SELLING CHANGE TO THE BOARD

In order to sell change to the board, we need to master and promote selling change. We need to fully understand the content of Chapter 2, Leading and Selling the Change, so it would be worth rereading this chapter. In order to be able to paint the default feature, show the board the reinvented future and ask board members if they really want the default future. If they do, we need to push selling change. In preparation for this sales process, you need to work out the cost of preparing board papers over a typical year.

Costing the Preparation of Board Papers

Board papers can reach mammoth proportions, tying up vast amounts of management time in preparation. In some organizations, one week a month is written off by the senior management team (SMT) working on board papers. The result of these excesses often is late board meetings, with the papers being sent to the directors only a day or two before the meeting. The board meetings themselves can then be sidetracked by the detail, with the strategic overview inadequately addressed.

Directors themselves are often guilty parties, requesting changes to board report formats, asking for unnecessary detail, and requiring analysis without first giving staff guidelines as to how much detail is required.

What amount of SMT time is absorbed by the board reporting process? It is important to cost this out and report it to the board members. They will be horrified with the results. Based on an organization with 500 full-time employees (FTEs) meeting 11 times a year, the preparation of the board papers could cost between $5 million and $8 million (see Exhibit 8.1). This is a scary sum, one the board would want to reduce.

I base the costing on 42 productive weeks a year, having removed holidays, training, and sick leave. The CFO, CEO, and SMT's available time is only 32 weeks for the year, as I have taken off the time they spend traveling and in meetings going nowhere quickly.

SCOPING OF THE INFORMATION REQUESTS

A request for information from the board often can take on a life of its own. A simple request soon adopts “Charge of the Light Brigade” characteristics, where instructions get mixed up as the request is passed down the management tree. Often, the director who asked the question had visualized a 30-minute job, and now the staff member, assigned the task, embarks on a massive exercise. How often has your board received a lengthy report with over $20,000 of time invested, only to glance cursorily at it?

There needs to be more direct communication between the directors and the staff who are going to research the request. A discussion between the director, the researcher, and the relevant general manager will be able to scope the exercise and ensure the likely investment is worthwhile. Failing that, all directors should be asked by the chairperson to scope their requests: “I would like to know about ____________. I suggest we invest no more than __days and $_____ on researching and reporting this.”

AVOIDING REWRITES OF BOARD REPORTS

Some organizations have made a major cultural change to board report writing, obtaining commitment from the board, CEO, and SMT that the original report can be sent, unaltered grammatically, to the board, thus avoiding expensive rewrites. The board no longer considers the quality of the board papers as a reflection of the CEO's performance. The organizations have learned to delegate and empower their staff so that SMT and board papers are being written with limited input from senior managers and are being tabled with few amendments, provided that the SMT agree with the recommendations. The CEO can choose to put a caveat on each report: “While I concur with the recommendations, the report was written by ___________.”

The board understands that the report is not written in SMT language. Board members are encouraged to comment directly to the writer about strengths and areas for improvement in report writing. The writers are also the presenters, where necessary. The benefits include motivated and more competent staff, and general managers being free to spend more time contributing to the bottom line.

In this regime, the CFO would not present the results. This would be delegated to the senior management accountant closest to the numbers. The CFO and other SMT members deliver more strategic papers.

PAPERLESS BOARD MEETING

Many of the procedures that support a board meeting have changed little since Charles Dickens's time. Board members receive large board papers that they have difficulty finding the time to read. In the twenty-first century, we should be using the electronic board software applications outlined in Chapter 4.

INTRODUCE A CHANGE TO THE BOARD MEETING SCHEDULING

Seek to restructure the operations of the board, setting bimonthly meetings, with the board members' investing the saved time elsewhere, such as:

• Sitting on subcommittees that are looking at improvements in key areas of the business.
• Assisting the organization to share specialist knowledge by making presentations on topics to management and staff.
• Helping the company by opening doors to new markets.

Since board meetings are to be strategic, there is no need for monthly meetings, and enlightened companies now have bimonthly meetings, or, at most, eight board meetings a year.

The longer the period of elapsed time you allow for a task to be completed, the greater the chance of its being completed inefficiently. Thus, a prompt board meeting will ensure a more efficient one. The best practice is for the board to meet within 10 working days of the reporting period to avoid the process absorbing too much time.

At the other end of the spectrum, some boards are meeting six weeks after the month-end. There is another month-end in between, making for a truly ridiculous situation. Exhibit 8.2 shows an efficiency scale in the scheduling of board meetings after the month-end in question.

MISTAKES TO AVOID WITH THE FINANCE REPORT IN THE BOARD PAPERS

Here are the top mistakes, which constantly reappear, in board finance reports, as noted by Graeme Nahkies, Director of BoardWorks International.

CONTINUALLY PURGING THE BOARD PAPERS

Does it take a 200-page board paper package to run a business? Are the key decisions a direct result of board papers or the collective experiences of the board members?

