What makes great directors? Is there a case for ‘Finance for non-Finance Director’ programs? There are many schools of thought advocating different requirements for directors and board members.
Some of the recommendations include availability – ability to attend meetings regularly, age – having younger directors, equity involvement – directors having a stake in the company’s stock, financial literacy – have strong financial credentials, independence – fewer insiders on the board, and so on.
Over time though, statistics – from successful and failed companies – have shown that having directors with the aforementioned qualities does not necessarily translate to a successful company.
Notwithstanding there’s a case for strong financial literacy for directors. This post examines the importance and benefits of having financially literate directors.
What exactly is financial literacy as it concerns directors?
In simple terms, this refers to having a substantial understanding of budgets, financial statements, cash flow, investment portfolio, money management, and general financial knowledge, enough to make flawless well-thought-out decisions that propel business growth.
It can be argued that all the directors may or may not have such qualities. Yet, it is imperative that all directors understand the rudiments of finance, so they can participate in critical junctures where decisions are being made. Because at the end of the day, all decisions impact the bottom-line – directly or indirectly.
That’s why at Prime KBS Institute, we facilitate programs like ‘Finance for non-Finance Directors’ to bring non-finance directors up to speed on the requisite financial knowledge necessary to function in their capacity.
Benefits of financially literate directors to a business
- Financial statement comprehension
Interpreting financial statements or reports is part of the primary responsibilities of the board. However, it is not uncommon to find directors tune out when it’s time to discuss financial statements because they either don’t understand much of the jargon or don’t appreciate its importance.
Directors with finance-related skills keep the business focused and ensure that the financial statements are accurate. Board members will also know to ask important and relevant questions.
How do we plug leakages in the XYZ division of the company? How will this new initiative affect our investment strategy? These are sample questions that stem from an understanding of the financial statement presented.
- Creates an atmosphere of mutual respect and trust
Think about it this way. You have a group of directors who understand their roles and trust one another even in seemingly challenging situations.
They are able to provoke one another to intelligent conclusions based on the information they processed from the financial statement.
In such meetings, it is not uncommon to have give and takes, with each question providing clarity to the different interpretations on the table.
Of course, this is predicated on the directors receiving information on time – enough to digest and process the information in the reports.
- Make better decisions
Decisions make or mar a business. Where to invest? Who to hire? When to let go of an existing investment? When to go public? These are the sort of questions businesses grapple with regularly.
The best businesses survive through data-driven decision making not sentiments or ego-driven solutions. Directors who can process financial information will know the financial implication of their decisions and that of others too.
This creates a healthy environment where directors or executives can vet decisions before they are executed.
Companies thrive where there’s accountability, innovation, drive, excellence, and strong internal controls. Directors, executives, and boards play a major role in providing these and leading the way in their execution.
Being financially literate is very key especially for accountability and maintaining internal controls. As such, companies should strive to improve the overall financial literacy of its board. It must be a deliberate effort.
At PrimeKBS Institute, we offer Finance for non-Finance Directors with the following objectives:
- Gain an understanding of accounting principles and standards and learn to compile a financial statement
- Find out the financial duties of directors, learn to interpret the key component of capital investments, and -using accepted financial ratios – establish the financial health of their business.
- Learn how to unlock the full potential of your business by discovering the various sources of finance available and their pros and cons.
- Demystify financial accounts.