Jean Pousson, our Managing Director, looks at Boards’ financial (il)literacy in the light of the UK Government’s proposal to make Directors more personally responsible about their financial understanding of the businesses on whose Boards they serve.
Should Directors be subjected to regular financial literacy tests?
The UK Government White Paper is currently out for consultation and the proposal to make Directors personally responsible for their financials will probably be watered down and apply to large listed Companies only.
Restoring trust in audit and corporate governance (publishing.service.gov.uk)
Having said that, it is, once again, another timely reminder for Directors of the need to be financially competent and not to rely on the FD/CFO with blind faith.
How else could you possibly contribute meaningfully to Board discussions?
Section 172 of the UK Companies Act 2006 reminds Directors of their duty “to promote the success of the Company”. Are you able to articulate how you have discharged that responsibility?
There are many developmental routes to better equip Directors to enhance their understanding of finance matters. We offer, among others, specialised one-to-one Coaching on finance matters to bring Directors up to speed. This highly personalised intervention tends to be highly effective as the Company’s own financial matters are explained and discussed.
Another idea is to suggest that, at the next Board meeting, you present the Financial Pack and not the FD/CFO. The few Directors who have taken me up on this have found the experience highly beneficial, although a bit stressful at times! But the learning was very rich and it provided them with a deeper understanding of the finance areas that they should have been comfortable with in the first place.
Directors should also never be scared to ask questions no matter how stupid they may feel the question is. A course delegate once told me, “Jean, its fine for you to ask, but I am petrified of the answers!” Fair point! Having said that, never let an abrupt response like, “It’s for tax reasons” silence you. Prod further. You might learn something.
Here are a few typical questions that Directors should be asking, or at least thinking about:
- How would you describe the relationship between the FD/CFO and the external auditors? “Very friendly and amicable, we get on very very well” to “Combative! Tell them nothing! We need to hide this before they come” are two extremes that should really worry you.
- Do you understand every item on the Board Dashboard? Are you sure?
- Could you talk about the Company’s financial performance with confidence to Bankers or Investors?
- Can you identify your most profitable product/service or your most profitable customer with ease?
- Could you explain your break-even position and confidently explain if you could fight a price war, (from a financial viewpoint)?
- Do you understand fully the accounting policies chosen by the Company? Could you explain them to the most junior member of staff in plain and simple language?
- Do you have a good idea of the value of the business and at how that value may have been arrived?
Company scandals almost always highlight that there were signs of which Directors and other stakeholders should have taken notice. Here are some examples, (there are many more), that Directors should pay attention to:
Red Flags:
Profit margins very good. Too good in fact. What could you be doing that no one else is?
Regular conversations about changing accounting policies when the business has not changed. Why?
Financial information taking too long to be produced. In an age of technology this should not be so.
Exceptional items keep appearing every year.
Many Related Party Transactions, (ie transactions with other associated Companies and/or Directors), that make no sense.
Payments to suppliers, (and tax), being constantly delayed.
Sudden and arbitrary freeze on spending.
Resignation of FD/CFO and/or external auditors. The mother of all red flags!
Every year the external auditors send a letter to the Company after the audit. Do you see that letter?
Inability to reconcile the cash position and flows with other information. The cash flow information (from the Bank(s) does not lie. Do you see the Bank Statements?
Are you happy that the FD/CFO’s performance is being appraised by someone qualified to do that?
Year-end accounts seem to take for ever to be finalised. Why?
There are many other warning signs by the way, but the above are the ones that seem to recur far too frequently.
Another key point to note for Directors is that external auditors are not forensic accountants. It is not their remit to spot fraud. They can therefore, sometimes provide a false sense of comfort. As they have a fondness of saying, “we provide a True and Fair view but not THE True and Fair view”. If ever concerned Directors have every right to ask the auditors to investigate any particular area more deeply than they would otherwise do.
So, should Directors be subjected to regular tests as to their financial proficiency? Why not?
And never lose sight of this.
Does this pass the ‘Common Sense Test’?
If you see hoof marks on the soil, look for horses!