Board papers

T he COVID-19 pandemic represents an extreme version of both complex and urgent issues that impact the information delivered through board papers. This director tool examines the generic function of board papers. For more specific COVID-19 practical guidance and answers to frequently asked questions, refer to the Australian Institute of Company Directors' COVID-19 Resources website. 1

Board papers are generally prepared by non-board members who may not always be familiar with the board’s requirements, which means a thorough control process can improve the quality of reports. Such a process also allows the senior executives to consider and coordinate information so that they are better prepared to answer questions that arise from the board discussions.

The information contained in board papers should be consistent, coherent and complete. Board papers are part of the official records of the organisation and a complete set must be retained in accordance with legal and organisational document retention requirements.

Board oversight of the reporting process

Directors must read the board papers to be able to contribute effectively to board meetings and satisfy their duty of care and diligence. Further, board papers can be important in establishing that directors have discharged their duties. It is essential that directors take an active role in satisfying themselves that the board papers are adequate and that they have sufficient information on which to base decisions. It may be entirely appropriate for a chair to ask for a board paper to be supplemented if considered necessary to address the key issues. 2

Boards should carefully manage the board paper process and focus on the manner in which information is provided to them. Boards need to ensure that they receive meaningful information and not merely data. Notably, the Centro case (ASIC v Healey (2011) FCA 717) made it clear that the complexity and volume of information that boards receive cannot be used as an excuse for failing to properly read and understand the financial statements.

As Justice Middleton noted:

“A board can control the information it receives. If there was an information overload, it could have been prevented. If there was a huge amount of information, then more time may need to be taken to read and understand it.”

Commissioner Kenneth Hayne, in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, reinforced the need for boards to do all they can to satisfy themselves that they are receiving the right information and inputs from management to make complex decisions. The Commissioner emphasised that, often, improving the quality of information given to boards will require giving directors less material and more information, and that boards and management must keep considering how to present information about the right issues, in the right way.

Commissioner Hayne specifically highlighted the importance of board challenge of management and information flows as being essential to good governance, noting that “boards cannot operate properly without having the right information. And boards do not operate effectively if they do not challenge management”. 3

At a board level, this can involve:

• setting expectations and providing directions to management on:
  - the content and format of reports;
  - the timing and timeliness of board papers;
  - the depth and clarity of information provided;
• endeavouring to be satisfied that it has sufficient information with which to make decisions;
• tasking management with having processes and controls in place to ensure the integrity of the information provided; and
• setting KPIs for management to report against.

Further, management should be made aware that directors will consider the following questions about the information they are receiving:

• Is the data trustworthy?
• Does the paper cover all necessary aspects of the issue?
• Is the information up-to-date?
• Is it presented in such a way that a director can readily understand it?
• Is the level of detail, language and content appropriate to a member of the board?
• Are the risks, if any, considered?
• Are options/alternatives discussed?

To clarify the board’s expectations in relation to board papers, a specific policy and procedures guide can be developed—either as a standalone document or for inclusion in the board charter—that sets out the content requirements, format, paper writing and distribution time frames, etc.

The organisation can also facilitate training for writers and preparers of board papers to hone their skills.

It is important for management’s time to be considered when asking for a paper to be developed for inclusion in the board pack. Therefore, board paper selection should be based on:

• whether the matter is reserved for decision by the board in accordance with the delegation of authority policy;
• the importance and urgency of the issue, and its implication and relevance for the organisation;
• whether it is a new issue, or if there is potential to consolidate a response from existing information, reports, etc.;
• the scope of the task and time available; and
• resource requirements and capacity.

Points to consider

• The board’s information needs differ from those of management, and papers put to the board should prioritise issues and pay attention to key matters of substance rather than operational detail.
• One of the challenges boards face in fulfilling their responsibilities around oversight of culture – and in challenging management appropriately – is whether they have enough information to do so. There needs to be a dynamic dialogue between management and the board to determine what information and metrics should flow to the board. This dialogue sets the tone from the top and can support the effective governance of organisational culture when it references the organisation’s vision, mission and values.
• There may be some disconnect between what the board thinks it needs to know and what management thinks the board needs to know. Some directors choose to spend additional time with the CEO and management to close this gap. Generally, this should be done with the knowledge of the chair.
• It may be helpful for non-executive directors to meet in advance of the board meeting to discuss the adequacy of the board pack, so that feedback can be provided to the CEO and to allow time to seek clarification or further information. Similarly, some boards may wish to confer at the end of their meeting to discuss the way the meeting was conducted – and the adequacy of papers presented – to help them to continually improve meeting processes and board reporting.
• Standardisation aids clarity and speed of reading and allows board members to focus onthe key points. Uniformity and consistency can be achieved by using a board paper template, as shown in the sample that follows. A template such as this provides the headings within which the writers of board papers should work. This type of template will, of course, need some modification for papers that are for noting or discussion rather for decision-making purposes. However, the paper can still include a draft resolution and recommendation, such as: ‘It is recommended that the information is noted’.
• Consider providing specifications for length, content and order of papers. For example: “The executive summary shall be no longer than half a sheet of A4 with text of normal size and spacing”, or “Generally, board papers should not exceed [X] pages and all papers should contain a glossary of any technical terms”.
• If some directors would like to see detailed information, such as the full business case prepared by management for an investment decision, consider including these as an appendix to the document. Remember, however, that courts may take the position that directors are expected to have read all the information provided to them.
• Consider circulating a sign-off sheet so that board members can see that the paper has been reviewed by various staff members. This helps improve coordination in large organisations and alerts staff to the issues.
• The CEO is responsible for any paper prepared by the executive team, regardless of whether he or she signs the signing sheet.
• Clarify whether the paper will be supported by a verbal presentation and whether supporting information will be supplied at the meeting.
• Consider the delivery method of the paper, which could include hardcopy or an electronic delivery mechanism. Technology offers a greater range of presentation style but creates other issues such as cyber security risks, which must be managed.
• Clarify document retention policies.

Beyond the board papers

While the board pack is a director’s key source of information upon which to learn about the organisation and make decisions, directors should look beyond the board papers if they are to fulfil their directors’ duties, especially the duty of care and diligence.

There are various sources of alternative data and information – outside board papers – that enable boards to effectively understand their organisation and challenge management. These include arranging visits to sites and events where they can learn about the organisation and interact with employees and possibly customers and other stakeholders; briefings from independent experts on topics related to the organisation and its industry; attending industry events and conferences; and taking advantage of any director development opportunities provided by the organisation that will increase the director’s knowledge about the organisation, its business operations and its culture. 4

Footnotes

1 For example, S Linwood, 2020, Eight tips for effective digital board meetings, 25 March, https://aicd.companydirectors.com.au/resources/covid-19/eight-tips-for-effective-digital-board-meetings, (accessed 10 May 2020).

2 Refer also to the AICD Director Tools Board meeting agenda and Board minutes, and the Joint statement on board minutes co-published by the AICD and the Governance Institute of Australia in August 2019.

3 K M Hayne, 2019, Final Report: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Volume 1, Commonwealth of Australia, p 395.

4 Refer also to the AICD Director Tool Governing organisational culture.

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