“Why can’t they just rely upon me and not keep asking questions?” This is a frequent question asked of me by many CEOs after meetings with their boards.
Although all of a corporation’s power and authority are vested in its governing board, a basic tenet of corporate governance is that a board does not directly exercise all of that power and authority, but it is exercised “under the direction” of the board. Boards are expected to rely principally upon management in recommending, and especially executing, that direction, and each board member is protected from liability if the board member has a reasonable belief that management is reliable and competent in recommending such direction.
Courts generally require that, in order to have such a reasonable belief for a matter, board members must ask questions verifying the reliability and competence of management for the matter.
We generally advise the CEO that “the role of your board members is to exercise reasonable care to oversee that your organization has direction, but not to execute that direction or mange the organization unless the board believes that you as the CEO or management as a whole are not reliable and competent to do so. Boards do this by asking sufficient questions until they have a reasonable belief that you and management are reliable and competent in what you are authorized to do.”
Sometimes boards, or individual board members, need coaching on what questions to ask and when to stop asking them. The questions should not generally be “how are you going to do this.” Management should have the authority to determine “how.”
Instead, the purpose of most questions by a board should be to verify or confirm the reliability and competence of management in making the “how” determination: “How does this benefit the best interests of the business?” “Is it consistent with our business model and strategy for the future?” “What financial, legal, ethical, strategic and reputational issues have been considered?”
We have learned from the events that led to the recent crisis among large financial and investment institutions that policy makers such as board members must consider all of the possibilities, especially those that could have a high impact, albeit remotely probable, and not just the normal. Accordingly, the most import question is “what if?” “What happens if real estate prices fall?” “What happens if things don’t go as expected?”
Finally, directors can stop asking questions on a matter when they reasonably believe that management is reliable and competent to handle the matter. This generally occurs after management has shown that they have considered and answered the “what if?” questions.