Sound-Up Governance

Each week, we will release two illustrated definitions of corporate governance jargon in order of increasing complexity. In this instalment we have the definition of "information asymmetry". Check the episode thumbnail for an illustration by Nate Schmold.

Originally published March 27, 2023

What is Sound-Up Governance?

The real impact of corporate governance isn't about compliance or structure or policies, it's about the conditions that impact decision-making. Sound-Up Governance features fresh perspectives to help boards and executives to be a bit better tomorrow than they were yesterday.

As the CEO of Reallie Steilish, you basically know everything there is to know about your corporation. You wake up every day thinking about new hat designs and marketing tactics, you eat lunch with your senior executives or important suppliers, you dream every night about what hats Billie Eilish might want to wear, and then you start over the next day. On the off chance there’s something about Reallie Steilish that you don’t know, your senior executives *do* know and will have your back.

On the other hand, your directors get together for quarterly board meetings and don’t think all that much about Reallie Steilish in between. It’s not that they don’t care, but, well, they’re directors! They delegated the job of running the corporation to YOU so that they didn’t *have* to know everything. But they’re still accountable for making great decisions, and even for any mistakes that you might make as CEO.

The fact that senior executives – especially the CEO – know EVERYTHING about a corporation, while directors know a lot less than everything is one important example of information asymmetry in corporate governance. It’s not all that important for directors to know that you decided to paint your office neon green to match your favourite Billie Eilish-endorsed hoodie and shorts combo. Or is it? What if they’d be inspired by your creativity and suddenly have some great new ideas that take Reallie Steilish to the next level?

Well, it turns out this is one of the many tricky parts of a CEO’s job – working with the board to figure out what information they need to do their jobs well. For most corporations, engaging the board in a discussion of the paint in the CEO’s office is probably a waste of time. But there are no perfect rules here. Just remember that information asymmetry between the board and CEO is a feature of corporate governance and not a bug.