Better Boards Conference 2013 Board Complexities and the ( dis )Engagement of Financial Data
description
Transcript of Better Boards Conference 2013 Board Complexities and the ( dis )Engagement of Financial Data
Presenter: Adele Johns
Executive Officer: Community Compass Inc.
Research student: International Graduate School of Business, University South
Australia Director: Adssi Home Living Australia
Better Boards Conference 2013Board Complexities and the (dis)Engagement of Financial Data
Acknowledgement Acknowledgement to country
Introductions background, purpose, outcomes
Non profit sector in Australia is worth at least $70 billion
It is Australia’s principal employer with more than 600,000 employees
It is reported that charities employ about 7% of the workforce and account for 5% of gross domestic product – making the sector equivalent in size to agriculture
Not for Profit Productivity Commission Report 2010 – Peter Fitzgerald.
Setting the scene
Of the 59,000 non profits that are employers the CEO/Manager position works under the governance structure of a board.
Requires Executive positions to be held by the board, the financial executive position known as the Treasurer.
All board members have a legal fiduciary responsibility
Governance structure
Australian Charities & Nonprofit Commission:
“Governance is the process, activities and relationships that make sure your organisation is effectively and properly run.”
Governance for Good: The ACNC’s Guide for charity board members. www.acnc.gov.au/ACNC/manage/tools/ACNC/edu/tools
Governance Good Governance Guide - ACNC
Strategic planning – big picture thinking
Setting the Vision
Setting the objectives to meet the key purpose of the organisations existence
Ensuring sustainability and viability – ability to meet all pecuniary liabilities
Certify compliance and accountability matters of the organisation are adhered to
Role of Governance
Maintain effective record keeping and monitoring of organisational objectives
Audit requirements dependent on level of income received.
Australian Taxation obligations – Goods and Services tax, Withholding taxes Fringe benefits tax
Funders requirements – philanthropic or Government funds, State and Federal
Statutory Compliance
The purpose of this research is to highlight the complexities of board dynamics and engagement of financial management providing an insight as to ‘how’ boards are currently engaging in financial management practices and alternate models.
To identify if Boards of non profit organisations are
insufficiently engaged with sound financial management practices.
To observe Board members (lack) confidence in
asking appropriate questions regarding financial matters.
Determine the level of understanding of financial reports.
Research purpose
My observation is, the member of the board responsible for financial matters, usually called the Treasurer, presents a report which is only given moments of ‘air-time’, before the agenda is quickly whisked along to matters of general business.
The treasurers report and financial statements are either inappropriately set out, condensing financial data to meaningless reports/spreadsheets, rather than formal financial statements.
This could be the result of lack of interpretation and understanding of accounting standards and formats but there are a range of other issues including the capability of the board to deal with financial issues.
Research purpose
This research provides the opportunity to delve deeper into the complex nature of board, unveiling boardroom capacity in financial management matters
Observation of member participation in their engagement with financial data, report layouts and time allocated for exploring the financial performance and position
Recognise the human dynamics at play with the theoretical perspective of Ralph Stacey.-
Stacey, R. and Griffin, D., (2005). “Complexity and the Experience of Managing in Public Sector Organisations”. London, Routledge.
Method
How could non profit boards improve engagement in financial management?
Subsidiary questions… What issues/complexities arise due to the
relationship(s) between the CEO and the board?
The power of influence – Ralph Stacey – Complexity Theory.
The research questions posed…
Zahara and Pearce (1989) have stated, “There are countless lists of what boards
should do. Yet evidence of ‘what boards actually do’ is not well documented… there is a pressing need to document what boards actually do: (pp325 – 326).
Zahara, S.S & Pearce, J.A., (1989) “Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15,291-334.
Board members often lack skills in understanding financial management reports
Meaningless reports are being presented
Large asset purchase decisions being made by members with little understanding of the financial position or future forecast
Cash flow forecasts either being non-existent or provided with limited information and understanding
Current observations
Movement away from ‘Community’ based committees/ boards being replaced with ‘Skills’ based board membership
Agenda set and led by internal staff
Longevity of membership linked to ‘power’ by either board or staff depending on term.
Current observations
Strategic planning led by staff, with limited input by Board
Dominance of position linked to longevity
New members have silenced voices
Selection of board members led by CEO/internal staff
Current observations
Shielding - Lightbody M (2000) – agenda set by internal staff creating opportunity to shield information due to differentiating between operational and governance activity of the board.
