The Resolution

‘Why’ should be the word you hear most in any board meeting

The word “why” is the most powerful word for any non-executive director. Hearing it used regularly signals a healthy board who is approaching their role in the right way.

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For board dynamics to work, directors need to make thoughtful contributions. A good way to achieve this is through rigorous questioning, and the best way to open a discussion is to ask the question ‘why’.

Why is this proposal better than another project? Why are we deploying our capital on project A when project B, C and D are all queued up? Why does this serve the interests of our shareholders the best?

This kind of questioning helps a board to test contrary propositions and really understand whether a proposal is in the best interests of the shareholders. If one director starts the ball rolling by asking ‘why’, others will usually chip in with their own perspective. Before you know it you have half a dozen experienced business people sitting around a table chewing on a proposal. That’s the sort of testing needed to ensure you reach a sensible decision.

Boards need to ask ‘why’ to be effective

A board that fails to take a critical interest in the proposals that are put before it is not doing its job properly. Directors must be sceptical and critical as part of their role. This doesn’t mean they can't be supportive, but they've got to be satisfied that they’ve asked all the right questions and that they’ve been answered.

Discussions about large transactions like a proposed takeover, for example, can often become quite complex. There are volumes of charts, documents, projections, pro forma balance sheets and profit and loss statements that can be very hard to assimilate. It’s essential that the board interrogate these at length and, in particular, understand the assumptions made by management and the impacts if those assumptions prove to be incorrect.

By questioning a proposal the board can open up a healthy debate that will help it reach a unanimous decision. Boards need to question and be unanimous to be effective, and the two are not mutually exclusive.

‘Why’ creates a narrative for the decision

Asking management ‘why’ also serves to ensure that the rationale for a proposal can be explained satisfactorily by management.

Management should be able to succinctly explain how the relevant proposal fits the company’s strategy, what the benefits of the proposal are from a shareholder point of view, what options they’ve considered and why this proposal is the best option. If management is unable to be clear and convincing on these matters, that is a big red flag.

As a board member, you need to be clear why a decision is being made and satisfy yourself that it’s in the best interests of shareholders. Any incoherence you detect in the articulation of the rationale by management should be taken as a warning that the proposal could be difficult to justify to stakeholders, and warrants further work and consideration before being approved.

Boards need to sell their decisions into both internal and external stakeholders, and to do this they need to be able to explain why the decision was made in simple terms. By asking ‘why’ they can understand the rationale for a decision and develop a narrative that they can use once the deal is done.

While it’s not necessary for boards to question why on every little thing, it’s important to hear the word ‘why’ often when contemplating large proposals. It signals that the board is exercising good process and is therefore increasing the likelihood of making decisions that are in the best interests of shareholders.