Aaron Atkinson is a partner at Davies Ward Phillips & Vineberg, focusing on corporate governance and M&A.
With a new year on the horizon, many public company boards will soon be gearing up for another proxy season. As part of that process, boards and their management teams would be well-advised to evaluate their communications and decision-making processes. That may sound far less interesting than planning the next grand strategy, but doing so would surely be a sound investment – one need look no further than the business headlines, and the parade of business scandals over the past years, for evidence to support that claim.
Regardless of the company’s product – whether it be gold, trees or cannabis – high-profile corporate scandals often have a variety of contributing factors, which may include a frothy market, rapid growth, a race for capital and acquisition opportunities, and a board and management team that may be overtaxed, inexperienced or both. But one factor that is common to many is a basic communications breakdown between those in the boardroom and those in the C-Suite.
Almost inevitably, news reports on the scandal include details about e-mails that went unread, inquiries that went unanswered or relationships between directors and senior management that became increasingly frayed.
Detailed governance policies and codes of conduct, all of which are routinely adopted by public companies, are merely words on paper and of little assistance when corporate leaders fail to observe the basics of effective communication and ignore the benefits of curiosity. Policies and codes of conduct are insufficient on their own; boards and management teams would be well-advised to incorporate the following guiding communications principles to improve information flow and build trust.
Embrace candour. Each member of the board and each corporate officer is subject to a fiduciary duty that includes a duty of candour: Directors and officers are to ensure that all information relevant to a corporate decision is brought to the attention of decision-makers. When in doubt about whether information is relevant, it is often better to disclose than to withhold. In addition to driving better decisions, doing so also builds trust.
Be prepared. Directors should come prepared for meetings and engage actively in discussion. Management should provide the board with adequate information on a timely basis to allow for that preparation. Corporate decisions are often made in very tight time frames and sometimes the management team is justifiably pinched for time. However, it can be easy to slip into a pattern of rushing decisions unless the information flow is carefully managed.
Ask questions. If an issue is of concern, ask questions. Boardrooms are full of high achievers, but even the smartest director cannot be expected to spot every issue. Do not assume an issue has been looked into by others: If everyone assumes someone else has looked into the matter, the matter will be overlooked. Directors also need not wait for a formal meeting to ask questions. In fact, waiting to raise significant issues for the first time in a board meeting can make others feel ambushed and lead to defensive and incomplete answers. Active and engaged boards often take part in fruitful dialogue between meetings with other directors and the management team.
Insist on answers. It is possible directors will not receive a complete answer the first time a question is raised. Insist on proper follow-up. Loose threads of inquiry can be a gold mine for plaintiffs’ lawyers and will be scrutinized by regulators. In addition, a lack of candour by the party being questioned may itself be a red flag that something is amiss.
Collaborate. It can be challenging at times to ensure that the board does not micromanage its leadership team; however, being overly deferential to those who run the operations on a daily basis carries its own risks. Both the board and management should view themselves as collaborative partners, ensuring each has adequate time, information and guidance where necessary to make sound business decisions.
Normalize private board deliberations. Board discussions without management present should be routine. While the partnership model is a useful metaphor for board-management relations, it is a partnership in which the buck ultimately stops with the board. To maintain the integrity of the board’s oversight role, some matters must be discussed out of the earshot of management. At the same time, to maintain the trust of management, the board should clearly communicate decisions made in camera that affect management’s role in running the business.
Consider the big picture. Corporate scandals often reveal themselves iteratively and episodically. Be sure to connect seemingly disparate facts and lines of inquiry. And if something doesn’t add up, ask more questions.
No governance system yet exists that will inoculate an organization from scandal, and it is likely no such system will ever be created. Systems are only as useful as the fallible humans that implement them. However, boards and management teams that embrace communication, candour and curiosity not only may avoid scandal – they will create an environment that promotes better business decisions.