Building the right board

board-advisory

Video: Setting up Boards to drive performance

Video: Practitioner Panel – Providing a Board Advisory Service

To lack another set of skills is not a criticism. What is important is to recognise the value and validity of other skills in other people and to combine the people with the necessary skills to attain the collective objective.

J.B. Reid, Commonsense Corporate Governance, Sydney: AICD, 2002

Board composition is a broad term that encompasses issues such as who is on the board and the skills mix of the board. It involves both structural and cultural issues and board effectiveness depends on obtaining the right mix of skills and experience. Board composition varies significantly between organisations and is influenced by:

  • Legal requirements including the organisation’s constitution and purpose;
  • Board size;
  • The balance of executive and non-executive directors;
  • Director competencies;
  • Terms of office for directors; and
  • The structure of the shareholding or membership.

Stable boards with long-serving, committed members will have the advantage of a thorough knowledge of the organisation and its mission. However, it is important that the board represents and reflects the interests of its owners/members by injecting some new blood occasionally. Selecting new directors to build a board that is right for the organisation is not a simple task.

Director selection

More and more boards are engaging in more structured and professional processes for director selection. Such processes will generally take into account:

  • Alignment of skills with strategic direction;
  • Value added to the current board composition;
  • Cultural fit with the board;
  • Time it will take to be an effective contributor; and
  • Succession planning.

Building the right board requires an understanding of director competencies, which involves consideration of the directors’ experience, skills, attributes and capabilities. Director competencies encompass two distinct areas: technical competencies and behavioural competencies. Technical competencies are a director’s technical skills and experience (“what you need to know and are able to do”) such as accounting or legal skills, industry knowledge, experience in strategic planning and corporate governance. Behavioural competencies are a director’s capabilities and personal attributes (“how you apply what you know and your personal and interpersonal skills”) and include, for example, linkages to the “ownership”; an ability to positively influence people and situations; an ability to assimilate and synthesise complex information; time availability; honesty and integrity; and high ethical standards.

Boards often pay less attention to director capabilities that may not be evident in a CV that lists the director’s qualifications and experience. Consideration should therefore be given to whether the board needs a mix of directors who can:

  • Assimilate and synthesise complex information quickly;
  • Develop and deliver a cogent argument;
  • Be innovative and think beyond the square; and
  • Understand issues at both the detailed and “big-picture” level.

All directors need to have the ability to make points succinctly and effectively at board meetings and not be either the “silent” director who never speaks or the “loudmouth” director who seeks to dominate all discussions.

Prior to reappointing, nominating or appointing individuals as directors, the board should:

  • Consider what competencies and skills the board, as a whole, should possess, recognising that the particular competencies and skills required for one board may not be the same as those required for another;
  • Assess what competencies and skills each incumbent director possesses. Since it is unlikely that any single director will possess all the competencies and skills required, the board should be considered as a group in which each individual makes their own contribution;
  • Consider the character of directors and their fit with the current board culture. Some attributes worthy of consideration include self-awareness, integrity and high ethical standards. Boardroom dynamics will be impacted by the personalities and behavioural types present, so attention should also be paid to these qualities.

The Board competency matrix shows a simple competency matrix that can be employed to assess the board’s capability requirements against the mix of current directors.

For more information on board skills/competency analysis, see http://www.effectivegovernance.com.au/how-competent-are-your-directors/.

Author: James Beck, Effective Governance

Complacency Breeds Complacency


Why Should I Worry?

Professional Complacency

When it comes to profit many firms are complacent. So long as the bills are being paid and I draw a reasonable sum each month why should I worry? That raises a most interesting question just how much is enough?

I frequently ask principals/partners in workshops to write down on a piece of paper just what they think their profit should be? Invariably there is a very diverse range of opinion and there should at least be some attempt by partners to come to agreement on a suitable amount. But the point I wish to make is that a large sum is inevitably left on the table. Complacency breeds complacency and as long as partners are reasonably satisfied a serious effort to change is unlikely. Yet most professional firms invest so little in areas like innovation, staff training, the latest technology, professional marketing, systems and procedures improvement, furniture and equipment, office presentation, and much more. If there is cash in the bank at the end of the month then a suitable drawing is on the cards!

So few firms complete a budgeting exercise that drives the firm. Ideally the overall firm budget for the year/s ahead should have a number of budgets branching off and supporting it where a serious drilling down is evident. I refer to the Personnel Budget, the Work-in-Progress and Debtors Budgets, the Capital Expenditure Budget that itemizes future investment in equipment especially information technology, the Training Budget that links into the skills audits and individualizes or tailors the training needs, the Marketing Budget, the Cash Flow Budget as distinct from the accruals Profit and Loss Budget, the Balance Sheet Budget, the Drawings Budget, and all of these should link in so that what if scenarios may be considered up front. The DuPont analysis is also an outstanding tool for assisting in these projections.

Detailed Drilling Down

Now I did say ideally and the reality is that this sort of detailed drilling down enables decisions to be made in advance and not on the run. For example, what percentage of our revenue should we outlay on training? What is realistic to enable us to grow our people and skills to reach the vision we have already determined in our Business Plan and strategies? In light of our growth projection what is a reasonable percentage to spend on marketing in order to achieve that growth. This should lead to what I refer to as laser beam focused marketing rather than the scattergun marketing that most professionals engage in (if any marketing at all!).

Rule of Thumb

Most professional firms work on the rule of thumb of 1/3rd, 1/3rd, 1/3rd, i.e. 1/3rd of revenue is taken up in overhead, 1/3rd of revenue is absorbed in wage costs and 1/3rd remains for profit  suggesting that professional firms should earn 331/3 % net profit but this is where the illusion of profit comes in. Because no adjustment is made for realistic commercial salaries for principals, or interest on capital and current accounts this simple formula can lead to complacency. And note that the interest is calculated at commercial rates and after regular, realistic revaluation of Balance Sheet items  especially Goodwill, Intellectual Property and other intangibles. my book, “Earn Your True Worth”  I explain in greater detail the options for calculating commercial salary.

