Performance = Value
Directors work with management to increase shareholder value. Improving performance leads to better results, which puts more value into the business. This value is measured by an increase in the company's overall worth, but also in its perceived value, which can help win contracts, raise capital and improve relationships at the bank.
Improving business performance takes real courage, because it means making tough decisions. A business should:
- identify and stop things that are not working
- do more of the things that work well.
Making these tough decisions requires having clear and proven facts, and details on the current finances of the business.
It’s important to know what the bottom line is and what the company’s financial future entails.
For most small and medium size businesses this area of improving business performance is an achilles heel. A company will give an enthusiastic ‘yes’ to a large order without taking the time to calculate the knock-on effects such as increased stock costs, more credit and extra salaries.
Establishing a board and working with experienced independent directors will ensure formal steps are put in place to measure and improve performance. And luckily all of this leads to an increased value of the business.
Liberation through discipline
Boards meet with their management teams on a regular basis. The executive team will present reports like:
- a simple two-page summary of progress against the business plan
- an overview of risks and issues you're managing
- a financial summary.
Just knowing the meeting is coming up can be a great spur to get everything in order. Being accountable to the board usually adds a welcome pressure on SME owners, and helps them re-prioritise the work they spend 'on' their business, instead of 'in' it.
The board will also want reports on key aspects of the company's operation that are critical to the success of the business. These elements are often known as key performance indicators (KPIs). Some standard KPIs are:
- financial performance
- human resources
- marketing activities
- product or business positioning
- social and ethical responsibilities
- legal and regulatory issues
- organisational structure
- industry trends.
Some boards choose for a report-by-exception format which means the report explains business as usual:
- Nothing new to report? Say it in a sentence.
- Things are going better than expected? Say it in a paragraph.
- Things are going worse than expected? Explain it in depth over a page.
A board will only be interested in historical information to help set the context, what they really want to know is what the future outlook is. It is with this forward-looking information that a board can aim to make the most effective strategic decisions for the company.
Putting good boards together
Choosing a director
True stories – Aaron Rink