Avoiding information overload for board directors
In last month’s newsletter, I noted that the expectations on boards from regulators and investors in relation to ESG will continue to increase in 2023, focusing both on how they meet their responsibilities and on transparency about their activities and impacts.
In that article I said the boards needed to ask themselves whether they had the capacity, at board level and in the support functions on which they rely, to deal with the demands being placed on them. One aspect to consider is whether they have the information they need to make long-term strategic decisions as well as meet their reporting obligations.
There are some specific challenges with information on ESG – such as competing standards and the absence of agreed metrics in some areas – but this is not a new issue. For as long as I have been dealing with boards the quantity, quality and timeliness of the information they receive has been a common concern. Nestor Advisors’ data and experience with board evaluations echo that issue.
One of the main problems is the sheer volume of information that boards are expected to process, particularly for non-executive directors with only a limited amount of time to do so. In many cases, the problem is exacerbated by the papers only being circulated a few days before the board meeting.
Research I was involved in five years ago found that, for the majority of companies, average board packs were over 150 pages long and could be significantly longer for listed companies and regulated firms. This was before ESG had become a standard agenda item; the average is likely to be higher now.
The same research also highlighted some concerns about the quality of board packs and individual papers that would resonate with many of the boards that we have worked with at Nestor Advisors; for example, being too focused on operational rather than strategic issues and on internal rather than external developments.
The ever increasing and changing demands on boards may make it difficult to eliminate these problems entirely, but there are actions boards can take to mitigate them and ensure that the information they receive is fit for purpose.
The board needs to be clear in its own mind about what information it needs and when, and it then needs to convey its expectations clearly to management and those preparing board papers rather than expect them to second guess what it wants.
The starting point is clarity about what matters need to be discussed by the board. We have seen cases where a large proportion of the board pack was related to operational or compliance issues and arguably did not need to go to the board at all, or at least did not need to be discussed at a specific meeting.
Exercising more discipline over board agendas and stemming the upward drift of decision-making can reduce the overall size of the board pack, making it easier for directors to find and focus on the most important information. One good practice that can help with this is setting clear criteria and thresholds for determining when issues should be brought to the board for its approval or input.
Advance planning is also important. Many companies will have a forward schedule of board meetings, and this can help to balance information demands to keep them manageable. For example, if you know at which meeting the board will need to review the annual report and accounts you can avoid scheduling discussions on other items for which a lot of data will be required at the same meeting.
Another good practice is to set aside time at the end of each board meeting for directors to provide feedback on the quality of the papers and to review the draft agenda for the next meeting. This gives the directors an opportunity to discuss which particular aspects of each agenda item they consider to be most important. Their views can then be shared with those preparing the board papers so that they can ensure these points are addressed.
By providing feedback on the quality and usefulness of the papers they have received, the boards can help management and authors of papers refine the way in which information is presented.
Executive summaries are invaluable for directors. These should include an explanation of what issue the paper deals, an indication of what the board is being asked to do with it – for example, make a decision or provide feedback to management – as well as a reminder of any previous discussion the board has had on the issue and any decisions made.
Many companies now use one or more standard templates for board papers. These can be helpful as having a standard format means directors know where to look for certain pieces of information. They also ensure that important considerations do not get overlooked; for example, an increasing number of companies now include a section on environmental and social impact in all board papers.
Up to now, I have mainly been talking about board papers provided by management, but of course this is not the only way in which boards can receive information. For certain subjects, board briefings – either from management or external experts – can be more effective and less time-consuming.
External experts can in particular help the board understand new geopolitical, technological, regulatory and other developments that might have an impact on the company, which can inform the board’s discussions on strategy and risk management.
What suits each board in terms of the content and format of the information it receives will depend on the company. But the board needs actively to consider these issues and not just be a passive recipient of whatever information management chooses to share with it. Saying “we weren’t told” won’t be accepted as an excuse if something goes wrong.