Tell the Board what exactly?

[Mark Robilliard]

Whether you have a board or not, act like you do. One day you may want to sell part or all of your business and you will be in a much stronger negotiating position if you have this stuff sorted.

This blog came from a question I was asked “What should I be showing my board each month?” I was a bit surprised at the question as it seemed obvious, but perhaps not.

Your board is comprised of directors. They could be family members, friends, fellow founders, invitees or even self-invited private equity representatives! The directors may be more or less involved in the day-to-day running of the business but either way they probably won’t be across all that is happening on a day to day basis.

Right up front, let’s be clear that directors do not want to be drowned in financial reports and statistics. Quantity will not bring them comfort, for that you will need quality. It’s a bit like driving a car. There you are driving along and using the dashboard as your interface with the numerous, and quite complex, functions and systems under the hood. In business terms you could call these: liquidity, operations, delivery channels, resource management considerations, health and safety, people comfort and so on. The dashboard information provided to the driver is very selective. Can the same be said for the information you provide to your board? Could you construct a business dashboard (one-pager) that would provide the top level critical feedback to your board? Sure you can.

So put yourself in their shoes. They represent the shareholders’ interests and attract serious personal liability if they get it wrong. They turn up once a month or maybe quarterly to the directors’ meeting and what do they want to hear? In my humble opinion there’s two questions to be answered: is my backside covered (comfort) and are we on track strategically (achievement)?

Area 1. Comfort: is the business being managed responsibly and within the parameters agreed by the board? Exception reporting is often used for this area: “If there’s a problem, we’ll tell you.” This ‘red warning light’ mentality may be all right but you may also consider providing additional comfort with binary confirmation – i.e. when there are no problems show green lights.

Consider reporting on:
- Solvency
- Financial systems and related reconciliations up to date (e.g. bank, payables, receivables, inventory, GST, PAYG, superannuation)
- Fidelity of critical systems and functions - operating within agreed parameters (e.g. technology, currency exposure, maintenance, inventories)
- Crucial legal requirements met (e.g. in Australia: ASX, ASIC, APRA, ATO)
- Other critical elements specific to your industry/business.

Area 2. Achievment: is the business achieving the strategic goals set by the board? Enter the world of business consultant heaven. Ever since Bob Kaplan and David Norton brought out their seminal work “The Balanced Scorecard – Translate Strategy Into Action” in 1996, accountants and strategists alike have been working to blend their methodologies – if you can’t measure it, you can’t manage it.

In a nutshell, Kaplan and Norton found a pragmatic way to link strategy to actions. In hindsight it seems a rather obvious thing to do. If an activity is not supporting a strategic goal, why do it? They focussed on four areas which they called “Financial Perspective, Customer Perspective, Internal Business – Process Perspective and Learning and Growth Perspective”. Mapping and understanding the relationships between the key activities of the four perspectives allows focussed activity toward achievement of the strategic goals. For example, what specific actions are required to achieve a seven per cent increase in market share? The increase in market share is the result of other activities. So if you can map those activities to the desired outcome, then concentrate on achieving the critical activities, in turn you will achieve the outcome.

Undoubtedly, the most powerful part of using a balanced scorecard, and there are now many, many variants, is the process undertaken to construct the ‘one-page’ scorecard. It requires a significant effort to establish the relationships between the four perspectives, work out how to measure and manage the results and then systemise it. Done properly it becomes a very powerful strategic tool. If desired, the top level or master scorecard can then be devolved down to divisional scorecards and so on.

Some bewares. Like most you-beaut tools, you can go overboard and get analysis paralysis. Just because it can be measured, doesn’t necessarily mean that it should be. Doing business with yourself (!) can start to feel like real business – it isn’t. You really must be disciplined and just use the KEY indicators. Start off with the rule of five – any more than five is too many. Heck, if you end up with six it’s still better than sixty.

The other beware is voodoo witchdoctors – also known as business consultants. I just Googled ‘balanced scorecard’ and there was about 2.3 million hits, a million more than one year ago! Consultants have their place and when you need to use them make sure they facilitate your people in developing, creating and managing the scorecard – change must come from within. Otherwise the lack of ownership will inevitably ensure that it becomes another failed management fad and a waste of money and opportunity for you. Consider using your own finance team and strategists, perhaps with some external coaching and perspective if required.

Until next time ...

[Mark Robilliard]

Great comment! The issue faced here is, of course, relatively common. Particularly so in the not-for-profit sphere where community spirited ‘volunteers’ become involved in what can be significant business operations.

My thoughts are, however, that filtering information like this for the members is a very slippery slope and must not be allowed. It may indeed start out with the best of intentions but over time may well morph by degrees into something more akin to deception and deceit. For me the risk is simply too high.

Improve the financial reporting by all means: tag the cash, and other assets, as to restricted and unrestricted, explain the impact of the non-cash sales on profit and cash, improve the visual transparency and presentation, but don’t presume to know what other people, particularly directors and members, should or shouldn’t know.

And of course, 'bottom line': educate the board and the members. These days with new approaches to financial literacy like Color Accounting, there really is no excuse.

[Peter Frampton]

Mark, I volunteer for a not for profit organization, helping prepare financial reports for the board, but also for the members. And there's quite a fierce debate in the organization about what information to publish. There's a strong contingent in favor of not publishing very much of the financial information, specifically the complete balance sheet. The argument for this is that the broad membership won't understand the information and will simply be confused by it. For example, they'll see a bunch of cash in the various bank accounts bu not realize that a lot of it is from restricted sources. Or they'll see a whole lot of income but not realize that a big proportion of it was generation of accounts receivable not yet cash. My instinct and conviction is towards transparency, and I've been working to help present the financial information in a way that everyone can understand it. It burns me that people don't understand the information! But given your post on "what to tell the board" I'm interested in your thoughts on "What to tell the members".