communication. In some cases they
replaced directors’ in-meeting interactions altogether, with the result that
management never got to hear directors
discuss anything at all. Two of the boards
I studied kept in-meeting discussions
alive and meaningful through two tactics:
executive sessions and active in-meeting
leadership.
Boards are required to hold executive
sessions that exclude management.
However, these sessions are often
treated as an afterthought – left to the
end of a meeting,
when the directors are
eager to head out, or
run without structure
or clear purpose. Yet
given that management’s presence inhibits board communications, these sessions
ought to have great
weight. The two high-functioning boards
held regularly scheduled executive sessions led by the chairman or lead director.
The sessions followed an agenda that
included time for raising new issues. The
boards also developed a formal process
for taking their concerns to the CEO.
This approach signaled the importance
of executive sessions to the work of the
board, and directors took them seriously.
The sessions helped create cohesion
among directors, which translated into
better communication during full board
meetings.
Active in-meeting leadership went
beyond traditional administrative tasks to
enabling communication and getting the
board to work as a group. Leaders on the
high-functioning boards set up discus-
sions to clarify what role the board would
play and summarized them to clarify what
role it had played. They called on direc-
tors to articulate concerns they knew
were on their minds, thus giving the di-
rectors both the opportunity and permis-
sion to express criti-
cism and dissenting
views. Some leaders
periodically polled
all the directors
so that each was
required to weigh in
on topics outside his
or her own exper-
tise, which gave all
of them a deeper
understanding of the
various perspectives
and of how they
might tap previously hidden knowledge.
And finally, these active leaders brought
discussions to a resolution even when
conflict was involved, allowing the board
to feel unthreatened by the prospect of
conflict in future discussions.
Katharina Pick ( kpick@hbs.edu) is a postdoctoral fellow of business administration
at Harvard Business School in Boston.
Reprint F0807F
Communication in the Boardroom
Obstacles
The board is not one group but t wo:
directors and managers.
Directors play a strained dual role:
cops and advisers.
Solutions
Executive sessions enable directors to
meet without managers.
Active in-meeting leaders encourage
frankness and resolve conflicts.
RISK MANAGEMENT
Reduce the Risk
of Failed Financial
Judgments
by Robert G. Eccles and Edward J. Riedl
Because subjective judgment is increasingly required to make projections of corporate financial performance, directors
and senior executives face a growing risk
that their companies will produce inaccurate or misleading statements. What’s
more, the accountants and auditors responsible for monitoring these estimates
are limited in their ability to mitigate that
risk. The potential results of failures of
judgment include very unhappy shareholders and directors, a precipitous
decline in stock price, and the dismissal
of top executives.
Companies can minimize the risk by
relying on appraisers, actuaries, and
evaluators who are skilled at deriving
estimates. Using such experts – whether
they are inside or outside the corporation – is routine in the international real
estate industry and is spreading within
the oil industry.
Financial reporting today is numbingly
complex, entailing estimations of the
value of financial instruments, of pension
and health care liabilities, and of the
impairment of assets such as goodwill.
Companies are required to report many
of these at “fair value” – essentially an
estimate of the price an item would
fetch if it were sold in an active market.
Fair-value reporting, which may involve
assessing factors such as an item’s
usefulness to a potential buyer and the
risk of owning it, is on the rise as U.S.
accounting standards converge with
their international counterparts. As a
result, the degree of judgment needed to
estimate assets and liabilities has risen
dramatically in the United States and
promises to rise even further.
Although companies devote substantial resources to preparing reports for
shareholders and regulators, estimates
of complex assets and transactions
continue to produce errors and controversy. For example, the mortgage buyer
Fannie Mae, whose fair-value reporting of
