Directors Are Responding to New Pressures and Greater Risk
Anyone familiar with corporate governance would agree that the job of a corporate director is becoming more complex every year. The dizzying array of risks facing companies, along with the bright spotlight pointed directly at board members, makes corporate directors want to stay as well-informed as possible about what’s happening with their companies.
Meanwhile, inside those same companies, management teams and governance professionals (general counsels, corporate secretaries, and other staff supporting the board) are hard at work preparing detailed board reports prior to each meeting. These documents go through multiple rounds of review and edits, ensuring the final results are both accurate and easy to understand from the vantage point of directors, who might only meet a few times each year. By the time directors read these reports, the information contained in them might be weeks’ old.
In the past, management-supplied board reports were the board’s primary source of intelligence about company performance – but no longer. In today’s fast-moving, globally connected and digital world where information changes by the minute, directors are now independently researching industry trends, market news and competitors, speaking to fellow directors, and querying key company staff members to stay up-to-date – in addition to reading reports from management.
How Are Directors Staying Informed?
A recent survey by Diligent Institute sought to answer the question: What are directors doing to gain insight and prepare for board meetings? The study also looked at the types of information directors seek as they prepare for board meetings, how they feel about the information they get from management, and where else directors go to educate themselves.
In the report, we found that 65% of all directors, and 71% of public company directors, spend time gathering independent information about the company as part of their preparation for meetings. They are highly engaged in information about industry trends, with 77% of directors reporting they read these types of materials to prepare for meetings. And 64% of directors told us they also review corporate governance thought leadership or best practices.
In terms of how directors balance their time preparing for meetings, 40% of directors’ time is focused on activities other than reading management-prepared materials, with 21% of that time dedicated to conducting their own research.
Our report found that directors are highly engaged in their work – not just leading up to each board meeting, but year-round. As one director remarked, “The management team is generally up to their eyeballs in alligators on operational issues, so as a director, one of the best things I can do is research and read, dive into the industry, and make sure I’m up on all of the current trends. Then I bring that back to the management team as appropriate.”
Managing Risk Associated with Director ‘Due Diligence’
In the current 24-hour news cycle and global media landscape, inaccurate information is increasingly accessible to anyone with an internet connection. For corporate directors who have a prodigious amount of responsibility, making business judgments based on inaccurate or unreliable sources could ultimately do more harm than good. Most governance professionals would cringe at the thought that their directors might be led to the wrong conclusions based on incomplete, inaccurate, or outdated information they found somewhere online.
But the decision to seek external data sources is no longer a choice as much as it is an imperative. The rise of activist investors and social media has put unprecedented pressure on directors to be aware of and consider outside perspectives. Institutional investors and proxy advisors alike now have access to sophisticated tools that allow them to independently mine information on companies, which leaves boards at a disadvantage if they don’t also have access to similar external sources of intelligence. So, how can directors do their own “due diligence” without inadvertently increasing risk?
Where to Go From Here? Lean Into Director-Led Research and Engagement
First, it’s important to create a process that enables directors to be proactive while ensuring they have access to credible, reliable sources of information. Rather than fear the increased level of director engagement, management teams should lean into these efforts and help facilitate them. As one executive quoted in the Diligent Institute report put it, “As an executive, a lot of my time is reaching out to board members on key issues to see if there was anything they wanted us to present on or that they wanted more information about. I’m encouraging those conversations beforehand so that there won’t be long, drawn out conversations in the board meeting that we were ill-prepared for or that could have been addressed beforehand.”
Second, equipping boards with better digital tools to conduct research – that the management team can also access – puts both groups on an even playing field. Ideally, look for the kinds of tools being used by proxy advisors and institutional investors to conduct research on companies. That way, your board and management team are best positioned to see what those reviewing your company from the outside are seeing.
Third, reconsider how the management team communicates with your board leading up to meetings. Is it really necessary for every board report to go through five rounds of reviews and edits while the data in it goes stale? Or would providing more preliminary results faster, with a few key questions for the board to consider, be a better approach to spur discussion at the board table?
Also, leveraging digital tools designed for secure board communication can make it simpler for directors to ask probing questions in advance of each meeting, which in turn can help direct the meeting preparation efforts of the management team to the activities the board would find most beneficial.
Ultimately, companies stand to benefit from director-led research in an age where paying attention to a broad array of inputs has become a key part of running a business. With that in mind, it’s also imperative that management is prepared to navigate the risks and rewards of such an environment and ensure that we continue to encourage the eagerness and initiative of today’s board directors.
This blog post is based on the latest Diligent Institute report, Beyond the Boardroom: How Corporate Directors Gain Insight. The Diligent Institute is the think tank and research arm of Diligent Corporation, tackling governance issues through a global lens. For more information and to subscribe to receive research updates from the Diligent Institute, please visit the website.