perform your duty. If you don’t want to ask clarifications thinking that it might show your ignorance, then you can’t perform your duty effectively. There are Managers who may complicate an explanation so as to avoid being questioned by directors.

As a director ensure the reporting activities are linked to the corporate strategy and the financial and operational KPIs are linked to the corporate strategy, market conditions, and the competitive environment. Any analysis or KPIs that are not in line with corporate strategy should be eliminated to ensure reporting is effective and concise. This will help in seeking focused clarifications, quality decision making and better governance.

About surenraj

“Views expressed are my own”
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