Trust May Be the Enemy of the Board

Norman Marks, CRMA, CPA, is an evangelist for better run business, focusing on corporate governance, risk management, internal audit, enterprise performance, and the value of information. The views expressed in this blog are his personal views and may not represent those of The IIA.

 

 

I first heard the expression “noses in, fingers out” from Don Sparks many years ago. He was referring to the idea that board members need to ask probing questions and challenge the executive team, but not get so deep into decision-making that it appears they are trying to manage the organization themselves.

Others use the expression the same way. For example, here is a post by Dave Berkus from 2010. Jamie Flinchbaugh weighed in with the same message, also in 2010.

I like the expression and recommend it to all the board members I work with.

I go one step further than these two commentators, though, by focusing not only on the “fingers out” part of the phrase, but on the “noses in.”

Board members have to use all their senses to detect whether everything is going as well as management presents. They need to recognize that what they hear will have bias and "spin" added to the facts, which means that they have to watch and listen carefully (i.e., use their eyes and ears to catch the entire communication, both verbal and non-verbal) when management presents and especially when they answer questions.

They need to be able to sense when there is more to the story — and extend their questioning and probing as appropriate.

I remember during one of my one-on-one meetings with a member of the audit committee of my company asking him (very carefully) about “noses in, fingers out.” He was German and that may be why he was not familiar with the expression, although he liked it after I explained.

I told him that I noticed that he asked more detailed questions of the CFO than I was used to. I don’t mean that he asked more questions about detailed accounting policies or practices. He asked about how decisions had been made, who was involved, and so on. Then he listened very thoughtfully to the answers.

I used my own senses to detect that something was going on below the surface.

The director confirmed, quite openly with me, that he asked more questions than “normal.”

I asked, again very cautiously, whether he was asking these questions because he didn’t have full confidence in the CFO (I used more delicate language).

He didn’t say yes and he didn’t say no. He smiled his answer.

Somehow, he had sensed from watching not only the CFO but the faces of the CEO and other executives when the CFO was talking, that there was some sort of issue with the CFO. I knew that some of the executive leadership team felt that while the CFO was an excellent financial person, he lacked a bit of drive and active leadership. The director was right to continue to ask questions of the CFO and listen carefully, as he needed to remain confident that the company had the right man in that job.

In the same way, I think directors need to ask questions and listen very carefully (eyes as well as ears) about organizational culture, teamwork among the executive leadership, confidence in the CEO and in corporate strategies, the completeness of the information they are receiving, and so on.

So where does “trust” come in.

Trust can lead you to assume that you don’t need to challenge the executive leadership; that you “trust” them to provide you with the information you need as a director; and that they everything is precisely as they tell you, without inappropriate bias, omission, or spin.

Just as it is inappropriate for internal auditors to say an area is low risk because they trust management, so directors must learn to exercise professional skepticism at all times.

We all know that people change, for reasons good and bad. Somebody who has been honest with you for decades may suddenly start holding information back.

I worry when directors get close to the executive team. Does that impair their independence and objectivity?

It’s interesting that the governance codes in places like Malaysia, Hong Kong, and Singapore assume that long-serving directors cannot be considered as independent after nine years. The U.K. sets the limit at 12 years and Australia considered setting the bar at 9 years before backing off.

It is important that every member of the board trusts every member of the executive leadership team.

But that trust should not be absolute. Directors must be able to poke their noses in and smell when things are starting to be “off.”

I welcome your comments.

Posted on Jun 21, 2014 by Norman Marks

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  1. I hadn't come across 'noses in, fingers out' before, but I rather like it.  And I agree the 'noses in' bit is key along with seeking to understand the whole communication - and what's missing from the communication. 

    I have long had a problem with 'trust' - as you say, past performance is no indication of future...  And trust can make individuals and organisations vulnerable - questionning and challenge of a sound idea results in positive endorsement of that idea, failure to question and challenge a flawed idea risks an expensive mistake.

    Asking for more information does not mean that I do not 'trust' the messenger, it may well mean that I want their idea to be sponsored and succeed, but I need more information to convince me that the thought processes have been thorough. 

  1. There is trust, and mistrust, of individuals' character, of their abilities, and of their knowledge base or expertise for dealing with a given issue or situation.  Sometimes the trust in character is misplaced, not because corporate officers have bad or weak character, but because good people sometimes do bad things in response to certain types of situations.  We all have cognitive biases and ethical blind spots that can make it more difficult for us to make the right decision or even to recognize that we are making a decision that has an ethical or legal dimension.  We also all are subject to different temptations and pressures.

    What this means is that boards need to cultivate a healthy skepticism, even as they trust their corporate officers as good people with good character (and often extraordinary ability).  You don't have to distrust an officer as a person, in order to be concerned and vigilant about potential misconduct.  I like to think of it as distrusting the situation. 

    Behavioral science can help us understand how situations and cognitive biases affect us and lead to misconduct.  It can help us, in some cases, to design appropriate preventive controls.  But just as importantly, it can take the trust issue a bit out of the "personal' realm and by putting it partly in the "situational realm," it can help directors understand why they must still monitor people they trust, and even help officers understand why monitoring is called for and does not necessarily betoken a lack of trust. 

    With due modesty, if any of this sounds interesting, I wrote a white paper for RAND on the subject, which is available as a free download here: 

    http://ssrn.com/abstract=2271840

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