In mid-September I read an article in my local newspaper that grabbed my attention.
The headline: “Surprised by 700K deficit.” Wow, I thought – a high six figure deficit is pretty large surprise for a non-profit agency. Why, I thought, was the board surprised? The focus of the story was the draft financial statement for the second quarter. Even before concluding that Policy Governance® is the best system for boards of all types and sizes who want to achieve excellence in governing, I believe that a board should never by surprised. Interestingly, one of the questions that my colleagues and I often ask a board to reflect on is, what would you not want to read about your organization in the newspaper?
I wondered what might be different if this board had been using Policy Governance. What if they had asked themselves the question about what headlines they didn’t want to read? What if they used their answers to identify situations that would be unacceptable because they were imprudent or unethical? What if they then crafted Executive Limitations policies to put those imprudent and unethical means off limits to staff? What might have been different? Would there even have been a newspaper headline?
What might a board be worried about regarding its financial matters? Here is a sample of some of the responses boards have given:
- The organization’s long term financial sustainability
- The strength of financial controls
- Financial mismanagement and fraud
- Return on investment or the degree of risk in the organization’s investment
- Chasing project funding that takes the organization off course
- Not paying taxes or vendors in a reasonable period and damaging the organization’s credibility
- Accumulated interest on debt
- Being unaware of deficits, new funding sources, threatened legal action
Policy Governance lets the board govern financial management. There are typically at least three broad areas in which a board sets finance-related policy: planning inclusive of financial planning (budgeting), financial conditions & activities, and protection of assets.
An Executive Limitation policy on planning helps a board to establish criteria in advance about what would make any budget unacceptable, e.g., omitting credible projection of revenues and expenses, separation of capital expenditures and operational expenses, cash flow projections, and disclosure of planning assumptions; or planning that endangers the fiscal soundness of future years or ignores the building of organizational capability.
An Executive Limitation policy on financial conditions and activities might make the following means unacceptable: Expending more funds than have been received in the fiscal year to date; using long-term reserves; or untimely payment of payroll and debts.
What might an Executive Limitation policy on Asset Protection say are unacceptable conditions? Allowing uninsured personnel access to material amounts of funds; or internal controls that are insufficient to meet the board-appointed auditor’s standards are just a few examples.
So if the board in the September newspaper article had had a set of Executive Limitations that they were regularly monitoring, would they still be surprised? It’s very unlikely.
The board would have been assured that budgeting had been done where the cash flow took into account the potential impact of environmental factors, in this case, an amalgamation with a much larger organization. The board might also have an Executive Limitation policy that states it would be unacceptable if the board were unaware when situations of non-compliance with its financial policies existed or were anticipated. Rather than finding out about the excess of expenditures over revenues at a board meeting, it might have known at the time the situation occurred. It might also have been made aware that the current deficit represented only 0.5% of the organization’s budget and it was not considered material by the organization’s auditor. It would also have been made aware of the four or five factors that would make it possible to achieve compliance with the criteria in the board’s financial Executive Limitations policies and the time frame within which that would have happened.
Then this board would have no surprises and no newspaper headlines.