Much like a driver steering a race car, a corporate board can keep a company on course and prevent wrecks. But corporate governance, just like racing, requires skill, quality information and a certain mindset to cross the finish line – especially when the road ahead is challenging.
Management accountants – whether they are executive members of the board, members of the executive management team or non-executive directors – serve as important navigators along the way, according to a new CGMA report, “Governing for Performance: New Directions in Corporate Governance”.
A key skill that management accountants have is the ability to balance financial data tracking and reporting with strategic planning and risk management, the report suggested.
“The best CFOs will successfully strike a balance between having a strategic relationship with their business that is based on hard-earned trust and respect, while maintaining the objectivity, independence and fiduciary stewardship required of them by the stakeholders of the business,” Mark Lubienski, vice president of finance for Europe, the Middle East and Africa at US software company Ariba, said in the report.
Corporate governance has long been important to companies, but the euro-zone debt crisis and the emergence of rapidly growing economies in Latin America and Asia are emphasising the need for good corporate governance.
Good corporate governance can help restore the trust in business, but a 2011 McKinsey Global Survey of corporate directors found that they had not increased the time they were spending on company strategy since before the collapse of Lehman Brothers in the fall of 2008.
“Regardless of who is to blame, the crisis was unquestionably exacerbated by corporate governance failure,” Robert Bunting, former president of the International Federation of Accountants, has said.
But 44% of the McKinsey survey respondents said they just review and approve management’s proposed strategies (rather than developing strategy with or for management) and only 25% rated the performance of their boards as excellent or very good.
In emerging markets, such as the rapidly growing BRIC economies, corporate governance is considered key to supporting sustainable economic and business development.
So what makes a high-performing and effective board? The most effective boards, according to the CGMA report, provide qualified oversight and robust risk management. Top performers:
Anticipate future events in an uncertain world.
Define the cultures and values of an organisation, model them and promote them.
Understand the needs of employees, customers and all those in the supply chain.
Avoid “group think” and are able to challenge the status quo.
The boardroom leadership model developed by the Chartered Institute of Management Accountants suggests it is more likely for boards to become top performers when management supplies high-quality information, when board members reflect a diversity in skills, perspectives and experience, when all players respect each other and when processes and frameworks are in place for board members to raise fundamental questions.
Becoming aware of how much risk an organisation is willing to take to generate more value is another important step for a board to improve its performance.
A COSO-sponsored survey of finance and risk professionals in the US showed that nearly half had no or only minimal processes for identifying and monitoring emerging strategic risks and only a minority tracked key risk indicators. The survey was authored in 2010 by the North Carolina State University Enterprise Risk Management Initiative.
“Risk and strategy are the lynchpins of every business, with equal power to create or destroy value,” another American Institute of CPAs/CIMA survey said. “They demand equal talent and attention. Management focus and board oversight must reflect this reality.”
The CGMA report also provides tools that boards can use to become more effective, such as the board mandate, developed by the UK-based Tomorrow’s Good Governance Forum, is a framework against which to judge transformational business decisions, such as whether to enter a geographical market or to make a major acquisition. It captures the “essence” of the company and requires the board to comprehensively discuss the company and its future. A toolkit that includes checklists guides the board’s discussions.
Risk governance probes whether the company’s risk appetite is set, measured and aligned with the business strategy. The AICPA Audit Committee Toolkit provides a useful checklist based on the COSO enterprise risk management integrated framework to help audit committees address questions on risk; the CGMA report includes a modified and abridged version for the board as a whole. The CIMA Strategic Scorecard is designed to provide a process that helps the board focus on key strategic issues and ask the right questions about the organisation’s strategic position, risks and opportunities, possible options and strategic implementation.
Quality financial and non-financial information is crucial for the board to apply the tools and provide effective oversight, the report says. Management accountants can evaluate this information and help the board by mapping out a strategic plan, improving productivity and translating the complexities.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.