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.
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.
Though the Dodd-Frank financial reforms were signed into law a year ago, the corporate governance environment remains at a crossroads of uncertainty in many ways. While business leaders continue to adjust to the sweeping legislative reforms that have already been implemented, regulators are still drawing up the details on a host of issues and deciding how to interpret and implement many other pending regulations.
Many other proposed rules are being enacted without delay, including a host of reporting requirements aimed at director and board accountability. What’s more, shareholders continue to exert pressure by questioning the qualifications of individual directors when they are displeased with board performance or compensation decisions.
Evolving regulatory requirements, combined with recent market fluctuations and an increased scrutiny of the board, will put pressures on board leadership and structures, particularly on the board’s nominating and governance committee.
The strategic landscape is also adding complexity to a director’s job description. One of the board’s primary roles is to approve winning strategies and monitor their execution. Major shifts—from an expanding global marketplace to the rapid pace of technology and data creation—must be considered. And by no means should such oversight be considered an amateur’s venture. Today’s directors need to be well versed on the latest trends and developments that impact their specific industries.
That is why it is crucial to continually assess and optimize a board’s composition and ensure that boards have the right people at the right time—competent directors who possess the knowledge, experience and skill sets most closely aligned with the company’s strategies. Equally important is a board’s ability to establish and maintain a set of policies for board recruitment—and ongoing evaluation and education–that will steadfastly guide a corporation through a business climate that may be at times precarious.
This year’s NACD Board Leadership Conference will host a special Nominating and Governance Committee Forum to help directors identify the leading practices they need to navigate the new and evolving business environment. The forum will feature in-depth insights and analysis that will focus on enhancing the value directors can bring to their corporate tables and examine best practices for board and C-suite cooperation and productivity. Combining classroom sessions with confidential peer discussions, the session will also offer techniques that can be put to work immediately to identify and address strategic and operational gaps on a board.
In today’s complex business world, there’s a growing need for well-rounded directors who stay informed on emerging issues and leading practices. Unlike doctors and lawyers, directors do not have a formal certification program. They must find resources, mentors and peers on their own to help them stay up to speed.
The need for this kind of peer-to-peer director education led the National Association of Corporate Directors to create a specialized course of study, the NACD Board Leadership Program. NACD’s new director credential enables directors to not only demonstrate their dedication and commitment to boardroom excellence, but also to showcase the highest standards of director professionalism and anticipate the unknown by learning from experienced, world-class board leaders.
To become an NACD Board Leadership Fellow, participants must be experienced company directors, complete The Master Class and then complete at least 10 more credits of NACD education within 12 months. Participants are required to take a number of formal, skill-specific learning electives to hone their committee skills, keep their knowledge of board function and purpose up-to-date, and prepare them to offer a 360-degree vision to shareowners, companies and their board colleagues.
After completion of the program, fellows must complete at least 10 credits of NACD director education every year to maintain their status as NACD Board Leadership Fellows.
The first 16 NACD Board Leadership Fellows were recognized at a dinner in New York City in May. Collectively, this elite group represents boards of more than 60 companies and provides a snapshot of the caliber of directors engaged in continuous learning with America’s premier membership organization for board members:
“As a director in today’s rapidly changing corporate environment, board leadership requires keeping current, fresh and, above all, relevant,” said Michael Pocalyko, one of the new NACD Board Leadership Fellows. “NACD events are among the only places where I can speak with my peers frankly, confidentially and unimpeded. By participating in the full range of NACD director education and becoming a Board Leadership Fellow, I get early intelligence on emerging issues—so my boards can engage these issues as opportunities instead of reacting to them as challenges. These advantages not only ground me as a director, but ultimately benefit the companies and the shareholders I serve.”
Directors who are interested in becoming an NACD Board Leadership Fellow can contact NACD’s registrar at 202-572-2088 or email Fellowships@NACDonline.org.