One of the board’s primary roles is to direct the organization. The main way that the board can direct the organization’s financial performance is by setting budget parameters before the management team and staff even start budgeting for the coming fiscal year.
The first step in an ideal annual budget process is for the board to determine what financial performance is desired in the next fiscal year. The board might select 3 to 10 financial statement elements or financial performance indicators that it believes to be critical to the organization’s success, and indicate what those numbers should be. Some examples are:
Gross Revenue ≥$5,000,000
Net Income ≥10% of Gross Revenue
Administrative Salaries and Benefits ≤$400,000
Gross Margin ≥30% of Gross Revenue
Capital Purchases ≤ $60,000
Debt to Equity Ratio 1.5:1 to 2.5:1
Return on Equity ≥12%
The appropriate numbers depend on many variables such as the industry, the size of the organization, the organization’s mission and goals, and the risks investors are willing to take. As the senior decision maker of the organization, the board has the job of wrestling with the realities of the organization’s current situation and the business environment in which it functions, and determining which financial parameters will most likely move the organization towards its goals. This work can be done most effectively when the CEO and CFO are available to answer board members’ questions on current financial strengths and weaknesses and operational realities.
I met a hospital executive last week who shared a great team success story. In 2009 their non-profit facility generated record profits! In a time when most hospitals are struggling financially, I was interested in digging deeper to uncover the how.
She indicated that their hospital is financially healthy because they are clear on their goals and everyone works together to achieve them. The board develops a twenty year strategic plan. No, that isn’t a typo, she said 20 years. The board updates the plan annually so that the current year goals are relevant and specific. Progress on all strategic goals is monitored monthly, with any at-risk areas being monitored more frequently. The board reviews strategic plan progress at every meeting.
Communication is a priority. Key messages are shared with staff many times to reinforce clarity. Diverse viewpoints are expressed and listened to at board and senior management meetings. When decisions are made they are implemented. This well-greased machine really gets the job done with excellence.
The Five Dysfunctions of a Team are not prevalent at this hospital. Instead, hospital board members and staff trust each other, engage in healthy conflict, act on commitments, hold each other accountable, and focus on results. The hospital and the community are reaping the rewards of a smart and healthy leadership team that focuses on the organization’s needs and aligns its resources accordingly.
When the owners or members of your organization selected you as a board member they entrusted you to be a good steward of their financial investment. Since it is impractical for all the owners or members to be engaged in senior decision-making for the organization throughout the year, you were selected to be one of the trustees whom they, and the law, can hold accountable for prudent financial operations.
The financial responsibility of directors is to be carried out by the board as a whole. It is only during a duly convened board meeting that board members may make decisions. Although the board may ask one or some of its members to carry out financial tasks on the board’s behalf, these are generally research or monitoring functions. The results of such board support work are reported to the board as a whole, which in turn makes any related decisions.
The fifth of The Five Dysfunctions of a Team is inattention to results. What have the board members paid attention to at board meetings you have attended? Has it been a diversity of matters about the organization or has it been the achievement of its stated mission and goals? Many board agendas are filled with current operating challenges or interesting updates. Board members listen, discuss, or rubber stamp. Yet, they walk away from the meeting with no idea whether the year’s goals are being achieved. Many couldn’t tell you what this year’s goals, are, even if they helped set them, because they are not kept top-of-mind.
The primary purpose of a board of directors is to be the trustees on behalf of the owners. This role involves directing the organization and protecting the long-term interests of the owners. Directing means determining where the organization will head, what results it will work to achieve. Protecting involves monitoring progress towards the desired results and ensuring that off-track work is pulled back on track.
The fourth of The Five Dysfunctions of a Team is avoidance of accountability. Most organizations have expectations of their board members, whether they be written or historically accepted. Often at least one member of the board is not living up to these expectations. The common response of other board members is a sigh of relief when the lax board member’s term is about to end.
By tolerating this board member’s inappropriate behavior, rather than holding him accountable to fulfill the role he accepted, the board has made decisions with less diversity of input than was intended by the board size stated in the bylaws. Other board members have been frustrated, which has reduced their energy and creativity, in turn impairing their ability to make quality decisions that move the organization forward.