How to Manage Communication About Risks

Every corporate director knows he or she needs relevant information to carry out oversight responsibilities effectively. But it’s not easy to know exactly what that information should be, the form it should take, or where it should come from. Unfortunately, experience shows that too often boards of directors don’t sufficiently focus on these issues, get caught by surprise, and pay a high price.

For board members (and corporate officers and staff working with boards) it’s worth looking at how to ensure effective communication of genuinely important information.

In this column and the next, I want to explore that topic from both perspectives: the boards worried about whether they are receiving proper information, and the senior executives worried about whether they are sending the right information. They are two sides of the same coin, and one cannot work without the other. Let’s start with the board members’ perspective this month.

Management’s the Key

Reality is that directors obtain the most relevant information from the CEO and senior executives in face-to-face meetings (and off-line as necessary). Yes, they get important information from written materials presented in “board books” in advance of meetings, supplemented with clear signs directing attention to critical issues. But the boardroom discussion, questions, and challenges are what provide the opportunity to evoke needed insight from management into what’s really behind the presented information and truly matters to decision making.

Every board, and indeed each director, gets a sense of the quality of information provided by management. There’s seldom an issue regarding management’s integrity, which is usually and appropriately taken as a given. But with that said, directors need to recognize that information provided to them might not be all that it seems, or should be. That can happen for several reasons.

Phil Lochner, former commissioner at the Securities and Exchange Commission and current member of several boards, recently pointed out that even a straight-shooting CEO might not have the numbers, facts and other information directors need to know. Also, a CEO may be misled by his staff, intentionally or otherwise. And, Lochner notes, senior management might consist of “optimists who, in complete good faith, somehow always see the glass as half full when in fact it’s cracked and leaking fast.”

Seasoned directors know that they can reasonably expect the company’s CEO to be honest in dealings with the board, but can also expect a natural tendency to try to gain the board’s support for a pending initiative or decision. Directors expect not only honesty, but also candor—that is, being direct and free from prejudice or bias. And they want management to be forthcoming—being not only honest and candid, but providing a full and balanced picture.

Experienced directors have sometimes encountered situations where a senior manager hesitates to tell the whole story, leading to uncertainty and doubt. Directors (and any business executive, for that matter), don’t want to have to pull teeth. We want people to tell us the information that they know and that we need to know. We want them to identify clearly what is fact and opinion, and the basis for their opinion. When we communicate with someone who is forthcoming with complete, honest, and unbiased information, we immediately trust not only that information, but also the individual (or institution) with respect to information coming in the future. For more on this, readers can look back to my August 2007 column.

Directors must recognize that regardless of how well management communicates they cannot take internal company input as the whole story.

Let’s boil all this down a bit. Directors must be certain they are getting accurate, relevant information, and receive a full picture of the issue at hand so they can make sound judgments. Senior executives providing information to the board should be certain they are entirely forthcoming, to dispel any doubts the board might have about whether the executive’s information is trustworthy.

Yes, in the absence of red flags, directors are entitled to rely on information provided by management—and no, directors don’t need to “audit” what management says. But directors must recognize that regardless of how well management communicates, they cannot take internal company input as the whole story. A board must gain information from a variety of sources so it can test and supplement the information management provides, and to fill in any blind spots management might have.

Where to Look

And where should directors look to be sure they know what’s going on in the company, the industry, and the greater socio-political-economic environment the company operates in? Phil Lochner put forth a good list of ideas:

Securities analysts reports. These reports provide an outside perspective on the company and are required reading for directors. Directors will want to get their hands on reports from “analysts of all stripes, not just those sympathetic to a single point of view.”

Media coverage. Here, boards can set up some neutral criteria for what they want to see, for both print and electronic media.

Trade publications. Periodicals covering the company’s industry often contain insights not readily available elsewhere, including relating to the company’s major customers and suppliers and the overall marketplace.

Internet coverage. Increasingly, interesting information can be found in online stories, chat rooms, and blogs that fall outside our traditional concepts of “the media.” You can’t find everything, and read with a skeptical eye, but a targeted approach can be useful.

Investor feedback. Listening in on presentations to shareholders and investment bankers can be valuable, especially when focusing on how management responds to questions.

Communication from shareholders. Information can be gleaned from feedback obtained at scheduled meetings with shareholders and at the annual meeting, as well as comments provided on proxy cards or other inputs.

Lochner also mentions such sources as non-profits, industry groups, and think tanks; director education programs; guest speakers; specialized books and newsletters; information in SEC filings and other government reports in the public domain; conventions and trade shows; and customers at retail outlets.

Of course, no director has enough time to delve deeply into all these potential sources of information. But it is worth the effort to look into at least some of them to get insights into the company and the environment in which it operates. And the more management is able to provide relevant information from independent sources, the better positioned directors will be to do their job well—indeed, the more likely they will appreciate management’s efforts in painting a full picture of what’s going on.

Getting Outside

Increasingly, directors get information through direct contact with a range of sources. My experience working with boards shows a clear trend of directors going out to obtain input first-hand from company managers and rank-and-file employees, customers, and others with whom the company does business. One of my client boards began modestly with plant tours in locations where board meetings are held, so directors could observe operations and talk directly with company personnel. Others have longstanding programs of directors going to retail outlets where the company’s products are sold to talk with sales people and customers to gain a first-hand perspective.

Here, too, directors must use their time efficiently, and “going to the field” should be carefully planned to gain the most benefit from the limited time available.

Putting it Together

Directors must have sufficient, relevant information in manageable form to be positioned to successfully oversee the company. Challenging as it is, directors need to determine what they need to know—and don’t yet know—and how they’re going to fill in the gaps. At the end of the day, it’s the board that needs to determine what additional information must be forthcoming, and take the necessary steps to be certain that it arrives in the right form and at the right time. The ability of directors to fulfill their fiduciary responsibilities depends on getting this right. And how do senior executives fulfill their managerial responsibilities to provide all that information? Look for the answers in next month’s column.