High Performance Boards, 2nd Edition

CHAPTER 23A Primer on Finance Essentials for Directors

Companies around the world have been working to create high-performance boards, usually with directors coming from diverse backgrounds. Nevertheless, accounting and finance drive a significant proportion of board decisions. Directors are therefore expected to have a strong grip in these areas – but as we saw in Chapter 14, financial illiteracy on corporate boards remains widespread.

This chapter provides an essential foundation in finance and accounting from a board-level perspective. It is intended for directors who are not financial specialists. It aims to show board members the fundamentals of how to read financial reports, interpret between the lines of financial statements, implement a desired capital structure, apply valuation techniques, make better M&A decisions, and oversee risk.

Directors who are well-versed in finance can have a great impact on a board's effectiveness. They can understand what drives a company's performance and foresee the likely strategic outcomes of board decisions. It becomes easier for them to resist management fads such as financial and accounting engineering and excessive borrowing. And they are better placed to detect fraud, or avoid M&A pitfalls that can destroy value. Financially literate boards and directors don't suffer from misconceptions, but instead make wise decisions about what creates long-term value.

Reading Financial Reports

Board members do not produce accounting documents, ...