Have you ever been to a board meeting where it seems one board member beats around the bush trying to get information, but won’t ask a direct question? Instead, the person asks for a direct inspection of one item after another. “Just spit it out,” other board members think. What do you really want to know? Direct inspection is a useful tool, but its purpose is not to obtain information. Rather, it is one of three ways to monitor. Monitoring is about determining if there is compliance with board policies. The three methods of monitoring are Internal Reports, External Reports and Direct Inspection.
Regardless of which method is used, the starting place is always the CEO’s explicit interpretation of the board’s policy statement, including rationale for why the interpretation is reasonable.
When using an Internal monitoring report evidence of compliance with the reasonable interpretation of the policy (achievement of the End or non-violation of the Limitation) is provided in writing by the CEO.
In an External report the evidence is examined by an outside expert such as an auditor.
In Direct Inspection the board or a board committee or member authorized by the board physically examines the evidence.
What is the board’s role in a direct inspection? It is to see if there is evidence of compliance with the CEO’s reasonable interpretation If a committee is appointed to do the direct inspection, reporting back to the full board is important, letting the board know that there is evidence of compliance . With this information, it is still the responsibility of the board as a whole to make a decision about the CEO’s compliance with the policy.
It is not the board’s role in direct inspection to delve into means and critique the internal operating policies or plans. If there is something you want to know, just ask. If the board as a whole agrees that it wants certain information, the CEO should provide it. Period. Don’t use direct inspection as a way to obtain information, or to prescribe back door means.