A Reasonable Return ?

Where these adjustments are made in a commercial manner invariably I have found that Net Profit (before tax) drops dramatically to around 5% pa or less. Losses are not uncommon. In my experience listed corporations on the stock exchange generally seek a return in the order of 15-20% pa or more and they are punished in their share prices if they don’t, so accountability is very strong. It seems to me that this is a reasonable minimal guide for professional firms. Return on investment should also be examined (allowing for revaluation of the intangibles). Is the firm receiving a reasonable return on their investment after the above adjustments?

A True Costing System

So where is the net profit we should be earning? Waste is a big factor and time sheet recording for many professionals has made us lazy. There is a strong move to value pricing, i.e., a more serious examination of the value to the client and negotiation and management of expectations with the client. I am not advocating cessation of the time sheet system; I am simply advocating a return to the use of time sheets as a costing system that is a reference point only (as originally intended), not the means of calculating the bill. As already explained when professional firms have such low productivity there is something seriously amiss.

The Practice Cannot Run Itself!

You simply must take the management of your professional practice at least as seriously as you do when attending to the needs of your largest client. My book will provide you with an approach to truly earning what you are worth but you must be willing to take action, apply resources and make decisions. The practice cannot run itself! And avoid being misled by the illusion of strong profit.

David Connell, Co-Founder, ATL Network.

Accounting Practitioners – What’s your plan?

Whats your plan

The average age of Accountants in Public Practice is 58 and getting older. Less than 20% of all practitioners have a documented exit or succession plan. So while many practitioners are thinking about retirement and life after their current business few are planning for it.

Like most things in business and life planning and preparation are critical. The value of your business is probable a key to your future so it is time to take a little time focusing on NOW.

Some questions you might be asking yourself are:

  • How can I exit my business on my terms and on my timetable?
  • How can I maximise the value of my business?
  • How can I ensure financial security for my family when I exit the business?
  • How can I ensure my business goes to the party of my choice?

Consider:

  • Is succession a viable option?
  • If I just ‘put it on the market’ will there be a buyer and what would they pay?
  • How long can I keep working in my business if I cannot sell it?

The importance and need to have well structured exit plan is essential for all practitioners. For many practitioners, their business is a large part of their ‘net wealth’ so improving business value improves their future. As a business owner you want to know how to:

  • What do you need to do so it sells for more rather than less?
  • Who can help you sell your business effectively?
  • How do you exit on your terms and your timetable?

We can help. Call us 1300 79 66 27.

How many accountants will make the cut?

Thought-Leadership-Light-Bulb.jpg

A number of years ago I headed up a national network of consultants, most of whom were accountants in public practice. We ran annual conferences, and in one particular year I decided to engage a firm to carry out personality profiles for all those attending the conference. While it was hugely successful and created many great conversations, it was also notable for another reason.

Before the conference I met with the managing director of the personality profiling firm to give him some background on what we did and where our members came from. Our goal was, essentially, to develop business ‘facilitators’ and make them better business advisors as opposed to compliance accountants. As I explained this I received a look of astonishment from the MD. When I asked about his response, he explained: “I have done a lot of profiling of accountants over a number of years and this has shown me that, only 15-20% of accountants have the profile to be successful as facilitators. So either my stats are wrong or you have been successful in attracting a large portion of accountants with the ‘right’ profile into your network”.

When we did the profiles it was clear that the latter was true. Just over 90% of those who attended the conference came within the profile he nominated as being required to be an effective facilitator. While I don’t put too much faith in profiles – people can’t be put in boxes – this was a result that made me sit up and take notice.

How many accountants, I wondered, are going to be able to make it in the new world?

Technology is driving changes that are disrupting the structure of accounting practices, now and in the future. This has particularly impacted compliance services – the core work of most accounting practices. As prices drop through technology-driven price competition and as technology is able to reduce the requirement for a visit to the accountant, revenues and profits continue to drop.

In response, accountants have cut costs trying to protect profits. They’ve taken work offshore.

Others have adopted a more progressive strategy: to grow fees beyond compliance work by developing ‘value-added’ services and moving into business advisory services.

Many services of professional service firms, and the accounting profession is no different, are based on the professional adviser, being the ‘expert’, solving ‘technical problems’ for their clients. The basic communication style appropriate for this type of problem-solving is called ‘advocacy’ – the professional adviser advocates the best or the ‘right’ decision. The dentist tells you what is wrong with your teeth and what you need to do to resolve it. While you may seek a second opinion your role is to make the decision as to whether you want to go ahead or not. Apart from keeping your mouth open, you have a small role in the final solution. The dentist solves the problem for you.

Accountants who move into business advisory services encounter clients with a different type of problem – adaptive problems. Adaptive problems do not have such clearly defined solutions – what works in one organisation may not work in another; what works today may not work tomorrow. Staff loyalty is an example.

Adaptive problems are ‘evolved’ rather than ‘solved’. Once a tooth is filled the problem is solved; staff loyalty is worked on each and every day.

Adaptive problems are evolved by a facilitator who uses an inquiry conversational style.

The inquiry conversational style involves more than asking questions; it requires a different skill-set than what most accountants are used to. There is a key shift: while experts solve technical problems for their clients, clients solve adaptive problems (under the guidance of the facilitator). Adaptive problems not only require a different conversational style but also a different way of thinking about value, problem-solving and how the service is delivered.

By Warwick Cavell, Associate Advisor, ATL Network