Ensuring Effective Board Actions

When a company is failing to meet expectations, it is the board that will effect change based on their own conclusions, although failure is also likely to drive shareholder dissatisfaction.

The Need for NED Knowledge

Before making a material decision that will affect the future of a company, NEDs need to ensure that they have sufficient relevant information to reach a reasoned conclusion. This need for information arises not only when things aren’t going well. The seeds of failure may have been sown in the company’s strategy agreed by the board in previous years.

At Bvalco, we have seen situations where an ‘oven-ready’ strategy has been presented to the board by the executive, offering very little real opportunity for NEDs to question, comment on, or challenge executives’ proposals. Conversely, we have seen models where the CEO returns to the board on multiple occasions with ideas on strategy, first with a presentation on big-picture ideas and subsequently as the strategic plan is developed further. Each stage of this process keeps the board abreast of the executives’ developing thinking and offers NEDs the opportunity to ask questions, make suggestions, and challenge constructively.

Involving NEDs at an early stage helps to strengthen the board’s team dynamics, build mutual trust, and offer the executive the chance to mine the knowledge of NEDs’ experience and knowledge. Collective respect between executives and NEDs helps to build confidence and enhance the effectiveness of the board.

Oversight and Monitoring Performance

Once a strategy is in place, the board will need to monitor its implementation and effectiveness. NEDs need to think carefully about the type of management information they wish to receive from the executive. Such information should enable the measurement of implementation and success.

NEDs need to ensure that reports and information are presented in such a way that they can clearly assess company performance. Lack of clarity may not be a deliberate ploy by management but just a failure of process. Whatever the reason, poorly crafted information hampers the effectiveness of the board and can damage trust. For example, at Bvalco, we have seen management information that fails to employ consistent metrics from one report to the next, making it very difficult for NEDs to assess performance or identify potential weaknesses.

Conversely, it is important for information to be dynamic; content and form are likely to need to change as a business develops or circumstances change. Data presented to a board must be fresh and retain relevance.

NEDs also need to think about what information they may not be receiving. This can be difficult for NEDs, as identifying known unknowns is one thing, but working out unknown unknowns can be particularly challenging. This is where NEDs’ experience and knowledge really come into play; reflecting on a business, the market, and its competitors can help NEDs formulate questions and requests from executives. If something is an issue in the market and NEDs have heard nothing about it in management information or at board meetings, they need to ask why.

Handling Unreported Initiatives

At Bvalco, we have attended board meetings where executives have reported to the board on significant initiatives that apparently had been underway for some time but had not previously been brought before the board. This is a particular risk for subsidiaries in large groups where key resources and policies are often developed at the group level. A parent in another jurisdiction can make the issue more complex. Executives must remember to keep their board updated, even if they believe that a group-wide initiative or policy limits the ability of NEDs on a subsidiary board to influence matters.

When Things Go Wrong

Information and knowledge are particularly relevant and important when things go wrong. Subject matter expertise among both executives and NEDs is essential. Some of the most significant failures in the financial services industry were not picked up early enough because management did not understand the business which carried the risk. Sometimes, failure occurs in those business lines which had been reporting the best results. Unexpected or super-success may be an indicator of risk.

NEDs who are taken onto a board because they have a particular expertise, such as in cutting-edge IT, but who lack a detailed knowledge of the business in question, can face particular challenges and risks. At Bvalco, we have sometimes interviewed NEDs who have told us that they consider themselves to be on the board because of their particular skill and feel reluctant to comment on questions falling outside their area of expertise. However, in practice, a NED is responsible for any decision or omission by the board. All NEDs need to build sufficient knowledge as part of their own due diligence; walking the floors of the business, speaking to the business, and seeking support and training from the governance secretariat as needed. Their knowledge needs to be reasonable in the circumstances; they are not expected to be experts in everything, but they cannot absent themselves from the decision-making processes of the board.

Conclusion

NED’s play an indispensable role in ensuring robust corporate governance through informed decision-making, continuous oversight, and proactive engagement with the company's strategy and operations. Their expertise and diligence are crucial in steering the company towards long-term success and stability.