Shoring Up Financial Performance While Supporting Growth: Finance Committees in the Spotlight
Publicly held company boards continue to mitigate a range of threats stemming from a prolonged recession, including a fluctuating base of investor confidence. In this business environment, the key question facing boards—and finance committees—is how to balance financial performance while also maintaining the spending needed to support future growth.
An increasing percentage of boards have finance committees separate from their audit committees—one in five according to the 2011 NACD Public Company Governance Survey. This is an increase from 2010 when the figure was 17.8 percent. Whether this increase is to supplement the audit committee’s role in overseeing financial reporting or to augment directors’ and executives’ analysis, the finance committee holds responsibility for some of the most important strategic decisions.
Ideally, members of the finance committee will be “financial experts,” defined as members with the ability to confidently read, analyze and understand key financial statements (the balance sheet, the income statement, and the cash flow statement). While most directors understand the basic concepts of the income statement (revenues minus costs equals income) and the cash flow statement (cash in minus cash out equals cash flow), the balance sheet is frequently more challenging, and involves a look at assets on one side, and liabilities and equity on the other, as of a particular date (normally the end of the fiscal year). Although changes in stock prices do not directly affect any of the three key financial statements, they do affect the company’s ability to raise more capital by selling stock through secondary offerings.
A look at some of the latest financial management trends shows how some companies are using cost cutting to achieve short-term improvements in their financial statements—including even their balance sheets (by increasing the cash component of their assets without increasing their liabilities)—hence building equity, at least in the short term. A recent article in the Arizona Republic, for example, details how shareholder-owned companies throughout Arizona are increasing cash levels by controlling costs, postponing expansion plans and holding off on hiring. According to the Republic, the companies analyzed “have emerged as healthier, more flexible and in greater control of their assets,” and are finding that allowing cash levels to build up is the safest way to play it.
However, the same practices that have allowed these companies to sustain wealth also display a reluctance to hire new employees and other limitations in capital spending that would spur corporate growth in the future. In his recent book, Saving Capitalism from Short-Termism: How to Build Long-Term Value and Take Back Our Financial Future, Alfred Rappaport (known as the pioneer of discounted cash flow and of shareholder value) warns against a myopic financial perspective.
Other companies are seeking out cost-effective solutions wherever they may exist. The Denver Post reports on a recent Global Business Travel Association convention, where an estimated 6,000 corporate travel managers met to discuss the best strategies for promoting business travel at a time when most companies have cut travel budgets over the past two years.
Although cutting costs while refraining from capital spending has thus far allowed corporate profits to remain relatively high, these answers will hardly be sufficient for the long term. With companies of all sizes adopting measures ranging from modest steps to drastic restructuring, finance committees are under increasing pressure to provide solutions and strategies for a corporation’s development.
At this year’s NACD Board Leadership Conference, the Finance Committee Forum will provide directors the chance to sharpen their skill sets in financial analysis and performance assessment, as well as the management of any changes in projected results. Sustaining and promoting a company’s viability in today’s economic market calls for a mature and educated perspective on how to keep business on track, with an eye towards future growth.
This year’s Finance Committee Forum will kick off with an Introduction to Financial Statements with Proctor and Gamble, followed by several presentations on value management systems and insights on how to create additional value for your corporation. The forum will conclude with an open discussion, allowing participants to recap the day’s lessons and converse with peers over their take on how the finance committee can best work to manage hardships and generate wealth.
To register for the NACD Board Leadership Conference, go to nacdonline.org/conference. Additionally, directors and executives from NASDAQ-listed companies will save 10 percent on the registration price by entering coupon code OMXSAVE. To register, or to ask questions in person, please email registration@NACDonline.org or call 202-572-2088.