2000 Volume 3 Issue 3

What Directors Need to Know

What Directors Need to Know

The link between timely information and responsible governance

Suggests ways for directors to manage information more effectively.

The Internet and other new communication technologies are rapidly raising standards in knowledge management for corporate directors. To discharge their governance responsibilities effectively, directors require an ongoing flow of information from a variety of sources concerning markets, products, competitors, suppliers, technological capabilities, and personnel. Directors who formerly devoted a couple of hours to scanning a briefing book on the day before a board meeting must now review a formidable quantity of print and electronic data in preparation for responsible decision-making. The Internet and information technologies give employees, investors, and the rest of the outside world a greater ability to scrutinize how well directors are performing. Consequently, directors are challenged to review the sources of business data that are available, determine the types of information required, and implement processes to ensure that salient information is available in a timely manner.

Of the six characteristics of effective boards proposed by the Canadian Comprehensive Auditing Foundation, three deal with information. These characteristics state that effective boards consist of people who have the necessary knowledge, commitment, and ability to fulfill their responsibilities; effective board members understand what constitutes reasonable information and, once informed, they are prepared to act to ensure that the organization’s objectives are met.

Information is particularly critical for outside directors who may not be close to an organization on a daily basis. However, internal directors and other senior executives will also benefit from a periodic review of their needs for information about an organization’s strategy, operations, supply chain, and competitive environment. Each individual must ultimately determine his or her personal information needs. Some existing information sources may no longer be useful while new types of relevant information must be distinguished from the flood of extraneous data available. Once, information needs are determined, accountability can be established, and delivery systems can be developed.

Determine the Specific Information Needed

Taking a cue from Peter Drucker, directors might ask themselves, “What information do I owe to the people with whom I work and on whom I depend? In what form and in what time frame?” The follow up questions are, “What information do I need myself? From whom? In what form? And in what time frame? A discussion of such questions can be extremely enlightening to individual directors and help to bring consensus on a board’s information requirements. These questions must be revisited regularly.

Boards need information, not just data. Information brings greater understanding or meaning to a board, while raw data frequently does not. Unfortunately, the ability of organizations to generate data usually exceeds the ability of individuals to translate bits into decisional information. One way to recognize relevant information is that it typically pertains to key events in an organization that represent strategic inflection points such as new product launches or significant personnel changes. Another defining characteristic is that it pertains to events that are outside the normal range of experience in an organization. The unexpected often calls for action.

Russell Palmer notes that one of the primary things a director needs to know is what is on the CEO’s mind. The reverse is also true. A.J.C. Smith, Chairman and CEO of Marsh & McLennan Companies, created a Chairman’s Advisory Committee as a forum for informal discussion between senior management and board members. The committee meets twice a year with a primary focus on personnel and strategic issues. According to Smith, a main objective of these meetings is to familiarize board members with employee demographics, skills deployment, and plans for professional development.

Establish Accountability

Information flow is so vital that a board may designate a director or task force responsible for identifying an organization’s information needs and auditing its information sources and delivery systems. Alternatively, accountability for information flow might be given to a Chief Information Officer or other top executive. The initial objective for this individual or group will be to help build consensus concerning a minimum standard of information necessary for effective board performance. Then, an information design can be developed and implemented.

An important role of the information champion(s) will be to keep the board committed to the process and apprised of progress. This minimizes resistance to the information initiative and helps to surface potential problems such as security issues or the need of directors for additional technical training and support.

The CEO and staff are just one source of information available to a board. Directors can also open useful information channels with the directors of marketing, production, R&D, and other key executives as well as with customers and suppliers. The California Public Employees Retirement System recently gave Texas Instruments, Inc. its Board of Directors Award noting the open lines of communication between directors and senior management that ensure that the board does not rely solely on the CEO for its information. And, of course, a board should look to its own members as unique sources of information. Their professional experience, personal expertise, and professional contacts are why they are selected as board members. These should be tapped.

In some cases, a board may choose to maintain its own support staff to achieve greater accountability and preserve independence from the CEO. A board may also opt to control its own e-mail system, intranet, and/or technical support staff.

Review Information Sources and Channels

The effective flow of information to board members is dependent upon reliable information sources, screening processes, and delivery mechanisms. These functions must be monitored regularly to ensure the timely delivery of relevant information. Because information sources are both internal and external to an organization, separate screening processes and delivery mechanisms may be needed. A news clipping service can be used to gather information on environmental factors such as markets and competitors.

Security concerns may lead organizations to partition their internal information system from external information channels. Nevertheless, it is important for both management and board members to be able to compare and interpret information from both sources in a consistent manner. Financial data from competitors or suppliers may need to be adjusted during the delivery process so that it is consistent with an organization’s financial reporting methods. As a side effect, efforts made to improve the consistency of this information may lead to better communication with suppliers and related efficiencies in managing the relationships with suppliers and distributors and others who make up the value chain.

The Internet is a vast storehouse of information – some of which can be conveniently accessed with search engines and some of which can be delivered to the desktop using personalized Web portals. A carefully designed portal can become the primary information source for a director or executive. Portals can be created easily and inexpensively using an Internet directory such as Yahoo! Custom portals are available from companies such as SAP, Oracle, and Cisco to meet specific information requirements. Executive support systems (ESS) can also be used to detect signs of trouble in an organization. ESS technology can also be used to perform analysis, modeling, and environmental scanning.

Information technology is essential to information flow in the contemporary business organization, including the information flow among board members. E-mail and intranets are being used effectively to deliver information and facilitate interaction. The Lutheran Brotherhood, a large fraternal insurance and financial services company, reports a number of benefits from linking its 13 board members by e-mail. Information once presented at board meetings is now delivered online, permitting directors in different time zones to work together more effectively. Board members receive information in a more timely way and have more time at meetings for critical analysis and discussion. This initiative required a project champion who proposed the idea and implemented it with careful regard for issues such as equipment, training, and security.

PECO Energy Company recently renovated its boardroom with ceiling microphones and speakers for teleconferencing and a new presentation system. The speakers amplify voices so that all participants are easily heard. Presentations can now be e-mailed to the corporate secretary and loaded for projection in the boardroom. PECO scanned all of its essential corporate records into the system and can easily print electronic copies or locate specific information using a search engine.

But technology should not divert attention from the primary questions of what information is needed, when is it needed, in what format, who is responsible, and how should the organization proceed? In addition, some of an organization’s most sensitive information is communicated verbally. Organizations may find it beneficial to create new opportunities for board members and senior management to meet informally, including opportunities for board members with a particular functional expertise to talk with company managers in that area.

Ensuring Informed Governance

Directors must know what information is needed to govern effectively – and take responsibility for getting it. The three main aspects of effective information management are to identify a board’s information needs, to establish accountability for providing that information in a timely manner, and to continually monitor information sources and channels. Increasingly, the information needed by board members to perform their duties is also available to corporate investors in one form or another.

BP Amoco now delivers such information to investors through a new website that provides daily reports on financial performance along with detailed information about the board’s composition, objectives, and accomplishments. By dealing squarely with the information issue, a board can prepare itself to govern effectively while building stronger bonds with stakeholders and the larger community.

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Author of the article
W. Bradley Zehner II, PhD
W. Bradley Zehner II, PhD
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