The Director’s Dilemma – July 2023 Edition

July 03, 2023 Share this article:

Directors Dilemma May 2023

Produced by Julie Garland-McLellan, Consultant at AltoPartners Australia and non-executive director and board consultant based in Sydney, Australia.

Contribution by Sonal Agrawal, AltoPartners Global Chair, Managing Partner Accord India and AESC Global Board Member.

This edition of the newsletter was first published on The Director’s Dilemma website and the full newsletter is available for viewing here. To subscribe to future editions of the newsletter, click here

The Director’s Dilemma - July 2023

This month we consider how a board can diligently discharge its duties if the papers contain information that is incorrect.

Elizabeth was thrilled to join the board of a government trading enterprise that delivers essential services and has the potential to make a large contribution to the nation’s environmental performance.

She has become concerned because board papers are frequently revised after they have been issued to the board. While she understands that there is always a need to balance issuing the papers in a timely manner with providing the latest and most accurate data, she has difficulty keeping track when documents in the portal are altered.

At her most recent board meeting an important investment decision was called for. Management had prepared a paper and it all appeared quite straightforward. During the meeting, management informed the board that some numbers in the paper were incorrect and offered a verbal change to the figures.

The CEO expected the board to simply note the new financial details and approve the decision based on the paper. Some directors were deeply uncomfortable with doing that. Others were more sanguine. The discussion on whether they could or could not use a paper with incorrect financial information as the basis for their decision quickly grew heated, and the Chair called for a break to allow directors to regain their composure.

Elizabeth used the break to call an experienced director friend and ask for advice.

What should she do?

Sonal’s Answer

In Elizabeth’s situation, there are several actions she could consider depending on the specifics of the situation, her relationship with the rest of the board, and the culture of the organization. This is a compromise of the formal board governance process, however insignificant the changes may seem.

Elizabeth could :

1. Call for resubmission: Ideally, Elizabeth could recommend that the paper be re-submitted to the board after corrections are made. This would ensure that all directors have updated information and the document trail is clean. At the very least, if the changes are not of significant impact, she could suggest the issuing of an errata sheet noting the corrections. This would formally ensure that changes are tracked and documented.

2. Discuss the Issue: As approving significant investment decisions based on verbally adjusted data presents significant governance and financial risk, Elizabeth might consider a direct conversation with the Chair / CEO / risk committee (or equivalent) to review these practices.

3. Intervention: Given that last minute changes seem to happen often, it would also be prudent to formally recommend a review of the documentation process and training to reduce such incidents.

As a board member, her focus should be on providing timely strategic impetus, but equally on ensuring that decisions are made based on accurately documented information to protect the stakeholders, and indeed, her position and reputation as a board member.

Julie’s Answer

When board papers are not reliable, directors should become concerned. This situation is now intolerable. The board cannot risk making a substantial investment decision based on financial information that is not documented.

Elizabeth should first consider whether the decision must be made now. If it can be deferred, even for a week, that would allow time for management to write a new paper with the correct financial information.

Given the history, I would suggest bringing in external expertise to help management verify their data and write an acceptable business case that will underpin a responsible decision. When there is reliable information, a decision can be made.

If this is a big investment, there are likely to be stages in the process, and Elizabeth should look to see if the board can make a decision to proceed with the next step without committing to the whole process. Again, this will buy the board time to verify the information and gain some shred of confidence that management are capable of managing the process to a successful conclusion.

The board should review previous communications with stakeholders, including the relevant Minister and Department, to ascertain what commitments have been made, and what consequences a delayed or partial decision might have for them.

Finally, the board should ensure that it regains the ability to discuss difficult topics and make decisions without unhelpful friction or lack of respect. At the moment, Elizabeth should work to rebuild the team and trust. In the near future she should work with the board chair to help instigate a board review.