Management Reporting to the Board of Directors

This article deals with management reporting to the board of directors. Before I jump into specifics, however, let me establish a set of assumptions to work from. Of course, these are my assumptions. But in any case, articulating the assumptions in your cooperative concerning board-management relations is essential for discussing what is expected in management reports.

Your manager is your Chief Executive Officer, whether called that or not -- hence I use the term 'CEO" throughout. (And since these CEOs often are women, I've used the female gender throughout.)

Assumption one: As a board member, I work for my CEO.

While it is true the board of directors hires its chief executive officer, I believe the job of an individual board member is actually to work for the CEO. If this is indeed the case, it is very important for the board to have a chief executive officer they believe in and want to work for. For this to happen, the goals of the CEO must be the same as the goals of the board, as articulated in the corporate mission statement, and the board must have complete confidence in the ability of the CEO to achieve these goals, as demonstrated by past and current performance.

Assumption two: If you do not like your CEO, you will fire her.

This seems obvious. In reality, many boards choose to fight with their CEO instead. You won't catch me on one of those boards. Antagonistic personal relationships are not something I volunteer for. Change the CEO or change the board member.

If your board as a whole only has wavering support for your CEO, the issue can be made clearer by giving her a $10,000 raise. I call this a win/win raise. !f she is good she deserves it, she will appreciate it, and she will produce more because of it. If she is bad, it makes firing her a whole lot easier.

Remember: just because you give your CEO a $10,000 raise does not mean you give her permission to reduce net income by that amount. In fact, to justify her high wages you should now demand that she produce more net income than before.

Assumption three: Being a board member is a volunteer position.

Although you may be receiving money for your service, the money has nothing to do with why you are serving on this board. As a volunteer, your generosity should not be exploited. Your board work must be structured to allow you to make the greatest possible contribution with the least amount of time spent on your part. Boards are not training campus for martyrs.

Assumption four: My major responsibility is to assist my CEO in making good decisions.

Note that this is not the same as making good decisions myself. Since I trust my CEO, my role is simply to provide, during the decision making process, as much insight and critical appraisal as my training and experience allow. Utimately, I let my CEO make the actual decisions. If the end results of the CEO's decision are good I am glad I let her do it her way. If the end results are bad we fire the CEO.

Assumption five: All the important decisions have been made before the board meeting starts.

I am a rubber stamp proponent. A good CEO will not bring important proposals to a board meeting unless they are going to pass: why waste the time? All the passionate arguments have already been made before the meeting starts, and everyone is fully aware of all the pros and cons. People have made up their minds. Now is the time to tolerate brief discussion, vote, and accept victory or defeat graciously. Board meetings can be a pleasant experience.

 

Once we have structured a board/management relationship we can live with, it is time to ask the question: as a board member, what reports do I need from management in order to do my job well?

In order to maintain an overview of the business I want a regular management report in a standard format. Since board members are busy people and your CEO is an effective manager, our board only needs four regular meetings a year shortly after each quarterly financial statement is released. For each meeting I want two to five written pages of comprehensive management commentary.

The contents of the written management report should answer seven fundamental questions for every key area of the business.

  • What happened (during the last quarter)?
  • How does what happened compare to what was supposed to happen?
  • Why was there a difference between what happened and what was supposed to happen?
  • How does what happened compare to what happened the last time (same quarter last year)?
  • Why was there a difference between what happened the last time and what happened this time?
  • How does what happened compare to what is going to happen in the future?
  • What are you doing today to make sure things are different tomorrow?

Reporting by Exception (RBE) in each area: If things are as they are supposed to be, please tell me in one sentence.

Directors need reports on each of several key areas. The definition of a key area is one that is critical to the successful realization of the corporate mission statement. Typical key areas of a business include financial performance, human resources, marketing activities, product or business unit positioning, social responsibilities, legal and regulatory issues, organizational structure, and industry trends.

For the method of reporting, I propose the term Reporting by Exception (RBE). For the most part I want RBE in each key area: If things are as they are supposed to be, please tell me in one sentence. If they are better than they are supposed to be, feel free to use two or three sentences. If they are worse, I want a paragraph -- a very good paragraph.

Since financial performance is the cornerstone of the business, I prefer a financial report from management prepared as a separate document, written in the same style as the comprehensive management report. It should take me through the financial statement in sequential order and highlight everything I need to be aware of in order to understand the financial position of the cooperative.

The financial statement itself should consist of an income statement which is one page long and includes current quarter and year-to-date figures, both compared to budget and to last quarter/last year-to-date, and a balance sheet with a comparison to budget and to one year ago. (By one page I mean the distance from my top line (sales) to my bottom line (net income) should be no more than eleven inches. To present the comparisons to budget and last year might require the use of two or more sheets of paper.)

By way of standardized management reports, I now have everything I want. With the papers in my hand, I will be able to assess the performance of the business and of my CEO. I will know what areas demand my further attention and which ones I can safely ignore for another three months. I will know how much risk is ahead and what is being done to manage it. I will be able to realistically demand that the board meeting end after two hours.

A few of my beliefs about management reporting do not fit neatly into the scenario I have presented above. One of them has to do with good news/bad news and who delivers it to me as a board member. Good news I like to hear from everyone. Any time of day or night is fine, write me a letter or give me a call. Bad news I want to hear straight from my CEO -- first -- in-person -- always. If nothing else, I want a one minute phone call: "Rick, the state inspector just found an eight inch cockroach and chained our front door shut. I'm working on it, bye for now." Don't let me hear it from the checkout clerk first. Another expectation of mine is for my CEO to accept full and total responsiblity for everything that happens. I want explanations for why things went wrong -- I never want excuses. When my CEO tells me why things went wrong, I want her also to tell me how she is going to make them right again. In return, I never flog my CEO with past problems and I promote her in public (including board meetings) as a leader who has my full respect and support. After all -- she does, and I want people to know it.

See other articles from this issue: #011 June - July - 1987