How much should boards know?

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When companiesfail, boards getblamed- eitherthey knew and were complicit,or did not know and wereincompetent. At the heartof corporate governance isinformation asymmetry betweenvarious parties. TheUK Code of Governance setsa high standard for board informationgovernance, placinga particularly heavy burdenon chairmen, stating that’the chairman is responsiblefor ensuring that the directorsreceive accurate, timely andclear information.’The Code goes on to statethat ‘management has anobligation to provide suchinformation, but directorsshould seek clarifi cationor amplifi cation wherenecessary.

 

’Corporate governancefailure is almost alwaysaccompanied by informationasymmetry wherebythe non-executive directorswere not aware of what wasgoing on. Board knowledge,then is a critical element incorporate governance. Theassumption is that if boardsknow what is going on thenall will be well. If they do notknow, corporate failure willfollow.Independent directors typicallydo not have the sameaccess to company informationas executive directors,nor do they have companyspecific knowledge.The issue of board-managementinformation asymmetryis of fundamental importancebecause it is seen asa threat to boards, underminingtheir ability to monitormanagement and as tendingto reduce non-executive directorsto a dependent role.

 

Information asymmetry canbe viewed in a number ofways: (i) information as ameans for boards to monitormanagers, (ii) as a dependencyof non-executive directorson executives for informationand (iii) information asa resource non-executive directorsbring to boards.Boards of directors andnon executive directors inparticular, have been characterisedas having dual rolesas monitors of managementand as advisors.Given this dual role, chiefexecutives face a trade-offin disclosing information toboards: if they reveal theirinformation, they receivebetter advice; however, informedboards will also monitorthem more intensively.Since independent boards aretougher monitors, chief executivesmay be reluctant toshare information with them.Too much emphasis onmonitoring tends to create arift between non-executiveand executive directors;whereas forming strategy requiresclose collaboration.

 

In both activities, independentdirectors face the sameproblem: they depend largelyon chief executives and companymanagement for informationprovided by chiefexecutives.The better the informationprovided by chief executives,the better the boards’ advice.The more precise the boards’information about strategicoptions, the greater the riskfor chief executives to thinkthat boards will interfere intheir plans.As a result, chief executivesmay not communicatefi rm-specifi c information totheir boards.In practice, there is likelyto be a continuum betweenvalue-adding board adviceand board interference.In conclusion it can besaid that boards can neverknow more than management.Managers often havea lifetime experience of theirindustry with which boardscannot compete. The role ofthe board is to challenge butnot to second-guess or duplicatemanagement. Understandingthe clear distinctionbetween the roles of managementand board is, therefore,the key to resolving anyboard-management informationissues.Lucas Modimana