Information is the lifeblood of a board. While board members should seek out current, complete and accurate information about the companies on whose boards they serve – and many do so – their knowledge of those companies is necessarily dependent upon information provided by management. Similarly, management cannot properly follow the mandates and views of its board of directors if those mandates and views are not communicated in an effective and timely manner. Thus, information flows between the board and management are critical to the proper functioning of both, as well as to the execution of a company’s strategic plan and many other critical processes.

The Goldilocks Principle: Moderation In All Things 

We all remember the story of Goldilocks, particularly that she always searched for an ideal midpoint. She disliked the bowls of porridge that were too hot or too cold, the beds that were too hard or too soft, and so on; instead, she sought out the bowl, bed and so forth that was “just right.” Managing information flows between management and the board should utilize the same principle: Determine what’s “just right,” based upon the specific facts and circumstances. 

1. Quality Of Information: Before addressing other aspects of information flow, it’s critical to focus on the most important “just right” – namely, that the board and its committees receive full and fair information, including bad news as well as good news. Bearing in mind the earlier statement that boards are largely dependent upon the information provided by management, it’s unconscionable – and dangerous – to sugarcoat information given to the board.

We have all read (often in articles about scandals) of boards that were not informed about adverse developments. A very good if tragic example is the scandal that rocked Penn State a few years ago; according to published reports, management consistently opted not to tell the board of the allegations of sexual abuse and even of inquiries by the authorities. Examples in the corporate context abound, as well. Of course, the Goldilocks principle applies here as well – everything in moderation. But, at a minimum, management needs to avoid even a soupçon of the “no bad news” approach. In fact, the first questions management (including the corporate secretary) should ask when something bad – or good – happens are, “do we need to tell the board, when do we tell them, and what do we tell them?” Some examples:

When preparing materials on acquisitions and similar corporate transactions, it’s important to candidly discuss the risks of proceeding – and not proceeding – with the deal. Giving only the upside is simply not good policy. And, if the upside (or downside) is based upon certain assumptions, be straightforward about the assumptions and how realistic they are. The same goes for timing, antitrust implications, and other aspects of the transaction.

When informing the board about litigation brought by (and against) the company, it’s important to be realistic about likely outcomes.

2. Amount Of Information: It may be tempting to give the board massive amounts of information to avoid omitting something that may be of significance. The thinking goes that you are protecting the directors against liability by making sure that they have every piece of potentially relevant information.

However, think of Goldilocks: there is such a thing as too much information, and giving your directors everything that may possibly be of interest falls into this category. There is no assurance that the directors will find the important needles in massive haystacks of information. In fact, by giving them too much information, you may be forcing them to choose between reading it too quickly and thereby not absorbing it, and not reading any or all of what you’ve given them.

In either case, you may be causing problems – not the least of which may be that your directors will not be prepared for discussions at board meetings; the worst of which may be that your directors are found liable for not considering the appropriate information. Consider how furnishing mass amounts of information may play out when a matter considered by the board is litigated: 

Instead, it is (or should be) management’s task – often executed by the corporate secretary – to make sure that the information provided to the board is reasonable in amount and can be read and digested prior to the meeting (and it’s acceptable to let the directors know that they are expected to do so). Even if the company’s culture calls for the use of lengthy, highly detailed materials, that approach is unlikely to work for non-executive directors. 

3. Timing Of Delivery: Again, the Goldilocks principle applies – avoid giving your directors information too early or too late. It may seem desirable to get them information as soon as it is ready, to assure that they will have “all the time in the world” to review and consider it. However, this runs the risk that they will forget some of it by the time the meeting rolls around. Also, giving information too soon may result in the failure to update the information as more details become available or in the directors missing that critical new factoid. The risks associated with giving your directors information too late seem obvious; they may not be able to review it on time, or they may read it too hurriedly, possibly overlooking key details.

Good governance does not involve a one-size-fits-all approach, but delivery of materials five to seven days prior to a meeting is generally regarded as appropriate. 

Format – Materials furnished to the board should follow the same format; that way, directors will know where to find what it is they’re looking for or what you want them to see. If directors know that the request for authorization – that is, the specifics of what the board is being asked to approve – appears in the same place in every memo or slide presentation (preferably in a prominent place on the first page), it will guide their reading. Where technical terms must be used, provide a glossary.

Informal Communications To The Board

When to engage in informal communications with the board and/or a committee should be guided by the following questions:

Do we need to tell the board?

When do we tell the board?

What do we tell the board?

In considering whether and when to engage in informal communications with the board, remember that sending something to the board on a too-frequent basis may be a bit like the boy who cried wolf; if you’re constantly sending materials to the board, it may be hard for directors to distinguish between routine matters that might better be collected for distribution on a regular basis (for instance, on a weekly or biweekly basis) and materials that truly require their attention. There’s no sure way of knowing this, but it can be very helpful to ask directors for their candid views as to how often they want to receive routine updates on various matters.

Information To Management

Because of the very nature of board-management relations, communications from the board to management are far more likely to be informal than informal. However, the same rules apply as those outlined above, with a few extra wrinkles.

First, clarity of tone is very important. Management can be sensitive to board criticism, and if a communication comes across as harsh or insulting rather than constructive, relations between the two groups can be seriously impacted. Depending upon the circumstances, it may be desirable to have a second director review the communication before it is sent, in case the drafter is unaware of how the communication will come across to the management team.

Second, while clarity of substance should be a given in all communications, it is particularly important when the board is giving directions to management. Management may be timid about questioning the board’s directions, so rather than ask for clarification, management may implement what it perceives to be the board’s direction only to find out that the board meant something else entirely.

Third (and this surely applies to all communications in both directions), the board and individual directors may want to think twice before putting anything in writing. If the board is not represented by its own counsel, it should consider consulting with the company’s general counsel or outside counsel to determine whether a particular communication may be discoverable; too often, boards assume that their communications are confidential without realizing that confidential communications will generally be available to plaintiffs and others unless some type of legal privilege can be claimed – and that it is very difficult to sustain a claim of privilege. 

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Robert Lamm is an attorney and co-chair of Securities and Corporate Governance practice at the Florida law firm Gunster.

Reprinted with permission from the author and White Page Ltd, publisher of NYSE: Corporate Governance Guide (2014). For the original chapter, and entire corporate governance guide, click here.