One of the key roles of the CFO is working with the CEO to support the company’s board of directors – but not all boards are created equal.
The nature and focus of private company boards are much different than in large, publicly held company boards. And this has an impact on the CFO’s role in relation to the board.
The CFO Leadership Council’s NYC chapter recently held a panel discussion on this topic titled “Inside and Outside the Boardroom: Managing and Working with Boards.” The panel was moderated by Patricia Lenkov – President, Agility Executive Search. The panelists included James Green, CEO of Magnetic; William Kraut, Lead Board Director and Audit Committee Chair for InTest; and Ellen McClain, CFO at Year Up.
Here are some of the key points raised during the panel discussion.
Changing Role of the Board
The nature and focus of boards vary depending on the ownership of the company – i.e., public company, venture capital-based, family-owned, or private equity. Boards in small and mid-sized companies are getting more involved in strategy development. Large company boards tend to read and approve strategy developed by senior management. Risk management is also becoming a big focus for boards, especially IT and information security risk.
Balance Cohesion with Risk Management
A non-cohesive board can be the death of a company. Best practice is to keep the board small, nimble, knowledgeable, and focused on the business. Boards shouldn’t be friends, or too diverse. They need to be well-versed in the industry to be effective. That said, the panelists acknowledged that thought diversification on boards is key. Boards need people with different skill sets, such as understanding overseas operations, or channels of distribution, if those strategies are in focus. Sometimes industry experience isn’t 100% necessary. Boards also need experts in various aspects of board work, such as audit committees.
CFO Interaction with the Board
For all three panelists, the boards they're involved with meet 8 times per year, and the audit committees meet as often as 6 times per year. CFOs need skill in presenting to boards, summarizing information. They need confidence in delivering good news as well as bad news. Establishing credibility and trust is key.
CEOs need their CFOs to have strong relationships with the board members. This helps with transparency. The CEO shouldn’t block the CFO from having a connection with the board. Bad news needs to get communicated quickly to the CEO and the board. CFOs need to back up estimates and valuations with supporting detail. They need to summarize data, focusing on key issues and how they are being addressed.
Should the CFO Focus on Specific Committees?
The panelists agree that the CFO should focus mainly on the audit committee. Separate sessions for the audit committee with the CFO are important to achieve transparency. This provides the opportunity for a deep dive on key issues, such as compliance, IT governance, information security, etc.
Board Communication Between Meetings
Boards should meet more than just 4 times per year. A best practice is 4 quarterly meetings with full reviews of the business. Then 4 additional phone-in meetings each quarter to review results, goals and to discuss specific issues, such as M&A opportunities. Boards should try to rotate the physical meeting location among major business operations.
Interim communication is not needed if the board is meeting on a regular basis – although a crisis could drive more frequent meetings. The size of the company has an impact here. Small, fast-changing companies need frequent communication with the board vs. more stable, larger organizations. In early stages, monthly or even more frequent communication with board members is required, especially if they're investors.
Public vs. Private Company CFO Interaction, Sharing Negative News
Public company boards need more diversity and independence in board members. Disclosure requirements are much more extensive in a public company. Boards of private companies have fewer pressures and disclosure requirements. This is one of the advantages of staying private for a long period of time.
If there's bad news to communicate, the CFO should coordinate with the CEO before notifying the board. Together, they should agree on steps to be taken and then quickly communicate to the board. The CEO creates the corporate culture – and as part of that should embrace issues and address them.
Final recommendations for CFOs
The CFO needs to have personal relationships with all board members. That personal connection is needed in case of a crisis. The CFO's relationship with the CEO should also be strong. Candor and transparency are important to inspiring confidence in the board. Trust is at the center of the relationship.
The panel put forth a great discussion with a lot of good questions from the audience of CFOs. It certainly got me thinking about how EPM solutions can help CFOs with their board interactions. One of the key needs is creating the “board pack” and distributing it prior to each board meeting. Another area is creating forecasts of expected future performance of the company and ensuring the top-line revenue and profit forecasts are backed up by substantial supporting detail.
To learn how Host Analytics Cloud EPM Suite can help you with board communication, here’s a link to a white paper on streamlining board reporting. Also, here’s a link to some information on our website about our reporting capabilities, including Financial Package Publisher for board reporting.