Yesterday we examined the reasons board members should not rely purely on reports to the board regarding the organisations adherence to board policies.  Today we will look at how to confirm that the report is correct.

One way to do this is to use key performance indicators (KPIs) with the board policies.

Any report you receive in relation to the policy will then be based not only on the content of the policy but linked directly to the KPIs.  The KPIs give you a numerical measure and body of proof to support the claims made within the report to the board.

So how would this work?

Here is an example. You may have a Finance Policy which states that there must be enough funds left to be able to maintain the liquidity of the organisation.  One way to monitor that this is actually occurring is to have a KPI in the policy that states that the working capital ratio must be greater than 1 or 100%.  Note:  that the working capital ratio compares short term assets such as cash with short term liabilities such as creditors.  If it is less than 1 or 100% then this can indicate you don’t have enough cash to pay your bills.  Depending on other circumstances you may in fact be trading while insolvent which can lead to significant penalties.

Here is another example.  Robin Hood has a policy of taking from the rich and giving to the poor.  To measure his success against the policy he could introduce KPIs regarding the number of people taken from, the number of people distributed to, the number of carriages held up and the number of nobles sent home on their horse facing backwards in humiliating style.  Little John would then report using figures that show how well the Merry Men were succeeding under the policy, instead of simply reporting that they were still doing the right thing.

Therefore, when you get a report from the Chief Executive Officer (CEO) in relation to the board policies you are not just getting a general statement based on what the CEO wants to tell you. You are getting the facts.

The report addresses the organisations compliance with the KPI’s.  In addition, as part of the report you may also require that a reconciliation is prepared and bank statements are supplied as part of the report.  As member of the board it is your right to ask for any information which will help you determine whether or not you are meeting your obligations.

The important issue with the use of KPIs with policies is that they must be linked to the objectives of the policy.  If the policy is well written, easy to understand and is clear and concise, it should not be difficult to identify KPIs to measure performance against objectives.

Remember, if you as a member of a board or committee of management cannot prove that you are compliant with your policies then you are potentially exposing yourself to significant ramifications.