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Sarbanes Oxley : Corporate Boards : Thought Leader
Improving Corporate Governance: The Case for Board Portals
By
Joe Ruck
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Joe Ruck
CEO
BoardVantage
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Immediately following passage of the Sarbanes-Oxley Act, a plethora of new products aimed at providing basic online access for corporate boards came to market. Today, reeling in the wake of a financial crisis, which has triggered a worldwide recession; it is timely to review the role of technology within the area of corporate governance. Surely governance is not about technology. Isn’t it about trust and ethics?
Indeed it is, but the very definition of oversight implies having visibility into operations and it is at this nexus that technology has most to offer boards. As banks the world over have learned the hard way, no board should accept a ‘black box’ approach for any aspect of basic operations -- one in which results are blindly trusted and performance is guaranteed without risk.
Jack Welch recently commented in an article on boards that it was impractical to expect a small group of people, working only one or two days a month, to be able to identify the early warning signs that CDO’s and other newly created financial products created unquantifiable risk. It’s hard to disagree with this assessment, but as a defense of board work, it seems inadequate. It begs the question, what exactly, do we expect of the board oversight function? And if boards are to survive as a linchpin of our corporate governance system it has to be more than ‘hire the CEO’.
Don’t get me wrong, I believe that boards play a valuable role and that enlightened boards have already increased their effectiveness by focusing on improving the volume, quality, and timeliness of information flow between boards and the companies they serve.
Given the pervasiveness of e-mail and the Internet in daily life, it is surprising that so many boards still insist on paper distribution of their materials. I hear two main concerns. First of all, why bother? Paper is fine and I prefer to read paper than anything on screen. Second, what about security? You hear every day of emails going astray, how can I trust a board portal?”
Moving Beyond Paper
Unlike maybe some other Web 2.0 CEOs, I have no beef with paper. In fact I still have a paid subscription to the paper edition of the NYT and prefer reading that format than the same content over the Web, even though it’s free. Conversely, at home we have an Encyclopedia Britannica, which is now steadily gathering dust. When I want to look something up, I now turn to Web. The information is always up to date and definitely more comprehensive.
The board book for a typical public corporation can be several thousand pages long. Much of the material comes in the form of numerical tables and the whole set may even take 1 or 2 boxes to be shipped. Not even a suffering insomniac would consider starting at page 1 and run through to the end. Board books are at heart a set of reference materials, to be picked through in detail at specific points in response to questions and concerns. They are not a novel or leisurely browsed through like one might do with a magazine. By comparison, they are much closer to encyclopedias than they are to newspapers.
Since no one reads a board book in a linear fashion, the ability to search and drill down with an electronic board book materially speeds up reading, while improving the quality of the experience. 24 hour business events require 24 hour oversight, with the ability to distribute information with zero-days notice, something only a board portal can do. It does, however, require a change in habit for board members that will not happen overnight.
In sharp contrast to the recent past, board work doesn’t stop when the quarterly meeting ends. Directors are expected to continue the conversation beyond the meeting, but without a portal, it is not always possible, let alone convenient to communicate hyper-sensitive information in real-time. Boards demand routine access to weekly store reports and other sales figures. CEO’s publish frequent updates. Executive committees work on succession planning and compensation committees review option grants. The list goes on.
Good portal design makes accessing all this sensitive information easier than traditional paper-based methods. Current meeting material is a click away, while hyper-linking allows scanning of subject headings followed by drilling down on details if necessary. Search tools allow directors to retrieve archival documents for benchmarking and automated distribution enables more frequent updates from management - without placing an unreasonable burden on the responsible executives. It’s easy to see that in this “new normal” board environment, portals are a far more effective medium than the old-school paper process.
Given the unpredictability of external events such as M&A activity, market swings and natural and man-made disasters, it should be expected that circumstances at some stage will dictate the need to schedule an online meeting within 24 hours notice and in that short timeframe make all relevant documentation available. Board portals include alerting to make sure that this information is available in a more timely fashion. Factor in the mobility of board members and the benefits of electronic distribution become clear.
