Performance Reporting to Boards
by Danka Starovic

Most post-Enron discussions about corporate governance have focused almost exclusively on the responsibility of directors and the structure of boards. This is hardly surprising – after all, a company’s survival ultimately depends on the effectiveness of its board decision-making processes. However, boards do not exist in a vacuum. In order to make the right decisions, directors must base them on good quality, timely information on how their businesses are performing. The quality of performance reporting to boards is therefore one of the key factors affecting companies’ competitiveness.

A good report should contain all the information necessary to facilitate decision-making at board level. It should lead directors to ask the right questions and initiate a chain of actions that will enhance the ability of the enterprise to achieve its short-and long-term aims and create sustainable shareholder value. Finance departments are particularly important in this context, since the information they provide reflects the overall health of a company. Finance directors have a critical role to play in ensuring that the information received by the board is unbiased, even-handed and multi-dimensional.

Having robust systems for collecting, storing and analysing financial and non-financial information is important, but the value of integrity and transparency should not be overlooked. There is always a risk that information could be distorted on its way up to the board. In some companies, finance directors may face pressure from the chief executive to restrict the amount of negative information that is provided to other directors and investors. Working at the heart of shareholder-value-managed companies and the decision-making process, a CFO is in a position to give the board a more prudent view of the state of the business.

Good quality information should be:

Relevant. Information presented to the board should be sharply focused and reflect the defined objectives and the overall strategy of an organisation. It must not obscure the overall picture with irrelevant detail.

The board should be able to drill down and access further supplementary reports where necessary. The information should be sufficient to allow the exploration of as many alternatives as are necessary for the impartial decisions to be taken.

If the board is to exercise its strategic, long-term planning function fully, it needs to focus on more than the current performance indicators. They may say something about historical performance – i.e. how it measures up to past objectives – but they can be a poor predictor of the future. The board should therefore have some forward-looking information at its disposal, including trends, projections and forecasts, but these should be based on more than a simple extrapolation of past data.

It is often hard for those who prepare the information to know what level of detail they should go into when compiling board reports. Non-executive directors may not know the ins and outs of the operational side of the business. Executive directors, on the other hand, need to balance the task of running the company with that of setting its strategic direction – what have been called their conformance (past- and present-orientated) and performance (future-orientated) roles. The right balance must be struck between too much and too little detail.

Integrated. Organisations are obliged to produce information for a range of internal and external purposes. The systems and processes used to provide this information should, as far as possible, be integrated. In other words, the data collected internally should be managed in a way that satisfies both internal and external reporting needs. We believe that the information needs of directors are broadly similar to those of investors, except in the level of detail required.

Some of the information that boards require – e.g. benchmarking competitor data – cannot be generated internally but will have to be collected from external resources. The same principle of conciseness should apply. The overall objective should be to have information that maps the business entirely.

In perspective. Information should be presented in relevant time context. Estimates of the projected time situation should always be plotted over time. This acts as an internal benchmark for the performance of each aspect of the information. Where, for example, historical, current and projected scenario are presented, operational problems are brought to light wherever the variances are significant. This applies as much to the monitoring of contracts and projects as it does to the profit and loss account and balance sheet.

Timely. It is better that the board receives information that is imperfect (but within acceptable tolerances of precision) in good time than completely accurate information too late.

Marconi is often cited as an example of a company that failed partly because its board did not receive timely information. In other words, it was not simply a case of incompetence or flawed risk assessment, as is often stated. The simple truth is that the company’s directors may not have had the chance to act, because they did not find out what was going on until it was too late.

Information should, as far as possible, be available in parallel with the activities to which it relates. The report should be available promptly enough to plan from it and/or take action to consolidate gains and recover shortfalls.

Monthly board reports should contain performance information relating to key operational issues as defined by the board: the critical success factors and key performance indicators. Quarterly board reports should contain a broader coverage of organisational activities and should also address qualitative areas of the business.

It is important that only the key pieces of information are presented monthly to enable a succinct and useful report to be produced.

Reliable. Information should be of good enough quality for the board to be confident in it. This will depend on its source, integrity and comprehensiveness.

The pack supplied by the management before the board meeting will be the key source of information for board members – especially non-executive directors. But there are other channels available, including business publications, formal and informal contacts with staff below board level and so on. Last, but not least, the extra information and analysis delivered orally by the CEO or other executives with different areas of responsibility will probably be the most useful in terms of decision-making.

Comparable. The board report is the performance report for the organisation and it covers both financial and non-financial aspects of performance. For financial performance, comparing what happens (actual) with what should have happened (budget/plan/rolling forecast), or in some cases what did happen previously (last month/year), will be valuable. Presenting a forecast year-end position will focus minds on the effectiveness of an organisation, rather than just its economy and efficiency. Comparison with budget should be one of the key management tools, but the emphasis should be on the future, which can be influenced, rather than the past, which cannot.

Clear. Reports should always be written clearly and simply. Everyday language should be used wherever possible and jargon or acronyms should be avoided. Used judiciously, graphs and charts can be an effective communication medium for key indicators. They also enable trends to be identified more easily.

Apart from the information they receive at the start of their tenure, directors would normally expect to see:

• Monthly consolidated profit and loss accounts, balance sheets and cash flow reported against budget;
• A further breakdown of results by strategic business unit, where they are of a size material to the overall performance of the company;
• A quarterly update of forecast results for the trading year;
• Specific papers on new investment projects above an agreed size;
• Updates, as appropriate, on major expenditure, such as acquisitions or large building projects;
• A six-monthly review of progress on the implementation of the strategic plan.

Finance professionals need to do more than simply put the right numbers on the boardroom table. If they are to add value, they must also act as strategic advisers, explaining what is behind the information and pointing out possible solutions to any problems. In order to this, accountants in business need to have a real understanding of the business model and the value-adding processes that that underpin it.

This article is contributed by CIMA, The Chartered Institute of Management Accountants. It is an excerpt from a CIMA report on “Performance Reporting to Boards: A Guide to Good Practice” by Danka Starovic.