Each month, Jan Bladen takes us through one of the top 10 reasons good boards fail and how to improve your chances of survival
Why good boards fail: part 7
PRINCIPLE 7: FINANCIAL FAILURE
Accidental or deliberate financial misreporting is one of the most common components in numerous recent corporate scandals.
While many cases of financial failure have involved either deliberate fraud or conflicts of interest, numerous other cases demonstrate a board that merely failed to act on its oversight responsibilities. This financial negligence in the boardroom has often resulted in substantial shareholder losses.
An accounting scandal in 2014 at one of Saudi Arabia’s largest telecommunications companies wiped out approximately $380m in previous profits. The company revealed that it had miss-accounted revenues and the corporation’s share price slumped around 35 per cent in one month.
More recently, the troubled Saudi contractor Mohammed Al Mojil Group announced the resignation of its entire board with immediate effect, days after the firm’s chairman Mohammad Al Mojil and his son were sentenced to five years in prison for misrepresenting the company’s value. Saudi Arabia’s Capital Market Authority further banned a ‘ big four’ accountancy firm from providing accounting services in Saudi Arabia for two years, following its involvement with the company, according to reports.
Boards must ensure that they have the financial skills and expertise to understand all financial aspects of a corporation so that they may effectively discharge their responsibilities vis-à-vis the organisation’s financial stewardship and accountability. A board’s financial oversight duties include:
• Establishing financial controls • Ensuring compliance with financial policies and procedures
• Approving an annual budget
• Performance tracking (actual cash flow, expenses and income vs. budgeted) • Ensuring the long-term financial sustainability
• Defining executive compensation Typically, a board also delegates their responsibilities to the audit committee for:
• Overseeing the financial reporting and disclosure process
• Electing accounting policies and principles
• Overseeing the retention, performance and independence of external auditors
• Overseeing regulatory compliance, ethics, and whistle-blower requirements
• Overseeing the internal control process and reviewing the performance of the internal audit function
Jan B laden is managing partner of Governance Creed, and qualified as the first accredited board director of the Mud ar a Institute of Directors( I oD) in Dubai. An independent board member on several boards, B laden was formerly the lead and senior executive advisor to the board at A bu D ha bi Global Market( AD GM ), and the founding chief operating officer of the Dubai Financial Services Au th or ity(DF SA ). Governance Creed is a niche advisory firm special sing in governance framework design, board performance, strategy development processes and corporate risk op timi sat ion.
Boards must ensure that they have the financial s k i l l s and expertise to understand all financial aspects of a corporation