Kathmandu Holdings’ management immediately informed the board when it knew of a cybersecurity attack this year. The outdoor clothing and equipment retailer disclosed in March that the breach may have captured customer data and payment details.
Kathmandu has more than 2 million members through its loyalty program, meaning the breach could have had far-reaching consequences. But the breach was contained quickly, customers were notified and the market informed. Kathmandu barely missed a beat.
“The board was told quickly about the problem, was regularly updated by management and given a timetable on the next steps to resolve the cyber breach,” says Kathmandu chairman David Kirk. “We structured our next board meeting to discuss the attack in detail and its remedy.”
Kathmandu’s response to the breach reinforced the value of management and the board identifying their organisation’s key risks and having pre-determined response strategies. Also, the importance of management providing directors with real-time information.
The timeliness of information presented to boards is becoming a bigger issue as business moves faster, industries are disrupted and market volatility remains elevated. Boards that rely on information that can be weeks or months old can be left flatfooted by organisation shocks.
This lag has prompted suggestions that directors receive dynamic board packs, where they access and comment on information as it is produced rather than wait for the full pack.
Video-streaming giant Netflix has gone several steps further with a model that has attracted attention in governance. Netflix asks directors to attend monthly or quarterly management meetings periodically, in an observational capacity, in addition to their board and committee roles. The goal: to better expose directors to management issues and provide real-time information.
Kathmandu’s David Kirk says the Netflix model is more suited to tech companies. “Boards of large tech firms tend to have industry specialists who are hands-on. My concern with the Netflix model is the potential to blur the role of management and the board.”
That is a key consideration with the quantity or timeliness of information provided to directors. Boards that want to dig deeper in their organisation might provide daily reports, expose directors to a wider set of data that management receives, and encourage regular information-sharing among directors and management with topical reports or presentations.
Kirk does not favour this approach. “When you start giving directors extra information each day, they feel obliged to read it and I question how much value it adds. The risk is you swamp directors with ‘noise’ and distract them from long-term strategy and performance.”
The retail sector typifies the dangers of this approach, says Kirk. “Obsessing about daily news clippings of a retailer or its competitors, or the latest retail sales growth figures or industry report, doesn’t add much value. It can sap directors of time and negatively influence their decision making.”
The key is directors being clear on strategy, the organisation’s key value drivers and the information required to assess those drivers. “For Kathmandu, the most critical performance indicators are daily sales relative to budget and our average gross margin during sales promotions,” says Kirk. “Kathmandu directors receive that information daily.”
Kirk, also chair of Trade Me Group, a New Zealand-based online marketplace that is under takeover offer, says timeliness of information required by boards varies. “Trade Me’s performance is judged more on a monthly basis and has different metrics compared to Kathmandu. The speed of information that directors need depends on the industry and organisation.”
Another risk of too much short-term information is directors distracting management. “The last thing you want is a director calling the CEO because there have been a few poor trading days. Directors need to consider daily information in the context of a trend and against strategy, and use that to inform boardroom discussions.”
Kirk typically meets fortnightly with Kathmandu CEO Xavier Simonet. He does not favour a meeting with the CEO, by videoconference, in between board meetings that all directors attend. “Again, it depends on the company, but a fortnightly catch-up between the full board and CEO, in addition to the board meeting, would be overkill for Kathmandu. Boards have to give management space to do its job and not waste time providing unnecessary information to directors.”
Finding the organisation heartbeat
George Savvides, chair of Next Science, deputy chair of SBS Australia and a non-executive director of Ryman Healthcare, says there are two dimensions to information timeliness for boards.
The first is the challenge of directors being up-to-date. “In larger organisations, it’s not enough if the board meets, say, eight times a year and directors rely mostly on a static board pack for information. Boards need to find ways to get up-to-date, regular information.”
Two of Savvides’ boards provide a written mid-board meeting update, typically 4-6 pages and focused on current issues, and there is scope for a videoconference between the board and CEO, if needed. “The board does not have to wait for the next meeting to receive or discuss information. Directors are getting faster information and we’ll often have a less-structured meeting to discuss it or pick up on an issue in more detail at our next board meeting.”
“Too often, boards give directors more and more data, and increase its frequency. Directors feel like they have to read all of it and inevitably get drowned in information. The board ends up spending too much time on the wrong issues.”
The second dimension is how the board gets real-time data on organisation intangibles. “The board pack by itself is not enough,” says Savvides. “It usually gives you lots of data around organisation outputs, but far less information on the company’s behaviours, culture and tone – issues that have become increasingly important in governance.”
Savvides says boards must find the right balance between “headspace” and “heartbeat” data. “Too often, boards give directors more and more data, and increase its frequency. Directors feel like they have to read all of it and inevitably get drowned in information. The board ends up spending too much time on the wrong issues.”
Effective boards have processes to understand their organisation’s heartbeat. The board of Ryman Healthcare, a leading NZ aged-care provider, for example, regularly meets at one of its 34 villages. “Directors have morning tea with staff and talk to residents and their families. We hold the Annual General Meeting at a facility and encourage residents to attend. It’s a fantastic way for directors to understand the alignment between customers and shareholders.”
Savvides believes boards can do much more to source real-time information on the customer experience. “A director of a financial-services organisation might open an account or apply for a home-loan and experience what’s involved. He or she can form a first-hand view on whether the forms were clear, any advice was reasonable and the level of selling involved.”
Boards, in particular, should rigorously scrutinise net promoter scores, a common metric used to gauge customer loyalty, says Savvides. “Boards congratulate themselves and reward management teams when the net promoter score is four out of five. What they don’t do enough of are deep dives on the 15-20 per cent of customers who are unhappy with the service.”
Savvides adds: “I don’t want to spend my time on the averages. I want to understand who the outliers are and why they are detractors of our service. Then, I want to know how we can move the customer experience from 80 per cent of customers who are satisfied, to 90 per cent. Net promoter scores can be ‘fool’s gold’ if they lull boards into complacency around averages.”
Boards should spend more time sourcing real-time information on the organisation’s “moral muscle”, says Savvides. “Does the organisation consistently do the right thing? Do we always act in the best interests of customers? Does the board unpack the customer experience, understand why some customers are unhappy and ensure something is done about it?”
Savvides says directors who rely mostly on board packs risk missing information that matters most. “The real-time data that directors need more of is not in board packs or lots of facts and figures. It starts with spending extra time outside the boardroom, being prepared to actively listen to stakeholders and a willingness to put yourself in their shoes.”