Are You Spending Enough Quality Time With the Board?

April 1, 2008

CFOs who are out of sync with their board of directors do shareholders -- and their careers -- a big disservice, especially when business challenges stemming from a recession unfold. Now is a good time for chief finance executives to take a hard look at what their boards need from them and how well they're delivering to meet those needs.

A new study from McKinsey offers the framework for such an assessment. It shows that boards want to spend more time and attention on talent management and forward-looking business strategies that maximize shareholder value and devote less time to dealing with compliance issues.

Over half of survey respondents say that they would like to increase the amount of time spent at meetings on strategizing, development, analysis, and prioritizing of strategies that maximize shareholder value. And over half of them say they would like to increase the importance of succession planning and of developing the top team's leadership -- which should be good news for ambitious finance executives.

But directors also say that they lack the knowledge and expertise that could enable them to up their contribution to long-term strategy. Part of the reason for such limitation, survey respondents say, is due to lack of substantive interaction with management. Directors that have a strong influence on creating shareholder value spend substantial time analyzing leading indicators to predict future performance, have access to many levels of managers, and engage with management in debates about long-term strategy.

What kind of forward-looking issues resonate with directors? Forty-one percent of the respondents say they want to increase the importance of ensuring that company resources are in place to execute strategy; far fewer want to elevate the importance of adjusting strategy based on changing conditions.

In regard to governance and compliance, directors want to place more emphasis on ensuring clear communication with investors. They also want to focus more on future, rather than current, performance (half of respondents say they want to increase the importance of analyzing leading indicators and decrease the importance of financial metrics on current performance).

CFOs who want to strengthen their role with the board -- and maybe rise to the CEO position if such opportunity comes along -- would be smart to think about how their company's directors would address these survey issues.

Board information gap

On April 10th, 2008 a bfmag.com reader said:

One of the reasons for these shortcomings in boards' strategic contributions is that they do not have the right kind of information. The foundation of the board package continues to be the financials of the corporation. Yet we know that the balance sheet of the average corporation only reports on 20% of its total value--the rest is intangibles.

When I say this, most financial people throw up their hands and say, "We don't know how to value those." But they are ignoring a rich set of data they have in the accounting system: the total cost of investments in intangibles like people, knowledge and external relationships. Every year, corporations spend millions on training, recruitment, systems, processes, technology, software, R&D, branding, and customer relationships . I call this spending "intellectual capital expenditures." Some call it "discretionary operating expense." But the point is that these expenses (which are hidden on the income statement) are really investments in the future of the corporation.

It will be a long time before GAAP reporting for these expenses changes. CFO's should not wait. Whatever you call it, it should be presented in a management report that shows intangibles investments on a consolidated basis to the board of directors. This one change would go a long way to arming the board with information that helps them understand and advise on the actions the corporation is taking to ensure its future.