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Board reporting and KPIs
A properly structured and functioning Board of Directors contributes significantly to the success of a company. For an effective Board, timely and robust board reports covering performance are essential.
Legal obligations of the Board
Directors appointed to a company’s Board are bound by a number of legal responsibilities during their term.
- Director’s duties are defined in the Corporations Act, the Company’s constitution and through common law. The Corporations Act in particular sets out the following duties to (paraphrased);
- Prevent the company from trading whilst insolvent (i.e. unable to pay debts)
- Act with reasonable care and diligence
- Exercise their duties in good faith
- Not improperly use their position to gain an advantage for themselves or to the detriment of the company
- Act in good faith
Director’s duties arising from the company’s constitution will be specific to each enterprise.
In Australia, the Corporations Act requires that a proprietary company must have at least one Director (3 for Public companies) who is a natural person (i.e. not a corporation) and an Australian resident. Directors are appointed by the shareholders of a company at a General Meeting, or by the existing Directors.
The role and responsibilities of the Board
The Board (i.e. the Directors) direct the affairs of the company but do not manage at a detailed level. The Board is responsible for such matters as directing overall strategy (in conjunction with the CEO), monitoring results, approving key management proposals, setting policy and approving the appointment of key executives including the CEO.
Structure and composition
The size and composition of the Board depends on the size, nature and complexity of the company.
It is usual for smaller companies (up to $10m turnover) to have up to 3 Directors, while large companies can have 7 to 10 Directors. The number of Directors should be sufficient to provide a breadth of skills and experience but not so large as to become unwieldy.
Directors should have a range of skillsets – technical skills relevant to the company’s perations, professional skills in law, finance, etc. and general management skills and experience. The CEO is also often a Director or Managing Director.
Substantial shareholders will also often have the right to appoint a representative Director.
For a Board to function effectively it requires comprehensive, accurate and timely information. Common practice is for reports to be provided to the Board monthly.
- Board reports will usually be comprised of (at a minimum);
- CEO report describing progress against strategic objectives and KPIs, key project and product development progress, staff issues and any other significant matters.
- Financial report summarising financial performance for the month, progress for the year to date and against budgets or forecasts. Cashflow and performance forecasts will often also be provided.
- Sales/Business Development report showing sales results for the month and year.
- Project status reports often highlight the progress of project with a red-yellow-green light indicator on these.
- One of the most widely used management methods for measuring and monitoring performance is through Key Performance Indicators (KPIs). KPIs are a set of values which are used to measure the key “drivers” of a business’ performance. KPIs will usually comprise both financial and non-financial values, for example;
- Financial – profit, sales, expenses, gross margin, cash
- Customer – number of customers, growth in customer numbers, retention, lifetime customer value, customer satisfaction (via Net Promoter Score)
- Employees – staff / sales ratio, staff satisfaction, turnover
- Product or service metrics – rate production, rate of defects, efficiency measures
KPIs must be relevant and specific to the business to be of value – KPIs should be S.M.A.R.T (a term coined by the management theorist Peter Drucker);
Specific – a specific bounded area of interest
Measurable – able to be measured objectively, reliably and quantitatively
Attainable – able to be met given the business circumstances
Realistic – reasonable given the business’ resources
Time-bounded – a specific time period for achievement
Progress against KPIs is usually summarised in a “Dashboard” – a short form report detailing the KPIs, monthly progress, year to date progress, trend etc. Dashboards are increasingly displayed and updated online and in real time.
The Board of a company plays a critical role in its progress by guiding overall strategy and validating key proposals and decisions. For a Board to fulfil its functions effectively robust, open and comprehensive reporting is an essential requirement. If you need help with Board Reporting and Dashboards reach out to the seasoned team at Fullstack whom can help with outsourced CFO services.