26 January 2018 by Simon Osborne
Ensuring directors are informed and able to discharge their duties is the responsibility of the chairman
The ‘Challenges to Effective Board Reporting’ research – which we launched with Board Intelligence in December 2017 and which ICSA policy advisor Chris Hodge details elsewhere – highlights some glaring issues about the way information is presented to the board.
Not only are many board packs unwieldy in size, the amount and type of information contained can often restrict discussions that help the board effectively oversee the management of the business and future strategy.
A board pack ought to inform board members of a company’s financial position and future prospects, the progress of plans, delivery against agreed strategy, and important developments since the last meeting. It should not be an encyclopaedia of corporate decisions and historical developments.
Without effective editorial control, board packs balloon in size, with new items added but little or nothing removed. This means that producing the board pack each month becomes an increasing burden of time, effort and expense, and it makes it harder for board members to digest management information.
One of the main duties of a chairman is to ensure that directors are properly informed and that sufficient information is provided to enable them to form appropriate judgments.
They are also responsible for developing and setting the agenda for board meetings. This should mean working with the company secretary to ensure items which have been dealt with and no longer require discussion are removed from both the agenda and the pack, and that board papers are clear and concise, with decision recommendations and supporting detail set out in appendices.
“It is clear current practices in the number and length of reports in the board pack need to change if board members’ time is to be freed up”
Chairmen should also be mindful that if there are constant requests from non-executive directors for information to be added, it may be a sign that the KPIs are wrong or that there is a lack of trust in the information provided – perhaps the result of metrics, or the basis for comparison, changing regularly in order to present the business in a more flattering light.
If the board pack does not provide board members with a clear, truthful perspective of the company’s recent history and foreseeable future, then the directors have little or no chance of discharging their duties effectively. If this is the case it could be argued that chairmen are not properly fulfilling their roles.
It will be interesting to see what effect the Financial Reporting Council’s proposed changes to the UK Corporate Governance Code will have in this respect. The current code places the burden for making sure that boards receive the right information at the right time on the chairman.
Under the proposed revisions the chief executive becomes ’responsible for proposing strategy to the board, delivering it as agreed and ensuring timely and balanced information is presented in order for the board to make decisions effectively’ (Provision 10).
On the one hand, the chairman will be shifting responsibility to the chief executive, but on the other hand the new Principle H now says the board, supported by the company secretary, ’should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently’.
Regardless of where the responsibility falls, it is clear current practices in the number and length of reports in the board pack need to change if board members’ time is to be freed up to allow them to refocus on the entrepreneurial nature of business, another stated wish of the FRC.
This brings me on to another concern, the surfeit of information contained in the average annual report.
A large amount of information is repeated each year, which might usefully be produced elsewhere. As Ben Mathews, group company secretary at HSBC Holdings, says in our lead interview, the list of subsidiary companies could, for example, easily be shown on a company’s website instead of being included in the annual report.
Similarly, directors’ biographies could move to the website, freeing up space in the report to focus on what directors have done during the year and what skills they bring to the boardroom. Reducing the volume of reading would be more useful to investors than masses of detail about pay, which I am told is simply not needed and may not even be read.
As the annual reports that we reward each year at our annual ICSA Awards clearly show, those that describe the business with thorough and relevant information, and that have a clear and logical flow, are the most effective.
A company’s story is more interesting if it can be told vividly, honestly and in a unique way. Perhaps it is time to look at less familiar and more digestible ways in which that story can be told.