Managing information

7 The Board Pack

7.1 The problem

• When governing boards, such as the Board of Directors or Trustees, meet they are usually presented with a pack of papers (or on-screen information) which is intended to summarise the state of the organisation. Such packs may comprise:
• The latest set of accounts (possibly in great detail).
• A forecast of budgets against predicted actual figures.
• A narrative explaining the above.
• The major risks threatening the achievement of the objectives of the organisation and their status.
• Details of expenditure to be approved, with justification.
• Reports the board may have requested, for example on possible opportunities in new markets.
• Such board packs may be many pages long and impossible to read between receipt and board meeting. The Institute of Chartered Accountants in England and Wales (ICAEW) have produced a publication, ‘Information Overload’ (opens pdf file) detailing the problems and possible solutions. One principle set down is, ‘Boards need to define their needs and communicate and pursue those persistently’. How are needs to be defined?

7.2 Why is the board pack required?

• Let’s get back to basics:
• The main aim of directors is to achieve their objectives
• They achieve their objectives by making decisions.
• In order to make the best decisions, the best information is required
• So in order to consider what might be the ‘best information’ we need to consider ‘decisions’.
• Decisions are like a physical force, they change the speed and/or direction of an organisation.
• A request to ask for more information is not a decision; it just shows the relevant information wasn't sent in the first place.
• A decision not to do anything is still a decision.
• DECISIONS CAN’T CHANGE THE PAST (Sorry for shouting but it’s important).
• What conclusions can we draw about the characteristics of the ‘best information’?
• Since decisions can’t change the past, historical information is not relevant other than as a guide to forecasts, and it may not be a reliable guide.
• Information which is not used to make decisions is not relevant and should not be included in the board pack.
• Information which should be in the board pack must be directly relevant to making decisions which contribute to the achievement of objectives.
• All information relevant to making a decision must be in the pack.
• Information should be no more accurate than required or that can be obtained.
• So the board pack is required to provide information to make decisions to achieve objectives. What does the board define as its needs? It first must consider its objectives.

7.3 The solution - Define objectives

• The board has to specify the ‘mission statement’ of the organisation and the objectives which will deliver the mission before any discussion about information requirements can begin. The mission statement will vary depending on the organisation but the objectives can generally be specified as:

1. Set up a strategy to deliver the objectives of the organisation

2. Maintain profit (or cash flow) of existing organisation

3. Develop the organisation

4. Operate within laws and regulations

5. Trade responsibly

6. State how responsibilities are met

7. Maintain support functions to deliver the objectives

• Decisions will need to be made to achieve these objectives and information is required to ensure these decisions are the best. How do we define the board’s information needs?

7.4 Risks, decisions and information

• Ideally the board could consider each of its objectives and the decisions required to achieve them, but this is quite difficult in practice. One option is to consider the opportunities and risks which impact on the objectives and then identify the decisions which will manage these and the information required to make these decisions. For example:
• Objective: Develop the organisation
• Opportunity/Risk: The organisation fails to anticipate opportunities for growth, or threats to growth.
• Decision: How do we spot opportunities or threats to growth?
• Information: Monitor competitors and markets using information gathered from trade publications, shows, exhibitions, conferences and press releases. Exception reports presented to the board highlighting opportunities and threats as and when necessary.
• This exercise can be incorporated into a table (details in free Managing Information e-book here (pdf))   

7.5 Conclusions from the table

• The risks, decisions and information from the table give rise to the following conclusions:
• The forecasting of financial information, opportunities and risks is essential. This is hardly a surprising conclusion since the main purpose of the board is to make decisions and decisions can only change the future.
• Realistic forecasting to the appropriate accuracy is required, possibly for several scenarios, for example depending on the outcome of Brexit.
• An independent forecasting team is required, not swayed by unrealistic projections by management. This team would effectively be a 'Forecasting Accounts' team alongside Financial Accounts and Management Accounts (depending on the size of the organisation).
• The ICAEW Exposure draft on Guidance for the preparers of Prospective Financial Information (PFI) lists the following attributes and principles, which should be followed by the forecasts:
• Relevant, because PFI is prepared on the user needs principle so it has the ability, in a timely manner, to influence its users’ economic decisions and has predictive value or confirmative value for its users. (Includes my characteristics of relevance and timeliness)
• Reliable, because it is prepared on the principle that it is supportable or based on sound business analysis. (Includes my characteristics of accuracy and completeness)
• Understandable, because it is prepared on the principle of containing reasonable disclosure about what it relates to, its risks, uncertainties and mitigating actions. (Covered by my methodology)
• Comparable, because it is prepared on the principle that it is capable of subsequent validation by comparison with historical financial information. (included in my requirements for forecasts)
• While it may be very difficult to produce forecasts with any degree of meaningful accuracy, attempting to produce accurate forecasts may result in learning more about the business. For example, if a major advertising campaign is to take place the forecasting team will consider past campaigns and their effect on sales and profits. It might provide a revelation.
• Special action teams may be required to manage some opportunities and risks. Their membership could be decided in order to undergo training on how to deal with particular scenarios, such as suppliers using underpaid labour or dangerous practices.
• Detailed historical accounts are not required. No decisions will change them. Members of the board may consider historical accounting information necessary in order to spot trends and anticipate problems. However, the past may be no guide to the future. It should be the responsibility of the forecasting team to anticipate the future and justify their conclusions. If the forecasting team are going to find it difficult to produce accurate forecasts, directors are not going to succeed by going through pages of a board pack in a few hours.
• May need to set up other board committees (Audit Committee, Risk Committee, Social Responsibilities Committee) who report exceptions to the board.

7.6 The board pack contents

7.6.1 For each board meeting

• Forecasts of future financial results with the following characteristics
• A forecast for each major scenario which might be faced by the organisation. For example: Brexit; new taxation rules, launch of a new drug.
• Comparison with targets, showing variances
• Action being taken to achieve targets, if appropriate, by whom and timescale
• Preferably in the same format as the management accounts
• The degree of accuracy is no more exact than necessary, or can be achieved given the uncertainty of the future.
• Explanations as to why any previous forecasts were incorrect and how they might be improved
• (Note that the traditional comparison of expected actual for the year against budget is not a forecast but a wish with probably little foundation).
• Approval of major expenditure, presented as a standardised report with benefits, costs, financial modelling results, opportunities, risks and their management.

7.6.2 Exception reporting as necessary

• Reasons for 'nasty surprises', failure to operate within legislation, failure to trade responsibly. Preventing future exceptions. What to tell stakeholders and the public.
• Competitor activity; major changes in the trading environment; new legislation; tax changes and their effects on forecasts.
• Significant new opportunities or risks and how they are being managed.
• Audit reports highlighting serious deficiencies.
• Regular reports from Board Committees highlighting exceptions.
• Supporting functions failing to deliver their responsibilities.

7.6.3 'One off' reports

• Approval of strategy and objectives to be passed to the whole organisation.
• Reports from independent consultants into new opportunities or past disasters.
• How to react to 'PR disasters'

Let’s look at more examples