How Cost Effective is Your Board?

The job of the board is to direct. That involves making decisions about what to do, how to organise, and who to engage with to further the purpose of the organisation. Those decisions, if taken reasonably and well, will require management support.

Increased demands for governance reporting and enhanced diversity will impact not-for-profit company boards in many ways. The three of the most feared are:

• a possible imposition of direct board costs as new independent professional directors demand recompense for the time, effort and risk involved in the role
• the increased cost of servicing a larger board, especially in the crucial first few months of each appointment when directors’ demands for information are often at their highest
• the ever growing costs of providing reports requested or expected by external stakeholders that are diligently reviewed by the board yet add little value to their decision-making.

Creeping disclosure requirements

In Australia, as in many other jurisdictions, ASX listed companies are required to disclose, in considerable detail, the remuneration paid to directors, any related party transactions, and the number of board and committee meetings attended by each director within each financial reporting period. This has led to increasingly detailed reporting of directors’ fees and the basis upon which they are earned. This requirement has been seen as a good practice and adopted by many not-for-profit organisations. There is a rightful expectation that boards will provide full and correct disclose of all relevant information. Most boards are keen to live up to their own aspirations of good practice and their stakeholders’ expectations.

The Australian Charities and Not-for-Profits Commission collects and makes available standard reports which include HR expenses (including board fees if any are paid) and board expenses, including governance activities such as travel and accommodation for meetings.

An unfortunate side effect of this reporting is ever more vigilant scrutiny of who gets what and why. This is rarely accompanied by an informed awareness of the personal duties and liabilities of directors or of the effort that goes in to making a properly diligent decision. Comments from outraged stakeholders to the effect that “I wish I got paid $20,000 for a few meetings” or “Why did we divert funds from the cause to pay travel expenses for a conference in Brisbane?” are often lobbed at chairmen during the AGM or fired off to directors via email.

A point that these comments usually miss is that what directors do in between meetings, as well as during them, should add value that vastly exceeds the costs. AICD Research, published in 2016, suggests that 39% of NFP directors spend 5 or more days per month on their NFP board duties. Within that cohort some 20% of directors spent more than 8 days per month on board business.

A Moot Point

The ‘elephant in the room’ that nobody seems to be talking about, however, is that the cost of supporting and servicing a board can dwarf the fees that are paid to the directors and the direct costs of their attendance at meetings plus the costs of any education that may be given to them during their tenure.

In research undertaken in Australia in 2014 over 77% of participants reported that their management teams spent more than 20% of their time working on board-related tasks: minutes, agendas, reports, information requests, logistics, administration, etc. The survey respondents were all senior executives reporting to the board or to the CEO. Job titles included CEO, EO, ED, CFO, CIO, CFRO, Head of Human Resources, COO, Operations Director, etc. The time cost of supporting a board exceeds 20% of the salary costs of each of these staff members.

One Managing Director commented “I would estimate about 30 – 35% of my time would be spent supporting the board by undertaking the tasks that you identified and at least an additional 15 – 20% of my time providing mentoring to board members and senior managers”. 45% of the MD’s salary? That is a serious cost impost.

If an average CEO in the sector has four direct reports the likely cost of supporting the board is more than the cost of an additional senior executive team member. The Australian NFP sector is characterised by relatively flat hierarchical structures and CEOs who often have more than four direct reports so the cost of the board can easily exceed this estimate.

For organisations where directors are remunerated the likely cost is estimated at approximately three times the direct fees paid to the directors (or to their employers if fees are paid to an organisation rather than the individual). The AICD NFP Governance and Performance 2016 Report suggests that 37% of directors in the sector are voluntary (entirely unpaid), 24% voluntary but with expenses reimbursed, 3% are listed as voluntary with honoraria and 15% are paid. 2% are classed as ‘other’.

Unseen, unmeasured and unreported

In research 52% of study participants said that their companies had little or no awareness of this cost and, as such, did not actively manage it or seek a return on the ‘investment’.

