What should be in the boardbook.

GUEST COLUMN What should be in the hoardbook The primary shortcoming of the typical board book is the lack of external information. BY MARTIN D. HANAN AND DAVID N. FULLER O NE OF A COMPANY’S Critical responsibilities is to involve its board of directors in the management decision-mak- ing process. The most valuable commu- nication tool used in this process is the “board book” prepared by management and distributed to directors in advance of meetings. While the board book is an extremely important tool, it rarely lives up to its potential in terms of fully in- forming directors with regard to the in- ternal and external factors that affect their decisions. Typical Contents Prior to the meetings, a board book is generally disseminated to prepare direc- tors for the coming discussions. Usually the board book contains an agenda list- ing the items that will be covered during the meeting, and, for each item, select de- tailed information. For example, a fi- nancial package showing the company’s financial statements for the recent quar- ter along with supporting schedules might be provided to coincide with the agenda item relating to management’s report to the board on recent perfor- mance. Other items may include pro- posed resolutions relating to such issues as loans and loan documents, senior management appointments, or compen- sation. While the information provided in a typical board book is helpful in terms of preparing the board for the discus- sions that will take place, there is typi- cally little information that would allow the directors to do much more than lis- ten and question within the boundaries of the information presented by man- agement. The board book typically provides ad- equate detail relating to the performance of the company and other internal issues. The primary shortcoming of the typi- cal board book is the lack of external in- formation. While there is a tremendous amount of information available, direc- Martin Hanan (at left), CFA, and David Fuller (r.), CFA, are co-founders of Value Inc., a Dallas -based financial management consulting firm that provides research and intelligence ser- vices to boards and company management. Its Web address is www.valueinc.com. tors often don’t have the time, resources or inclination to gather, distill and syn- thesize that information in order to im- prove the quality of their input. External Data Requirements Given management’s familiarity with the issues facing the company, the informa- tion they share with directors often pre- supposes a level of knowledge the outside directors may not possess. Between meet- ings, directors have their own dragons to kill and, while they may come across some information on their own, they are less likely to pick up on the news and events affecting the company than is management. It is therefore imperative that the company, either through its own actions or by engaging outside services, synthesizes the information that directors require in such a way that they can eval- uate alternatives and make decisions with the highest degree of certainty possible. The external data provided should cover the following topics: 1. The condition of and outlook for the economy in the company’s geographic scope; 2. The condition of and outlook for the industry and the specific markets in which the company operates; 3. The identity of the company’s com- petitors, their market positioning and the related perceived advantages and disad- vantages of each; 4. The comparative financial perfor- mance of the company and its competi- tors for which information is available; 5. The comparative performance of the company’s securities relative to those is- sued by competitors; 6. The level and nature of executive compensation in similar firms and iden- tifiable relationships between compen- sation and corporate performance; 7. The current opinions of analysts and institutional investors regarding the in- dustry, events or trends affecting the company and its competitors; 8. Mergers, acquisitions and divesti- tures in the industry and relevant deal terms; 9. Capital structure comparisons be- tween the company and firms of a sim- ilar nature; and, 10. An analysis of the information that can be gleaned from a comparison of the relative values of the company versus its competitors. Armed with this type of information, directors are better able to evaluate the alternative decisions proposed by man- agement and can be more proactive in discussions about key issues such as cor- porate strategy and investment decisions. Simply speaking, this information un- locks the value potential for which the directors were elected. As directors, as well as analysts, we un- derstand the importance of thorough, accurate and timely information to make the best decision for the shareholders. • SPRING 2001 1 1
 

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