Managing your Management Team: Advice for Board of Directors

There are many, many examples of management teams that are not interested in corporate governance. Their focus is solely on pursuing opportunities and executing the business plan. Financial reporting and forecasting and presenting to the Board is not a priority. From the Board’s perspective, this focus can be frustrating, especially if performance has been middling. 

In this scenario, the onus is on the Board of Directors to impart proper corporate governance onto its management. A good first step is hiring a consultant like myself to assist management, but that step will not create meaningful change unless the Board is actively engaged in the process. Management will not change if the Board says, “Management needs to improve its financial reporting and Board materials.”, but does not hold management accountable.

So, how can the Board make management accountable to change? I believe it can be done through setting clear objectives and then reporting and measuring results. A few examples below:

– Utilize a Delegation of Authority to govern management and require the CFO to report any violations on a monthly basis.

– Approve a budget of activity and dollars annually. Management is required to solicit approval for any activity or dollars outside of the approved budget.

– Require a monthly management report that details operating results, general market conditions, health and safety, internal controls, finance and business development opportunities.

– Set deadlines for the circulation of financial reporting and quarterly Board materials.

The above are designed to force management to improve its communication with the Board, which will enable the Board to effectively execute its mandate. With better information in hand, the Board will have a better understanding of the business. This will increase the effectiveness of the Board.

It is important that the Board impart expectations for Board meetings as well. Some management teams will fail to prepare financial forecasts to evaluate the business. Future opportunities may be simply listed out in a PowerPoint presentation with a recommended course of action and single number cost estimate. For the Board, going along with such a proposal is basically a leap of faith.  To avoid this, it is important that the Board requires an updated forecast with scenario sensitivities from management. The aim is to evaluate performance, test the business plan and evaluate future opportunities.

Such a requirement incorporates discipline to the decision making process. By forcing management to clearly detail the economics, key assumptions and supporting documentation, both sides win. Management will better understand the opportunities they are considering; the Board will be in a better position to help guide management.