It is about nuance, and often timing, but always about trust
By Graeme Proudfoot
“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know. … It is the latter category that tend to be the difficult ones.” — Donald Rumsfeld, US Secretary of Defence, 2002
One of the most uncomfortable, nagging concerns an independent director (iNED) can have is the worry about unknown unknowns. As we shall see, however, dealing with that challenge cuts in two directions: as a young lawyer working in an asset management business the question I dreaded most came (at regular intervals) from a wise old non-executive director asking me “is there anything else I should be aware of?” That was almost thirty years ago, but coping appropriately with that question is one of the most useful lessons I have ever learned. Especially now that I get to do the asking rather than the answering.
The starting point, and the topic of this commentary, is to look at how (and when) iNEDs can go about getting the information and analysis necessary to inform effective challenge. One of the powers iNEDs have is that their questions are on record for the future (if they aren’t, have a quiet word with your board’s company secretary). As a result, their requests have the ability to make life very painful for the people providing the answers. There is a world of difference between “can you explain to me how x works”, or “can you give me some insight into topic y” on the one hand and “can you write me a paper on [specifically worded question]” on the other.
The first formulation gives insight into what the questioner is getting at and lets the company see whether they have material in the organisation that addresses the concern or curiosity, whereas the latter demands a bespoke answer with potentially no wider use. As a result, it runs the twin risks of generating work (never popular) whilst not actually answering the deeper topic. A recipe for unhappy board meetings. As a general principle, if a subject is important there is a decent chance that there will be management information on it somewhere (management will presumably have been interested in the topic too), and interrogating that data is a good place to start. In other words, the thoughtful first question is a ‘do you have a way of answering this question already knocking about’ one, and if the answer is ‘no’, or is otherwise lacking then you can move on to more bespoke (and probably pointed) questioning.
When to ask is another aspect: companies like to deliver neat packages by way of response to stakeholders who ask them questions, with no loose ends and full of calming language. They generally deliver the package quite late — it takes time to smooth off the edges, and there will be lots of interested parties (at least if the topic is interesting, important or expensive) and as a result, there is a distinct chance that it won’t actually fully hit the desired target (and if thrown back there will then be an almighty scramble). The thoughtful iNED will therefore want to get plugged into the process early, but may run up against a reluctance to share work in progress for fear of setting unnecessary hares running. If the company hasn’t finished thinking the topic through, then its work in progress may shoot off at all sorts of unproductive tangents.
Squaring that circle can be done a few ways, but two I would point to are, firstly, for the iNED to establish a pattern of receiving partial information in the right way (calmly and reflectively): nothing discourages early disclosures (to go back to the ‘what should I know’ question) as much as every warning flag no matter how small or remote being treated like the outbreak of disaster. If proper early warnings are given, most of the time they will come to nothing so need to be treated as such. What this is really about is the accumulation of trust: which is added to each time information passes and is met proportionately; and is eroded each time information is overreacted to (and, to be fair, each time it transpires that information was held back and/or delivered late). The second technique, though it carries its own risks, is for iNEDs to have both formal and informal channels of information. When it works, the latter approach has great power – but more often than not arises over a good period of time as relationships deepen and probably represents a higher order of mutual trust again.
Building that state of trust effectively, then, is the key. If you have it, then when surprises come along as they inevitably will, you will know you are in the same position as the management team and the rest of the organisation, and can set about dealing with it together. If you arrive late on the scene you will tend to feel (and therefore act) as an observer and a critic, especially when the stakes are higher – as with the value for money assessment – definitely a topic for another day!
Now an independent director, Graeme spent the great majority of his executive career at a large asset management firm initially as a lawyer, then as a businessman becoming involved in all types of investment vehicle including as Director and Chairman of open and closed ended funds and ETFs in the UK, Europe and the USA.
Graeme can be contacted at email@example.com