Building a Better Board Book

The first question we like to ask directors is about the quantity, quality, and timing of the information they receive from the company. The late Tom Wyman, who served on the General Motors board in the 1990’s, told us that the board materials were delivered “by forklift” but the board agenda never included time for questions or comments. More recently, complaints about over-emphasis on compliance rather than risk assessment and strategy have led to concerns that board briefing materials miss the forest for the trees.

A new analysis by Alex Baum (Value Act Capital), David F. Larcker (Stanford Graduate School of Business), Brian Tayan (Stanford Graduate School of Business), and Jacob Welch (Value Act Capital) assesses the current state of board books and suggests improvements.

The six significant shortcomings they identify are:

Data lacks important context

Data focuses on results (outputs) rather than drivers (inputs)

Data does not inform organic (P&L) investment decisions

Unexplained outperformance is insufficiently investigated

Accounting allocations obscure true economics

Data does not match a manager’s sphere of responsibility

The authors note:

Having access to appropriate data is critical to making sound
decisions on strategy, compensation, and capital allocation.
However, evidence suggests some directors do not receive the
information they need on important drivers of the business. In
general, what is the quality of information that public company
directors receive? Is it sufficient to make optimal decisions? If
not, how widespread is this problem? In situations where the
quality of data is lacking, what discussions should the board
use with management to improve information quality and

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