Corporate Governance and Information Gaps: Importance of Internal Reporting for Board Oversight

Introduction
The evolution of corporate governance and board of directors’ responsibilities continues. Recent years’ actions of shareowner activist groups and securities regulators—and reports of shareowner votes in corporate annual meetings thus far in 2017—provide many indications of ongoing growth in public expectations for the roles and performance of corporate boards of directors.
The existence and responsibilities of specialized committees on boards of directors have also continued to evolve. In addition to long-established types of board committees such as the audit, finance, compensation, risk management, and nominating and governance committees, we now see committees being formed to address such issues as science, technology and innovation, cybersecurity, health, safety and security, environment and sustainability, regulatory compliance and public policy, and other contemporary concerns. While these topics are all valid issues to consider in the oversight of today’s corporations, one wonders how many committees one board of directors can effectively administer and support. And how can numerous board committees successfully monitor corporate issues and developments and report on these matters in periodic board meetings?
In the face of growing expectations, further questions arise regarding whether boards today are receiving and utilizing adequate information and support to address their oversight responsibilities. It seems that nearly every week brings another news report about a breakdown in corporate ethics and controls as well as performance failures across a wide range of industries.
Recent events at Volkswagen and the public blowup at a well-known and seemingly successful “new economy” company, Uber, leading to the resignation of its co-founder and CEO, are two notable examples. The total fallout and remedies for these and other performance and governance failures are yet to be fully determined.
Upon reading about each new incident, one is prompted to ask, how could the directors in these companies not have been aware of serious problems? Did something go wrong in communications and information flows that let this happen?
Somehow, somewhere, it seems evident that there must have been some serious gaps in information supplied to the board, or possibly in board understanding and reactions to such information.
A deficiency in information supplied to boards calls into question whether boards today are in fact able to serve as an effective check and balance in the governance of public corporations.
Over the years, courts and eminent legal authorities have repeatedly emphasized the significant responsibilities of boards for oversight of the management of public companies. In the words of former Delaware Supreme Court Chief Justice E. Norman Veasey, stockholders should have the right to expect that “the board of directors will actually direct and monitor the management of the company, including strategic business and fundamental structural changes.”
Delaware Supreme Court Chancellor William B. Chandler also noted the significant oversight role of the board in his widely publicized opinion in the Disney Corporation Shareowner derivative suit concerning the hiring, compensation, and firing of Michael Ovitz. Chandler stated, “Delaware law is clear that the business and affairs of a corporation are managed by or under the direction of its board of directors. The business judgment rule serves to protect and promote the role of the board as the ultimate manager of the corporation.”
The “ultimate manager of the corporation”—those are very strong words. Some might debate the terminology, preferring instead a phrase like “the ultimate overseer of the corporation.” But whether one uses “ultimate manager” or “ultimate overseer” as a designation, it is clear that a board of directors has significant responsibilities for the welfare of the corporation and its stakeholders.
Serving as an “ultimate manager” or “ultimate overseer” requires appropriate information flows to support that role. While there are different types of information flows, this article will focus on financial information supplied to boards of directors. We will also discuss two types of information gaps —quantity and quality—that can make it difficult for board members to carry out their oversight responsibilities.
Quantity of Information—How much is the right amount? Who decides?
In considering quantity, we must first ask these questions: how much information is needed for an oversight body to perform its functions, especially for a board or a board committee with a critical role in ensuring the welfare of the corporation and the interests of its shareholders? How much information is it realistic to expect a part-time body composed mostly of people from a range of industries, institutions, and professions, that typically meets four to six times a year, to absorb and act upon?
Who decides what data elements will be in the directors’