Gone are the days when boards of directors could look at just a balance sheet and income statement and feel confident they had complied with their fiduciary duties. As the business and nonprofit worlds have become more complex and seemingly in constant flux, what directors need to know about the organization seems clouded. It needn't be.
Many boards mistakenly believe that seeing more information is the answer. But that only puts additional time-pressure on them. In the end, directors spend more time and effort reviewing trivial data and gain only a little more useful knowledge. The payback doesn't match the effort.
The thing to do is reevaluate the current environment-political, legal, cultural-and your own mission and vision. Decide what information makes sense for your board at its oversight level. When a board attempts to know everything management knows, it loses the high-perspective and denies the organization its uncluttered wisdom.
Start from a clean sheet of paper as in zero-based budgeting. At the foundation, the fundamentals remain unchanged. A board needs basic financial statements to know the status and performance of the organization. Those statements are central to effective board governance. But, how detailed should they be to gain knowledge? In most cases, a single-page balance sheet, and a single-page income statement is sufficient. As with any suggestion in this article, test it.
Here we'll dwell on financial reports, but the ideas apply to all reports to the board:
• Boil your now more detailed financial statements down to a page each or even less; have both reports on the same side of a single page. To do that, combine small or less critical line items into category line items; make the categories meaningful to the reader.
• Seek guidance from your executive, chief accounting people and auditors. Keep in mind, what your board is receiving now was probably decided by them. As your board decides what it needs, have them explain what makes a particular detail important to your board's perspective before including it regularly.
• Publish the newly summarized reports to the board for six months. The executive will continue to produce the familiar reports and have them available at meetings. (Did you know it's common for management to produce detailed financial statements for their own examination? If so, there will now be, temporarily, three sets of financials with different levels of detail.) Then discuss what the change has meant to the board:
• Has the board missed anything important?
• Do directors continued to ask good questions?
• Do the directors believe the board cannot do its job effectively without a return of specific details they can name?
• Has any director's original sense of loss or fear mitigated or vanished?
• Has board-time remained "on mission?"
• Have directors during a meeting called for details formerly provided that truly enhanced the board's current discussions, debates or decisions?
If a six-month trial is not sufficient, continue the experiment.
Essential to a director's duty of care is the ability to realize that something requires exploration or action by the board. An increase in risk or a failure to execute according to plans or policies should reflect in the statements and reports and foster directors' inquiries.
Some readers may argue that detailed financial statements make it easier for directors to identify issues. On rare occasion that may be true. However, more detail means more pages. More pages do not lead directly to directors studying more: if read, directors read more trivia without gaining knowledge; if unread, directors incur the risk of appearing less diligent.
You may wonder how a director will know of a shift if one summary line item contains a detail that moved up and masked the risky downward motion of another. There are at least three ways these circumstances may be brought to light:
• The board tasks the executive to bring inconspicuous risks and trends to light. Management writes narrative reports providing insights that the numbers themselves do not expose.
• The board instructs and relies on auditors and audit committees to examine details and report on risks and trends that may threaten the viability of the credit union.
• The board periodically requests more detailed financial statements to study.
A combination of those methods will raise a board's care to a higher level. A steady diet of detail numbs directors more than it alerts them. There's no right or wrong here, only a continuum from detail to summary. A key is a board's ability to know what's really going on and to react to it timely. Note that the financial statements you receive now are summarized; ask management how many sub-accounts are beneath existing line items. The concepts posited here are applicable to all other reports a board may require.
The Reasons For Raising Challenges
To comply with its fiduciary duties, a board can use its power to require more detail when it needs to dig deeper. The trick is to return to normal reporting when conditions return to normal.
The reasons for challenging your present information flow to the board include efficiency and focus. The goal is for the board to maintain its "30-thousand-foot" perspective, understand the organization's status and performance, and maintain oversight of management's operations. In making the board knowledgeable, focus and clarity beat volume.
Dan Clark, CCUE, is a governance and strategic planning consultant based in Tallahassee, Fla.., and a former regulator, CU director, and CU CEO. For info: 850-559-7094 or www.danclark.com.