Dominance and power observed through robust conversations, (or lack thereof), linked to longevity of membership and skill – Renz,D(2001),
Discussion
Ralph Stacey lens – the interplay of human dynamics and relating that are apparent around the board room table
To Stacey an organisation is not a system, but a set of inter-connections.
Complex nature of humans, a set of interactions and relations
Discussion
Two organisation observed – both Company Ltd by Guarantee reporting
compliance to Australian Securities Investment Commission (ASIC)
Further research to broaden the scope of services observed, diversifying entity type and governance models
Limitations of current research:
Investigate board member selection practices
Little research has been conducted into the composition of not for profit boards in Australia.
Limitations
Organisation 1 ( Org 1) Organisation 2 (Org 2)
Entity Type: Company Limited by Guarantee Company Limited by Guarantee
Reporting to: Australian Securities Investment Commission
(ASIC)
Australian Securities Investment Commission
(ASIC)
Financial Reporting compliance: Corporations Act 2001.
Australian Accounting Standards Board (AASB)
Australian Taxation Office (ATO)
Corporations Act 2001.
Australian Accounting Standards Board(AASB)
Australian Taxation Office (ATO)
Current Board Membership 7 7
Membership mix Staff representatives, Project Volunteers and
Community members
Directorship volunteer capacity – no
remuneration
Note CEO holds position of Company
Secretary
Community or Skills based board Mixed Transitioning from Community representatives
to Skills based board
Funding source 70% Government grants 77% Government grants
Total revenue $1,021,000 $8,254,000
Interest Income $14, 648 – 1.4% of total revenue $131,563 – 1.6% of total revenue
What is the future sustainability of the non profit sector when research identifies such gaps.
With accountability mechanisms and compliance increasing, coupled with a shrinking pool of funds/resources/volunteers – how will the development of government intervention – ACNC impact the sectors sustainability
How can boards strengthen their skills and understanding of financial management without loosing the value of community based membership?
Further research questions…
Bridging the gap.. Presentation of financial data Sources of income Risk – dependencies Outgoings Critical cost areas Monitoring and tracking trends
Data Analysis for effective decision making What is the ‘back-story’ the financial reports
reveal about your service
How do we portray this story to other members
Strengthening/empowering the board with informative data to aid in effective decision making
Where we are at….. The accounting concepts Balance sheet items Understanding the financial position of the
organisation Understanding the performance Inflow and outflows of funds…
vulnerabilities/reliance's/ diversifying income..
Moderating expenditure.. Maximising efficiencies
Where do we want to be.. Linking strategy to financial reporting…
How do we know what we want to measure…
Ratio analysis – snap shot of data, showing big picture outcomes..
Dashboard of key performance indicators
Presentation of financial data Pie charts Trends Ratio analysis
Key critical cost areas – what are we trying to measure / monitor ?
Are reports aligned with strategy Key critical sources of income How do we manage these ?
Project analysis
Category 1 Category 2 Category 3 Category 40
0.51
1.52
2.53
3.54
4.55
Series 1Series 2Series 3
Pie Chart/ Sources of Income
Sources of Income
Grant IncomeRoom HireFee for serviceInterest
Tracking Trends
Category 1 Category 2 Category 3 Category 40
2
4
6
8
10
12
14
ForecastCurrentLast Year
Ratio Analysis
Gross Profit Margin
Gross Profit Income
- % of each income dollar is gross profit - determines the adequacy of direct
income/selling price
Ratio Analysis Operating Expense Ratio
Total Operating Expense Income
Indicates the % of each income dollar absorbed by operating costs
Helps control operating expenses (Lower the better )
Ratio Analysis Wage cost ratio
Wages x 100 Income
Lower the better, indicates the level of wages to income
Ratio Analysis Current Ratio
Current AssetsCurrent Liabilities
Measures cash positionAssets available for every dollar of current
liability(Higher the better)
Ratio Analysis Liquidity or Quick Ratio
Current Assets less stockCurrent Liabilities less overdraft
Better measurement of cash measures liquid (cashable) current assets
(Higher the better)
Ratio Analysis Cash reserves in weeks
Cash – Grants in AdvanceTotal Expenditure / 52 (weeks)
Indicates how many weeks an organisation could continue to operate if all income was ceased immediately
Thinking differently about the presentation of financial data
Monitoring and review of critical income and cost area
Importance of governance and effective reporting to enhance/support effective decision making aligned with strategy
Importance of a robust induction process for new board members
Understanding the complex nature of board dynamics.
Take homes…
Tips and Tools available for download
www.betterboards.net www.communitycompass.org.au
Adele Johns Community Compass Inc [email protected]
To wrap…