Boardroom Secrets by Yilmaz Argüden

Author:Yilmaz Argüden
Language: eng
Format: epub
Publisher: Palgrave Macmillan
Published: 2008-12-31T16:00:00+00:00

LEAD INDICATORS

One issue the board should be aware of is that the information presented to them is generally based on past performance. Also, performance indicators that are easier to measure get precedence. However, most of the board decisions are made for the future, so, access to lead indicators is important.

Companies who do not pay sufficient attention to lead indicators generally do not realize serious problems until it is too late. Therefore, the attention that management and board pay to lead indicators should be just as careful as that which they pay to business results. For example, a decline in customer satisfaction today may be an indicator of a decline in profits in the future. A decline in market share in a particular niche may be an indicator of the diminishing innovation capability of the company.

Customer complaints are also an important lead indicator. Failing to learn from them may cause bigger problems in the future. Focusing only on results and not paying sufficient attention to organizational process, and infrastructural developments may result in the repetition of mistakes. Therefore, customer complaints should not only be dealt with swiftly to increase customer satisfaction, but also be used to identify and remedy root causes.

The onset of problems in most corporations is due to not being perceptive of change. Thus, for example, Xerox, who failed to realize the importance of their own innovations, missed a significant opportunity in the personal computer revolution. Therefore, indicators such as the proportion of income coming from products and/or services introduced in the last few years should be watched carefully.

Similarly, performance in new markets should also receive special attention. When a board does not fully understand the competitive dynamics of a new market, errors of judgment, leading to too much or too little investment, are easily made.

Understanding the source of an increase or a decrease in profits, and variance analyses of past performances or budgets, are also key indicators of potential problems. For example, if a significant part of a finan-cial institution’s profit comes from trading activities, the board should make itself comfortable about the trading risks the company assumes. Similarly, if the source of profits is the value increase in inventories, due to events such as commodity price variations, then the company should be prepared financially for the reverse trends. Otherwise, as the market trends turn, the whole institution may be at risk.

Another warning for the board would be a tendency of top management to silence people with opposing views. For example, mega investments should be carefully watched for both schedule slippages and cost overruns. The sooner the board know about any potential problem, the better the solutions will be. Emotional attachment to such projects by the management should be avoided. With a system based upon transparency and objective data, it is possible to overcome such problems before they get out of hand.

Any indication of overconfidence on the part of the management or of underestimating the competition is another sign that needs to be watched by the board. Management

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