The nominally independent board of directors is in fact often dependent on management for information. But new pressures on companies, more cooperative approaches and new technologies can render directors increasingly effective as evaluators and advisers.
In the Wake of recent high-profile reversals in the financial services industry, surprisingly little attention has been paid to the limited extent and compromised value of information sharing between companies’ management and boards of directors. Nominally independent directors — those said to be entrusted with protecting shareholder interests — are often dependent on management for information on the very things they are expected to examine, assess and oversee, including management’s performance. Boards have long been urged, by regulators and activist shareholders alike, to take more initiative in assessing their companies’ performance. But they are unlikely to do so unless they have access to relevant information when they need it. As one recent study on corporate governance emphasized, “the board’s ability to provide meaningful oversight and useful advice is determined by the quality, timeliness and credibility of the information it has. And it’s clear to us that most boards have a long way to go in this area.”1 We refer to the difference between the information available to management and what is presented to the board as “information asymmetry.” (See “Agency Theory and Information Asymmetry.”)