If Toyota makes investment decisions on an A3 (fanfold) one-page submission, surely we can limit many other papers to one A3 page, leaving the presentation and question and answer session to cover the detail. The benefit to the board is that management has less space to cloud a problem. Management has to set out the issues clearly and concisely.

Making the presentation slides also a board paper will backfire, as you will tend to put too much information on the slides. See Appendix B on the tips to deliver a killer presentation.

MOVING TO GOVERNANCE INFORMATION

There is a major conflict in most organizations that have boards, as to what information is appropriate for the board. Since the board's role is clearly one of governance and not of management, we should avoid giving the board a copy of the management papers. If we use an analogy of the organization being a ship, the board must focus on the horizon for icebergs or look for new ports of call. This is instead of the directors parking themselves on the bridge and getting in the way of the captain who is trying to perform the important day-to-day duties of steering the ship.

The profit and loss statement and balance sheet should be reduced to no more than 10 lines each. No number is shown unless it is material—say, over 10 percent of total expenditure (P/L) or 10 percent of capital employed for the balance sheet. You simply amalgamate and be clever with your caption headings.

A3 (FANFOLD) ONE-PAGE BOARD DASHBOARD

There is a major conflict in most organizations that have boards, as to what information is appropriate for the board. Since the board's role is clearly one of governance and not of management, it is inappropriate to be providing the board with the organization's key performance indicators (KPIs), as these should be monitored frequently, as discussed in Chapter 18.

KPIs are the very heart of management. Used properly, many of them are monitored 24/7 or at least weekly. Certainly they are not measures to be reported monthly or bimonthly to the board.

We need indicators of overall performance that should be reviewed only on a monthly or bimonthly basis. These measures need to tell the story as to whether the organization is being steered in the right direction at the right speed; whether the customers and staff are happy; and whether the organization is acting in a responsible and environmentally friendly way. In Chapter 18, I called these measures key result indicators (KRIs). These KRIs help the board focus on strategic rather than management issues, and should be reported in an A3 (fanfold) one-page board dashboard, as shown in Exhibit 8.3.

The key features of dashboards include:

• The financial numbers include a summary P/L and summary B/S similar to the information given to the CEO in the one-page A3 finance report.
• Commentary is restricted to bullet points covering the “areas of concern” and “areas to note.”
• Use traditional graphs showing at least 15 months of trend analysis.
• Each graph has a relevant title, to explain what is happening. “Return on Capital Employed” becomes “Return on Capital Employed Is Recovering.”
• You may need to maintain somewhere between 10 and 15 graphs and report the most relevant ones to the board.

Please revisit the section on best-practice graphics in Chapter 7 before you commence designing your board dashboard.

Examples of Key Result Indicators for a Board Dashboard

Once you understand the terminology I am using, you will find that many of the measures you have been calling KPIs are in fact KRIs. Thus, the exercise of preparing a board dashboard of KRIs is very easy: It is simply a matter of recycling graphs you already have. I have included some examples of KRI board dashboard graphs that may be of interest in Exhibit 8.4.

Staff satisfaction: No different or less important than customers. As one person said, “Happy staff make happy customers, which make happy shareholders.” If you believe in this connection, run a survey now! A staff satisfaction survey need not cost the earth and should never be done covering all staff; instead, it should be replaced by a rolling survey.
Expenses as a ratio to revenue: The board should be interested in how effective the organization has been in utilizing technology and continuous improvement to ensure that the cost of operations is tracking down as a percentage of revenue.
Customer satisfaction: Customers should be set out in groups as to their importance to you. Airlines have between four and five different categories for their registered frequent flyers. Satisfaction needs to be measured at least every three months for your key customers and for the next level down. I believe the lowest customer category should be surveyed less frequently as they contain the disgruntled customer that should be abandoned in any case. Show the board only the satisfaction of the top three levels.
Value of new business, or amount of take-up of new services: All businesses in the private sector need to focus on the growth of their rising stars. In the government and nonprofit sectors, take-up of new services is more important.
Net profit before tax (NPBT): Since the board will always have a focus on the year-end, it is worthwhile showing the cumulative NPBT. This graph will include the most recent forecast, which should be updated on a quarterly basis bottom-up. Note that the year-to-date budget line is not shown, as explained in Chapter 16.
Health & safety: The well being of staff is a major focus of responsible management, and boards are interested in the progress being made. For manufacturing, accident rate, including near misses, should be the focus. In the service and nonprofit sectors, we might look at staff turnover rate.
Return on capital employed: ROCE has always been an important KRI and should never be called a KPI, as explained in Chapter 18.
Cash flow: This would be projected out at least six months forward.
Capacity: Monitoring the capacity of key machines and plant is always important. The graph should go forward at least 6 to 12 months. The board needs to be aware of capacity limitations, and such a graph will help it focus on the need for new capital investment.

PDF DOWNLOAD

To assist the finance team on the journey, templates, checklists, and book reviews have been provided. The reader can access, free of charge, a PDF of the following material from www.davidparmenter.com/The_Financial_Controller_and_CFO's_Toolkit.

The PDF download for this chapter includes:

• Cost of preparing board papers template
• Board dashboard template