Avoiding Financial Failure from a Director’s Lens

Lights, camera and action. This would be the normal sequence when shooting for a scene. The same rules should apply to the corporate world when making decisions. The problem is the sequence has been missed and so often, company directors and executives tend to take action without lights or preparing the camera. Look at some recent company failures and it is no surprise that the financial mark was missed.

In all companies, finance is the key and without proper and adequate financial management, companies tend to fail. Many financial systems are available but the problem is that the top level executives simply don’t get it right often. They look into financials without having a good grip of what financials are all about.

This article is prepared with the intention of offering directors and executives how to detect value drivers and avoid smokescreens without micromanaging. It is planned with the intention to further offer suggestions on how to make savvy decisions and apply a balanced leverage approach. In order to do this, directors must first be able to identify weak touch points in the quickest possible manner.

One big challenge is the different types of reports as well as keeping track with targets. Going through heaps of reports and figures may sometimes prove to be a huge task. Information overload is one burden which boards face but more important is to understand relevant reports and make useful decisions from these. Historical information may seem obsolete for many, but with good financial governance, directors would be able to use this information to gain more confidence, more courage and able to detect future trends with a high degree of certainty.

So, how can boards get the sequence of lights, camera and action in the correct order? The areas covered will give potential directors a basic grasp of what needs to be done and how to accomplish these.

Understanding financials: One of the key talents which any director must have is their ability to make correct sense of the financials. By simply understanding the key reports which include Profit and Loss (Income statement), Balance Sheet and Cash Flows will provide the level of insight into making your business grow.  There are certain signals which can easily be picked up just by looking at the figures. A large purchase or a material stock figure are board level concerns and reasons for any variations are perfectly valid for a board member to know. Sharpening executive competence in company financials  is no longer an isolated expert skill set but is a necessity for the success of your company.

Tying up long term coordinates: As you educate your self in financial know how, it is equally important to tie it with long term strategy. In other words, are the financials in line with the targets? Has the right mixture of resource being used in order to get the right combination in the forward statements? Do the financials tell a story deep enough to bring out the comfort needed to ensure that proper controls are in place? These few questions will help bridge any gaps as to whether the financials match with overall corporate performance targets.

Risk Management:  This has become a hot topic especially after the global crisis. It is discussed frequently in board meetings globally. So what has this to do with the financials? Well! The proof is in the pudding. Look at any company which was limping during the financial crisis. Citibank posted huge amounts of write offs in a single year which proved to be the highest in the history of Citibank. If you look at some of these financials, knowing that they had financial experts, they still got it wrong. Having an audit committee or risk committee is useful but not enough. Board members must be able to ask the right questions relating to risk matters and many of these can be identified from financials. If you look at these failures in depth, you will realise that there were many financial instruments but what happened behind the curtains was left mainly to chance. Having the right linkage between risk and financials creates fewer road bumps. A high exposure to risky vehicles in your financials will have significant impact to stakeholders. Careful consideration of what is happening not only internally but externally will bring in better discipline and focus.

Being on the same page: Probably a key weakness with many boards are that they are not always aligned with the discussions being held. This is difficult to achieve in the short run but having a good governance coach or an advisory board would help in ensuring that the board is on the right track. I have witnessed tremendous energy drains amongst directors when trying to reach consensus. The core problem is the level of collective understanding of the basic systems and processes of an organisation. Being power driven or commanding with an attitude are the results of future downfalls as it does not add value to the entire executive process.

Crafting Financial Policies from Inception: Taking time to construct easy to understand financial Policies will form a strong guideline. These Policies must be owned by the board but management or outside experts may help in the process. The whole purpose is to encompass all areas of financials covered through simple yet powerful policies. In our training programme, we have 2 or 3 simple yet powerful financial policies and this is all it would take. One of the biggest benefits is having a cohesive understanding amongst directors. This alone is the single most challenge which organisations face. It is good to have constructive criticism so long as it is correlated to the policies your organisation has. Nothing should be left to chance or patchwork and incremental burdens to the board. These policies should be designed to accommodate new changes as and when they occur.

Monitoring reports: Anything which needs attention needs monitoring. The financial health of an organisation must be monitored with acceptable frequency dependant on your organisation. If these reports are well constructed by management and presented to the board, it would provide the right fuel needed for discussion. Again the CEO will take responsibility of presenting these reports and the board will be the ultimate decision making body. No individual can influence such a report as it forms part of company documents. The monitoring is not about management reports , but what has been written in the policies. All issues which include asset protection, performance, budgets , cash and so forth should be part of the policies and these would eventually be monitored. The board may decide to accept these or may want an outsider to give an independent opinion or a director may scrutinise documents himself. Whatever the mode, the purpose is to ensure that financial stability of the company is maintained. 

Commitment, discipline and taking action: Boards must reach consensus within given time-frames. Some boards have items on their agenda which keep spilling over. This is not a healthy situation. Constant clean up and correct level of execution must be implemented by boards. In order to do this, the board needs to clarify and identify exactly what the situation or item is. If it requires a third party response, what are the follow-up mechanisms? By changing an approach, would that help the situation? If not what are the alternates? The attempt of constantly looking for answers will soon freshen up the outlook of your agenda.

These 5 points offer to help boards become more effective. If these rules are applied consistently, I believe your organisation would not face a difficulty in financial understanding.

Boards must constantly seek to find out the reasons underlying a particular action. They need to know why there is a financial misalignment if any.

In conclusion, boards must be fully engaged in linking long term strategies to what is happening at ground level. This can be achieved if all board members have conducive mechanism which is aligned in such a manner, that any knowledge gaps are fully covered.  Risk management and the financial health have proven to be central in majority of board meetings. If board behaviour, values and culture matters are built on the true purpose of your organisation, many irrelevant time taking tasks will be eliminated bringing out best practice amongst board members. This can be done by crafting the right policies using the right words which are rich in meaning yet simple to understand. Having monitoring reports which comply within workable parameters as reflected on executive policies, is basically the construct of a much needed framework for boards globally. The sequence of lights, cameras and action as far as boards are concerned is, craft executive policies ahead of time allowing and empowering management to function as effectively as possible and finally monitoring what has been executed.

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