Independent Inquiry

Boards of directors must rely on information provided by management, but an inherent incongruity exists in this interaction: many boards are receiving information exclusively from the group that they are supposed to be guiding and overseeing.

Certainly, management generally meets board needs in reporting financials and current company strategy. In fact, 91 percent of directors surveyed had a complete or good understanding of their company’s financial position, and 87 percent had a complete or good understanding of current strategy. Unfortunately, the survey showed that just 77 percent of directors have a complete or good understanding of industry dynamics, and only 69 percent of directors have a complete or good understanding of the risks their company faces.

All boards should have access to enough high-quality, independent information to help them ask strategic questions during committee and board meetings.  However, information is not all created equal with financial bloggers and social media users posting hundreds of unreliable articles per day on some companies.  To sift through this abundance of information to determine strategic, valuable information can be extremely time consuming.

A recent PwC survey shows that 30 percent of directors are dissatisfied with or do not receive information on competitor strategy. Directors’ lack of knowledge regarding industry dynamics and company risks can harm companies in both the short-term and the long-term. This incomplete access to information may not only impact the ability of the organization to unlock corporate value, but it may also open the door to threats from litigation, activist investors, and reputational risk.

Directors can no longer be satisfied with management reports of market dynamics.  Additional independent inquiry on the part of directors is a necessary component to enhance industry and company knowledge and diversify the perspective of the board. For many directors, independent inquiry is not optional. It allows them to be well-informed and competently contribute to the formation of both long-term and short-term milestones.

External research can often better articulate macro-factors especially regarding industry trends, risks, and competition. When 38 percent of surveyed directors think that the chairman or head of the board is only somewhat or not effective at challenging the CEO when necessary, this is a significant problem. An increase in reliable, external information allows for more confidence on the part of boards to collaborate and disagree with CEOs, resulting in improved corporate performance.

Furthermore, acquiring additional information and perspective regarding the company, competitors, and the industry by directors can actually strengthen the relationship between management and the board. In a 2015 article from the Harvard Business Review, directors identified lack of industry and company knowledge as a key area where boards fail.

Challenges remain in enabling directors with their own set of dynamic market information.  Most public company boards in the United States rely on management budgets to accommodate board education, training, and ad hoc professional services.  To rely on management to pay for and select the provider of independent information only further contributes to the independence incongruence in the relationship between management and the board.  While the worst thing for a CEO’s relationship with the board is for the directors to feel uninformed or surprised, executives have been hesitant to allow alternative perspectives in the boardroom.

Yet, hope for transparency and objectivity remain in corporate boardrooms.  More companies than ever before are acknowledging the value of technology to transform the noise and chaos of 24-hour news, media mentions, social listening, and financial bloggers into custom, consistent insights for the board.    Any elevation in director education through independent inquiry enhances relationship between management and the board and ultimately board productivity.