Introduction

This is the first of a series of articles on how internal auditors (IAs) can better communicate with non-executive directors (NEDs). IAs often focus on how to persuade middle and senior management to take action. Whether it’s discussing an ad hoc engagement, agreeing findings in a close-out meeting, or issuing an audit report, our audience is all too often those who will introduce or improve controls. But what about those in more senior positions?

We’re all familiar with the Audit Committee; however, the Board, including NEDs, set both strategic objectives and the corporate tone. Understanding these, and the people who set them, are essential if we are to communicate effectively.

NEDs hold a particular position in the organisation. They come from outside the organisation and therefore should be free from any conflicts, interests or involvement in internal disputes. This may also mean, however, that they don’t understand the detail of all the operational information in reports or discussions. They may also feel uncomfortable holding senior managers’ feet to the fire. This is all the more likely if the latter are technical specialists and control the supply of information to the NEDs. 

However, NEDs face increasing responsibilities that IAs can help them meet through fruitful conversations and well-written reports. We can do this through encouraging and persuading NEDs to ask the first (and second) line searching questions that require credible answers.

In this article, we will cover:

• NEDs’ responsibilities and perspectives, the better to understand where they’re coming from; 
• how to obtain and use precious time in conversation with the NED; 
• how to elicit useful feedback from the NED; and 
• how to help them discharge their regulatory duties.

Who are these people? Where do they come from? What are they for?

We should probably start by describing NEDs’ status, and where better than ACCA's guide to directors' responsibilities under the Companies Act 2006?

NEDs are now looked to to provide special input to the process of governance. The fact that NEDs are not involved with their company on an executive, day-to-day basis means that they can offer, and are today expected to offer, a more detached, objective and comprehensive view of how the company’s affairs ought to be directed than might be possible if the company’s board consisted solely of executive directors. Another virtue of NEDs, which is by no means limited to the listed company environment, is that they can provide a board with skills, perspectives and experience to complement the talents of the executive directors. [1]  

Traditionally, NEDs are not employees of the organisation they serve, yet they have the same legal duties, responsibilities and liabilities as executive directors. The post can be paid or unpaid, and the time required can range from a few hours a month to much more. The organisation should provide initial and ongoing training to NEDs, so they can keep abreast of relevant regulation as well as good practice in governance. 

Understanding this is essential to communicating well with the NEDs we encounter. We may be lucky enough to have experienced, informed, objective, thorough, rigorous people on both the Board and Audit Committee of our organisation. Or we may have to engage with NEDs – or indeed other senior people – who are learning as they go. In the latter case, IAs can help inform and update NEDs, so that the latter can better play their role in good governance.

Often, a NED’s objectivity and fresh perspective is what gives their opinion added weight. Between their Board-level role and their distance from internal enmeshments, they can advise, support and direct in a way few others can.

Whether the NED in question lacks confidence or has too much, one thing you can be sure of: you have limited time in which to make your point and engage the NED. So how can you make the most of whatever time you have – even only five minutes?

Time and tide wait for no one

How can you make the most of what little time you may have with a NED, or indeed any director? While all directors are busy people, NEDs may have only a day a month to dedicate to the organisation. This means you have to structure face-to-face meetings and written communications in ways that make the most of every minute.

Whether sending a document or attending a meeting (both on time, of course!), the temptation may be to plunge straight into the matter, giving as much detail as possible. However, this may be counterproductive, if your reader or interlocutor doesn’t appreciate this approach.

Do your research on your organisation’s NEDs and their backgrounds. Do they come from the same country or region as you, and therefore share the same culture of timekeeping and communication? Even if so, have they perhaps spent much of their career abroad, acquiring different values and methods? Work out first what is likeliest to appeal to their communication style.

Culture matters. Countries, regions and people perceive clear communication differently. What is polite in one culture may seem unclear in another, and frankly evasive in a third. Conversely, what is open and honest in one culture may come across as direct in another, and openly rude in a third. Consider your audience, adapt your style – but remember that people the world over appreciate a concise, useful report. [2]

Even within the same country, region and organisation, the culture may not always be consistent and constructive. If your organisation tends to avoid difficult conversations and direct messages, that is a broader problem. The greater the internal tendency to waffle and obfuscate, the likelier it is people won’t understand each other. And the consequences can be dire, as the LIBOR scandal showed: ‘Barclays appears to have regarded the points raised by Mr Sants as “issues” rather than “concerns”. On the basis of the evidence it is unclear whether Barclays “got the message”.’  [3]

Respect your reader, or interlocutor, and respect their time. Be timely and polite, but be as brief and clear as possible. If the other party is in any doubt about your message, you have not only wasted time – you’ve missed a precious opportunity to engage and influence a senior decision-maker.

How can NEDs help you to help them?

You may need to engage closely with a new NED, or one lacking in confidence. However, never underestimate how much they can help you to help them. Maybe the NED can bring useful experience from other countries, sectors and organisations. Such suggestions can improve not only your interactions with the NED in question, but indeed all your communications.

If, however, the NED feels your approach isn’t clear, but can’t say exactly what the problem is, consider using good IA practice to elicit more information.

All IAs should understand how to phrase open-ended questions and practise active listening. (If you need a refresher, look at ACCAs website for resources including its Internal Audit hub.) This should not only prompt the NED to provide more detailed insights, but also strengthen the rapport you are building.

If the problem is with written communication, and the NED is new to your organisation’s reporting conventions, ask what they found helpful in previous roles. If the NED has seen many of your reports, find out what they found most and least useful.

The NED may share with you the Board’s preference for certain layouts or graphics, this is invaluable. After all, if the busiest and most senior decision-makers find these techniques help them grasp critical information quickly, then people throughout the organisation may appreciate them, too.

Conclusion

Keep in mind our role, and the NEDs’. We must provide assurance regarding the organisation’s risk and control framework. NEDs must take business-critical decisions about the organisation’s strategy and direction, including risk appetite. How we communicate directly affects their ability to discharge their regulatory duties.

NEDs need to challenge the business – not just at Board level. All the more reason for IAs to use plain language and focus on the most important elements, rather than overly technical detail. The organisation’s external auditors and regulators, for instance, may not have technical experts equal to the organisation’s own – but they are still bound to review and conclude on various topics.

Different habits, expectations and communication styles all play a part in communicating. However, if you do your research, respect your reader, ask open-ended questions and listen to the answers, both sides will benefit – as well as the organisation.

This is the first in a series of three articles about IAs and NEDs. The second will address accountability; the third, reports and reporting process.  

Sara I. James, PhD, CIA, is the owner of Getting Words to Work (www.saraijames.com) and a member of the Chartered Institute of Internal Auditors.

[1] ACCA, A guide to directors' responsibilities under the Companies Act 2006, p.11

[2] Sara I. James, 'Writing the Right Report', ACCA UK, 2016

[3] Fixing LIBOR: some preliminary findings (2012), p.70.