The UK Corporate Governance Code specifically calls for effective communication among boards and stakeholders as a key characteristic of effective boards. Rapid communication of the material needed by board members to make decisions is a critical factor in board performance. But there is evidence that this is not happening on many UK boards. Directors need to be certain that they have access to the key metrics for judging management performance, and boardroom debate, which is highly valued by directors, must be supported. And a board member should have the ability to share in debate even if not present at a meeting, or the ability to make a debate ongoing beyond a single meeting.
Communication is a major issue for UK Boards
The UK Corporate Governance Code specifically calls for effective communication among boards and stakeholders as a key characteristic of effective boards, as the London office of law firm Norton Rose Fulbright points out in a report.
The report determines key areas in which rapid and effective communication should take place:
- What arrangements are in place with executive management to receive adequate information on the issues considered by the board?
- How and when is this information received?
- What arrangements are in place with the company secretary to ensure timely distribution of information to board members?
- If directors are not satisfied with the flow of information, what action can they take?
An example showing how communication can break down is shown by the relative lack of communication between UK boards and the external auditor. A December 2017 study by the UK Financial Reporting Council noted a “communication gap” between audit committees and auditors in a significant number of companies.
According to the report, the level of “materiality” – the qualities of transactions which have to be considered in financial reporting – is a key aspect of a company’s audit, and therefore should be a priority at all audit committees. Yet the report shows that only one in six (17 per cent) of audit committee chairs either discussed or challenged the level of materiality that had been set. A further 8 per cent did not have materiality levels shared with them by the auditors.
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“Given the enhanced requirements for audit committees to monitor the effectiveness of the statutory audit, this surprised us,” stated the FRC in its report.
As the report shows, there are still key areas where the directors have considerable responsibility in which the necessary communication does not take place.
Directors need the right metrics
As the example of audit materiality shows, directors must be supplied with the appropriate metrics so that they can make judgements about management performance.
“Boards use many data points to monitor company performance — including traditional financial metrics and non-financial metrics, along with peer and industry information. Knowing what metrics are most effective in helping directors to understand performance and to see early indicators of trouble is critical to enable them to take action,” explains the UK practice of PriceWaterhouseCoopers in a recent report.
In a similar way, boardroom debate is highly valued by directors, and the ability to share in it even if not present at a meeting, or the ability to make a debate ongoing beyond a single meeting, was rated as a key factor in the Grant Norton 2017 Survey on board effectiveness. The survey also showed that board members attributed value to their ability to ask challenging questions and debate key issues relevant to the board, which again very much supports the directorship characteristics of the board.
In fact, determining whether board members fit in the group does not necessarily mean that they should be ‘similar to’ all of the other directors, the survey showed. It can also mean ‘complementary’. Interaction and debate with other board members can be an important part of board effectiveness. Directors who fit in should support valuable boardroom discussions, the directors surveyed agreed in the vast majority. Such variety of opinion means that the potential danger of groupthink is reduced.
The company secretary has a key role to play in ensuring effective boardroom communication. As the Norton Rose Fulbright report points out: The company secretary plays a leading role in assuring the timely and effective flow of information. The background on a given issue has to be complete and broad enough to provide a solid perspective. The company secretary must identify when expert opinion is required for such context, and how best it can be obtained and distributed.
In assuring the rapid and effective flow of information, the company secretary should consider whether high-quality information required by board members to make decisions is being collated with sufficient speed. Is the distribution of printed reports and board books still slowing down the information flow? Do printed reports reach all of the board members, management and relevant stakeholders in time?
Diligent Boards provides the highest level of security
Secure and effective real-time communication is assured by Diligent Boards.
The portal uses Diligent Messenger, a proprietary solution supporting the most rapid communication and the most secure environment. Data is hosted on secure servers and a world-class infrastructure that Diligent owns and operates.
Moving confidential board communications out of personal and corporate email systems is easier than ever. Diligent Messenger integrates with virtual board meeting software, like Diligent Boards, to enable secure messaging and real-time collaboration.
It operates just like the popular text and email tools directors use every day, reducing the temptation of workarounds. The platform’s intuitive features are informed by Diligent’s work with 145,000+ executives worldwide.
Take control of who sees, sends and saves what. As with Diligent’s virtual board meeting software, administrators will be able to customise settings to governance and regulatory requirements. For Diligent Messenger, this includes:
Log-in Authentication. Log-in authentication and access that can be adjusted with the click of a button or the swipe of a screen.
Message Retention. Message retention, for preserving what’s required (and purging the rest).
Searchable Archive. Message archiving that saves what’s needed and makes it easily searchable.
Secure Compromised Devices. Swift “wiping” capabilities for lost or compromised devices.
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