In practice what often happens without the benefit of a portal is that companies improvise and make ill-advised trade-offs with readily accessible technologies such as email and fax. Faxes are sometimes sent to the wrong hotel, and in any event will be seen by hotel staff, all of whom are intelligent enough to understand the significance of an M&A bid. Worse yet, is the reliance on regular email, which creates a distributed, permanent and discoverable audit trail beyond the control of the organization. Taken out of context, off-the-cuff email deliberations can be presented in an adverse light.
More recently, a significant new requirement has surfaced, one that poses a particularly tough technical challenge - document sharing among directors. The first portals had been conceived as a mechanism for one-way distribution of documents from the General Counsel to Directors. What is increasingly required today is a two-way channel that supports the sharing of notes and other communications between board members and the General Counsel or among board members themselves.
The issue is how to keep this director-contributed content secure, and do so, without imposing a burden on individual directors. This challenge, not contemplated by early portals, is of growing importance in today’s tech-savvy boardrooms.
Maintaining Privacy and Security
Corporate boards have strict confidentiality requirements, as mistakes can have serious ramifications. Boards routinely discuss highly sensitive information. Leaks, whether inadvertent or deliberate, can create substantial fiscal exposure such in the case of M&A proposals, or have devastating impact on employee morale, as in the case of premature disclosure of company restructuring.
A second issue is discoverability of electronic content generated by directors, such as emails and notes. This presents a serious issue for many Directors because private laptop content can include emails and casual annotations that could be fertile ground for discovery and, taken out of context, could form the basis for embarrassing or damaging admissions in subsequent litigation.
While keeping web-based content secure is a fairly mature and understood area, extending that security perimeter to include the laptop is much harder. The technical hurdles that need to be overcome are non-trivial. The technology needs to be secure and easy to use. But functionality also needs to be quite flexible. For example, Directors may use a Mac at home and switch to a PC in the board meeting. If they travel with a laptop they may want to continue the annotations they started online while offline. Rapid document updates from the Corporate Secretary office and the difficulties of keeping multiple copies in sync also add a further layer of complexity.
At first glance, the requirements for privacy and transparency seem to clash. Many of the corporate governance scandals of the last few years have hinged upon companies shielding the true nature of their finances from public disclosure. It’s not unreasonable for shareholders to question whether this emphasis on privacy is just more of the same. Surely the owners of the company have a right to know what is going on in the board room?
Setting aside the fact that the quest for perfect disclosure may descend into an exercise in drudgery and documenting trivia, attempts at examining every piece of information may well create an atmosphere where boards will spend their time manipulating the information for external presentation, rather than focusing on debating difficult decisions.
Boards are paid to address hard choices, many of which exist inside a complicated business environment or an uncertain legal framework. One example would be the operations of a global enterprise, where there are considerations for different national jurisdictions, in particular as this applies to competition and cartel laws which can vary greatly. What is legal in one country may not be in another.
Also consider lawsuits. A significant amount of board time may be spent deliberating legal matters arising from class actions, patent infringements and HR related claims with strong emotional overtones. Difficult decisions often require the evaluation of unpalatable options. Taken out of context, these could cause real harm.
If Directors are constantly looking over their shoulder, knowing that everything written by them will be recorded for future scrutiny, their response will be predictable – they will avoid written communication,. They will resort to phone and face-to-face collaboration only. That will prove increasingly difficult in the volatile business environment where the companies they govern are 24x7 operations. Inevitably this will slow down and harm the process of deliberation with no increase in transparency.
It is self-evident that transparency is critical for effective corporate governance. But, if it is to have any meaning, governance can’t crowd out private deliberation. An overzealous application of tracking technology runs the risk of doing so and creating net harm. Supporting privacy of deliberation ensures that Boards can arrive at the best possible decisions that can then be held up to public scrutiny.
The Future of Board Work
It would be wrong to imply any of this is easy and that choosing the right balance is straightforward. Different industries, companies, and boards will choose different policies, and these may change over time. Ultimately, the role of technology is to implement what that policy is, not to dictate it purely on the grounds of what is technically feasible.
I believe we pose the wrong question when we ask what we can expect of boards in terms of oversight. Instead we should be asking what sort of boards we need in order to make sure the oversight function is properly implemented. This may require substantial changes in the make-up of boards and their requisite time commitments. Of one thing I am certain: Boards of the future will need independent access to every part of the organizations they oversee, and that will require the adoption of technology inside the boardrooms of every large company or other growing organization.
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