One of the ongoing questions from members of Board of Directors is how to resolve the tension between oversight and managing. I recently had the opportunity to visit with Joe Howell, the Executive Vice President (EVP) of Workiva, Inc. on this subject. Howell has worked on and with Boards of Directors at various companies and I wanted to garner his understanding of the role of a Board and both senior management and a Chief Compliance Officer (CCO). Howell had a short response which I thought was an excellent starting point to understand the role; put sand in the shoes of management.
The key to such a metaphor succeeding is that a Board of Directors, “by continuing to challenge management on these scenarios that management has considered and the stories management is telling itself about what could go wrong”, can “help get management out of its comfort zone by and large executive teams begin to believe themselves when they talk about how well they’re doing. The independent challenge that the board can offer putting the little bit of sand in the shoe to make sure that you’re thinking about things carefully can cause you to step back and really focus your resources where they're needed.”
Board’s do this by posing questions to management that help them challenge their own assumptions, especially those assumptions which senior management is most confident about. Howell said that Board’s “need to help senior management consider the things that management is so sure about that maybe are going to play out the way that they expect. For example, the things that can hurt investors more than anything else is a surprise. Chaos does not help investors in general. The things that surprise investors frequently are the things that also surprise management. Does management consider all of the things that can go wrong and have they built an environment where they can both help prevent those things from happening and detect them when they’re small and they can actually do something about them.”
Howell noted the role of the Board is not management but oversight, focusing on governance. To do so, an effective Board should challenge senior management not only on what they have planned for but what they may not have considered or may not even know about. He said, “one very good example is the whole, the reputation of those stakeholders involved in the company and that can be the management team itself, the employees, and the board members themselves.” This is because reputational damage hurts everyone. Howell went on to state, “it’s very important as we go through some of the ways the board can help management in that role. I think the things that really make a difference to management is when the board is able to be an effective devil’s advocate. Not managing management but helping them in their governing role by helping management to step back and think critically of their own underlying assumptions and biases.”
One of continuing struggles I hear from Board members is asymmetrical information, largely due from the siloed nature of company information and structures. Howell acknowledged, “These sorts of barriers are pervasive in any company of any size that has a particularly operations and different product lines and different markets and different countries and different time zones. These limitations in the free flow of information by themselves create a risk to the organization, to the investors of the organization, to the employees of the organization and the board’s ability to ask questions. If nothing else in their governance control creates this reminder to management to open up itself to itself and listen carefully to its own organization and be able to link information to all of the places it needs to be fed.”
I asked Howell to further explain his phase “open itself up to itself and listen”. He provided the following example, “how can the Chief Financial Officer make sure that he is giving all the information that the Chief Compliance Officer needs to do his job? Those questions from the board can be very valuable in making sure that the Chief Financial Officer doesn’t forget these issues and the Chief Compliance Officer has an opportunity to engage constructively with the Chief Financial Officer and others in the organization.”
Somewhat counter-intuitively, Howell noted that when it comes to the Board’s oversight role around internal controls, less is often more. This occurs by helping management understand a company can overdo a control environment, “in the sense that when management guides controls around risks that are not going to be the most serious risks to the company, that they end up building excessive amounts of energy and protection where they're not really needed. That you as a management team end up deluding your attention and deluding your resources.”
Howell went on to explain it is simply a matter of resources, “When things do go wrong, you’re in effect spread so thin that you don’t see those risks coming at you. The real question where less is more can be very valuable is when the board continues to challenge the management team on the scenarios that could play out. That could be devastating to an organization where risk really matters.”
I asked Howell if he could provide any discrete examples and he pointed to the food service industry for the following., “For example, in a food service company or a restaurant company, if there were contamination or if there were things that could happen either at the plant or by people who are touching the food. Those are very serious risks that a company needs to both be mindful of and to be able to prevent. If something goes wrong, you need to be able to detect early. When customers of the company or others are hurt that there’s a consequence of failures that can be devastating.”
In another example Howell said he had seen situations where internal “controls that are used for financial reporting for example, when examined in the light of where the risk really exists for the company, the companies have been able to reduce their controls actually by as many as half and improve their overall control environment and reduce the aggregate risk to the company. It’s interesting that even spending less money on controls by having fewer controls can improve the overall comfort that the company and its management and investors are protected from risk.”
A Board is not simply there to be a rubber stamp for senior management. It must exercise independent judgment, action and oversight. Further, it is the Board’s role to ask hard, difficult and probing questions to make sure management is not only doing its job but has considered other risk possibilities.