I read with interest a recent white paper written by The National Association of Corporate Directors and our US member firm, McGladrey, which delves into some of the gaps between what management communicates and what boards need to know. The report is quite detailed, and makes for fascinating reading. The report highlights that quite often management has a vested interest in withholding information, or distorting it, which means that boards may be making decisions without being in full possession of the information they need.
One of the key points to come out of the report is the dominant consideration given to financial data, often at the expense of non-financial information. Many directors are concerned that they are missing information which is vital to a holistic understanding of the business and its risks. Non-financial information may help to fill in that knowledge deficit, but too often this information does not find its way to the board. The example of how compensation committees often fail to pass non-financial metrics to the board is particularly relevant given the current furore over executive pay. A balanced pay package should include non-financial goals, yet if boards are deprived of that information, it can be difficult for them to focus on every business critical area when determining executive rewards.
Access to the right kind of information can mean the difference between success and failure. In the wake of the financial crisis, in which audit committees have been criticised for failing to act as an early warning system, this report is both timely and insightful. The information ‘gap’ between management and board may never be entirely bridged – and indeed information overload can be just as problematic as too little data – but more effective communication will be necessary to improve decision-making.
