Time and time again we’ve seen public companies grow themselves out of business and one would wonder: Where was their board?
While I’ve written many articles about what should have in place for sustainable, profitable growth, we haven’t yet looked at the board’s role in the equation.
So, what questions does the board need to ask to ensure growth that’s sustainable and profitable?
Here are the questions that will help boards keep an eye on growth and make sure the growth plan doesn’t kill the company:
Does the company make money and how?
A fast-growing company with multiple lines of business should know the profitability by each line. Does one subsidize the other? If so, should it continue or should some action be taken?
Directors should have a strong understanding of what drives profitability, and the company’s CFO typically provides this information. And if she isn’t looking at it, she should.
What is the competition up to?
A company should always keep an eye on competitors and some competitors may not be so obvious. For example, competitors in the financial services industry may be Fintech companies, major disruptors. And this can be seen in almost any industry – disruption by technology companies.
Management should ALWAYS have a good understanding and intel on its competition and share that information with the board. And, if they are not, the board should be asking for it.
What are the company’s biggest risks? And what is management doing to mitigate those risks?
A strong enterprise risk management program should identify these risks, measure them compared to the board’s risk appetite level and have action plans for those risks that are above the board’s risk threshold.
These risks should be reviewed on a regular basis, and for growing companies, I believe a best practice is quarterly.
How are we doing compared to benchmarks?
Investors are tracking how the company is doing compared to benchmarks and management and the board should be tracking this too.
I recommend a quarterly comparison of key financial metrics to the benchmarks. And if you’re not tracking benchmarks, you need to get on that right away. There are many sources of benchmark statistics, even for private companies. As mentioned earlier, the CFO is typically the position on the management team tasked with performing these analyses. If he isn’t doing it now, he needs to be.
The benchmarks to track will vary but should include return on equity, profitability (both gross profit and net profit margins) and liquidity metrics. Other benchmarks may include employee turnover rates, customer retention, etc.
Management should be able to explain ratios that are out of the benchmark range and propose actions for bringing them in line. On the inside of the company, the CFO is typically driving the company towards profitable growth.
What are the leading growth indicators?
For example, leading indicators in a firm (physician, lawyers, accountants) may be new patients or clients. If the number of new customers is decreasing, that could indicate a problem. So the board needs to know which growth indicators the company is monitoring and have its finger on the pulse of those indicators at all times. Internally, management should be looking at trends and patterns. I prefer to look at trailing twelve month information.
What disruptive forces are in place and how is management responding?
What do Kodak, Blockbuster and Sears have in common? They were all very solid companies at one time and, due to disruptive forces or changes in technology, either declared bankruptcy and/or are no longer relevant.
These changes didn’t happen overnight, but clearly the companies failed to pivot when the tea leaves indicated that change was necessary.
A board that’s highly tuned into the marketplace and emerging trends can be a company’s greatest asset. And, it isn’t always that they bring a wealth of knowledge in a particular industry, but that they ask great questions.
Who are the top 5 people in the organization and who are their successors?
The company should have a professional development program and succession training plan in place should a key executive leave, either voluntarily or involuntarily.
Small companies, particularly early stage ones, may not have the luxury of succession plans thanks to lack of resources. However, there should be a contingency plan in place at the very least, including a business continuation policy.
It is a significant risk if the viability of the company is on the back of only one or two people.
What is the company’s growth plan?
What are the strategies to growth, and are they organic and/or through acquisition? Is the growth plan realistic and executable? What measures should be in place so that the board can hold management accountable throughout the year?
How is the management team paid?
What portion of compensation is cash versus equity? Is compensation for key executives in line with market? Are incentives aligned with the measurable results? Are incentives aligned with long-term growth?
There is clearly misalignment if management is paid big bonuses when targets aren’t hit.
In short, good boards ask appropriate questions that get to the core of issues. That’s their role – that’s their job. So, good governance can only occur when directors are comfortable asking these questions and more, and when there is a good interaction with management.
If your board is not asking these questions yet, it needs to get there – and fast. The company and the board together must strive to create a culture that supports this type of dynamic. While that can be challenging, the rewards are well worth the effort.
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