The ACNC 2016 Charities Report states “On average the larger the charity the greater the proportion spent on employee expenses”. For a large company that cost can reach many millions of dollars per year. Even for a small not-for-profit company the cost can easily run into six figures. Nowhere else in the corporate structure would such an expenditure be made with so little scrutiny or expectation of a fair return.

These figures do not include the time of other staff members further down the organisation to whom work may be delegated or the costs of external consultants who may be called in to help advise or inform the board. Most companies disclose a charter that states directors have a right to receive legal advice on their roles at the companies’ expenses; few companies disclose the costs of that advice.

Getting an ROI

41% of executives surveyed said neither they, nor the business, received any ROI on the time they spent working with or for the board. This is hardly surprising when the time itself is unaccounted for and the associated costs are not separately identified in board or management reports.

As one Executive Director commented “It’s honestly not something that has been discussed – but it should probably be on every board’s agenda with a process attached to measure ROI as a way to keep the board on their toes”.

Part of the problem lies in the sheer quantity of information that is collected, collated and communicated to the board. All around the world boards have been required to have deep and direct oversight of an increasing number of management functions and activities. Good managers, unsurprisingly, accommodate the board’s demands for information. Modern IT systems exacerbate the problem by allowing the board to track expenditure and results and to correlate and compare across regions, functions and timeframes.

One Managing Director remarked: “I often do not see a good ROI from this time. Boards need to be very clear about the information they wish to receive and how this is presented. Good board governance is not measured by the number and length of the reports received.”

Governments and stakeholders have added to the problem with increased demands for standardised reports that allow comparison of one NFP against all others on a consistent basis, more frequent reports and detailed compliance data. An experienced non-executive director participating in the research complained “From a cost perspective, compliance-driven interaction adds no true value.”

Practical Steps

Senior executives agree on the actions that would improve the situation:

• 36% felt that better communication of requirements and standards for board interactions would assist. This would include making board charters more explicit on reporting and support requirements, training boards and staff to understand the role and needs of directors, providing specialist board presentation and report writing training, and educating directors on their roles by a thorough induction were all cited as likely to make a positive difference.

• 25% claimed that a more strategic focus and less operational and compliance detail in board reports would free up valuable thinking time for the executives and allow more high-quality discussion time during board and committee meetings.

• 25% suggested that improving time management and delegation skills would assist. Few senior executives are given practical skills training at this stage of their careers. If they missed out on these topics during their career progression they will often find themselves nervous about asking for such ‘basic’ training now. A candid discussion about small factors might make big differences.

• 14% asserted that improving reporting systems and practices, including better design of annual and meeting agendas, would help.

Nobody is happy

Management frequently state that they feel they are on a hamster-wheel of continued demands for reports and information which are renewed, augmented, and repeated at each board meeting and by each regulator. Directors claim they cannot find the strategic elements amidst all the detail, or that reports are full of jargon, too wordy or lengthy (and we don’t need reminding of ‘the Centro case’ to understand that particular danger).
Whatever the solution there are two clear facts:

• A frequently cited dissatisfaction when conducting board review is the quality of the reports that the board receives from management. Even the best boards feel they could improve.
• Stakeholders are increasingly conscious of the costs of NFP boards on their organisations and want to see those costs justified by a measurable ROI.

Suboptimal decisions

Saddest of all, many chairmen feel that their boards are not making the best decisions that they are capable of, as one remarked “We put great people together on our boards and have another team of professional, motivated and well-intentioned people providing them with information but the important strategic clarity is missing”.

As governance structures change and new directors enter our boardrooms, now is a good time to review governance practices, reduce the costs, and improve the value of the work our executives do for their boards. Specific training for both directors and executives that report to them would be a good place to start.

The long term cost of sub-optimal decisions is likely to far outweigh the costs of the time spent by boards and management in reaching them.