MODULE 6

EFFECTIVE BOARD MONITORING

ADB Private Sector Development InitiativeCorporate and Financial Governance TrainingSolomon Islands

Dr Ann WardropLa Trobe University

Acknowledgement

These materials were produced by the Asian Development Bank’s Pacific Private Sector Development Initiative (PSDI). PSDI is a regional technical assistance facility co-financed by the Asian Development Bank, Australian Aid and the New Zealand Aid Programme.

Module 6 Outline Effective board monitoring

Board meeting frequency What kind of information reports should the

board receive? How should the information be presented? Performance review

Guidelines for developing performance measures

Assessing the CEO Assessing the board and individual directors

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Effective board monitoring4

The previous module discussed why plans are needed and how they are reported externally as part of the company being accountable to its stakeholders.

This module will examine the question how does the board internally monitor the company’s performance?

Effective board monitoring

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Recall that ‘monitoring’ is one of the board’s critical roles.

Oversight extends to all aspects of the company’s objectives: operational, strategic, and financial.

Board also assesses the CEO Board should also assess itself and

individual directors

Effective board monitoring

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To perform this function it must have: An effective reporting system

Relevant timely

What kind of information/reports should the board receive?

Effective board monitoring

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Board information should include: Key results indicators of business compared

to: Plans, strategic, annual, and others

Timing of reports will differ: Strategic review annually Business plan quarterly or monthly

Effective board monitoring

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Object of reports to board should show overall performance to ensure board focussed on strategic issues and not detail of management

Following monthly report items should include: Actual result against budget Year to date Results for previous year Forecast for next quarter and year-end

Board report9

General Overview of operations

Financial Profit and loss, balance sheet, cash flow,

capital expenditure Working capital trends and analysis Loans Foreign exchange exposure Sales Costs

Archer & Thornton, "Seeing the wood for the trees" Co Dir Magazine (2012)

Board report10

Non-financial reports Human resources

Relevant committee reports for particular meetings

Progress against strategic plans

Board reports11

Too much information or not enough time to review information

This is an area of risk for the board Board needs to consider what

information they need in line with directors’ duties

Director packs can be large No defence to say that you have been

provided with too much information

Board reports12

If there is a lot of information then you need to ensure there is sufficient time to read it

The board controls the information it receives so work with management to ensure it provides information in a format that is useful for the board.

One mechanism used: dashboard reporting

Reporting dashboard13

*Image by Klipfolio: http://www.klipfolio.com

Dashboard reporting14

Useful, also has its limitations If too much information over a large variety

of factors, can be just as confusing to read

If dashboard highlights any problems the detail of the problem should be provided in a separate report

Performance review and its relationship to planning

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Plans Performance review

Strategic 5 year planSets the long term objectives

Annual review of strategic planReviews progress and relevance of strategic plan reported to the board

Annual business plan Quarterly review of business plan

Sets out annual objectives and initiatives that are determined in relation to strategic 5 year plan

Reviews progress and reported to the Board

Divisional plan Monthly performance review of the division

Sets out detail of how annual plan is to be implemented

Reported to the CEO/management and forms the basis of report to the board

Performance development plans of staff

Annual performance reviews

Guidelines for developing performance measures

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Board’s role is to oversee management set up a workable planning program that is linked to performance review

Performance measures or key performance indicators (KPIs): valid verifiable global communicable achievable

Kiel, et al, Directors at Work (2012)

Guidelines for developing performance measures

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Number of performance measures of the business should not be excessive;

Assessment of the business should not only relate to financial performance

“Balanced scorecard” approach Financial Customer Internal processes Learning and growth

Guidelines for developing performance measures

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If badly designed lead to “gaming” by executives and staff

Lead to short termism Gaming reduced by better design and a

values-driven culture in the company Are managers acting within organisational values

Conduct staff attitude survey Look at rates of absenteeism, sick leave and

retention rates

Assessing the CEO19

Agree performance indicators and their objectives Are they related to remuneration? Should be related to strategic plan Mix of quantitative indicators and

qualitative indicators Qualitative indicators not easily be measured Heavy emphasis on annual financial indicators

– short termism

Assessing the CEO20

Chair or committee carry out the assessment

Informal discussions or written questionnaire

Companies with resources engage outside consultants to facilitate corporate governance

Assessing the Board and Individual Directors

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Can be a sensitive issue In addition to usual methods (co performance)

formal performance appraisal should be used Review of board and individual directors should

be annual, gaps identified previously form basis of following year review

Review entire board and its mix of skills, diversity Are there regular meetings? Reports sent on time so members can read? Minutes kept?

Review of individual directors

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Questions to be asked: ‘Do the directors understand the company business

and strategy? Do they stay abreast of current issues and trends in

the industry? Do they attend all board and committee meetings? Are they well prepared and do they actively

contribute? Do they challenge management when necessary? Do they effectively enquire into major performance

deficiencies?’

AICD, Appraisal of Board and Individual Directors: Director Q&A (2013)

Effective board monitoring

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Exercise