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Ten Questions Every Board Member Should Ask
By Ram Charan and Julie Schlosser |
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The best questions are often disarmingly simple. So simple, in fact, that we often forget to—or are embarrassed to—ask them. But when it comes to fulfilling your role as a company director, asking the right questions is the most essential part of the job. It is at the very heart of corporate governance. Indeed, it is an equally critical task for managers and shareholders of all stripes. (Directors, though, have a better shot of getting the answers!) The goal is not to demonstrate what you know; it's to learn what you don't. You are not querying a company's CEO and CFO merely to fulfill a fiduciary requirement (or the new rigors of Sarbanes-Oxley)—though, these days, it may feel that way. So once you've posed a question, make sure to get out of the way and listen. That means paying attention to how someone says something as well as to what they're saying. The process need not—and should not—feel like an interrogation; the "gotcha" question is as unproductive as the softball. What you want is a conversation—an unscripted exchange conducted in plain English. So set your jargon filter to "on." Here are ten simple questions that are always worth posing—even if you feel a bit foolish asking them: 1. How does the company make money? There is no more central question in business; it applies equally to the corner grocer and to the FORTUNE 500 company. But many of us confuse the issue of "making money" with "posting earnings." Net income is an accounting figment of sorts—an estimate at best—and one that often sheds little light on where the money is actually being made. Cash, on the other hand, is real. (Just ask any grocer what he'd rather fill his register with.) Cash is the blood flowing through the company, and tracking it shows the anatomy of the business and how the various parts work together. So don't be shy about asking management where the cash is coming from and how it's disseminated through the company. (This is particularly important if cash flow and earnings are heading in different directions or if profits are rising even as sales are in serious decline.) If the company's managers don't answer in terms that you truly understand, something could be wrong. When a FORTUNE reporter posed such elemental questions to Enron executives back in February 2001, they took umbrage. "People who raise questions are people who have not gone through [our business] in detail and who want to throw rocks at us," CEO Jeff Skilling said at the time. It was not a good sign. While few managers are hiding an Enron-scale deception, the point holds: If management can't provide a clear answer to the most basic business questions, don't nod politely and move on. Call in the auditors.
2. Are our customers paying up? Cash comes from sales. But a sale isn't cash—not until the customer actually forks it over. Until then, all you've got is a fancified IOU known as a receivable. So ask management to talk candidly about the pace of sales growth in the context of receivables. If the pile of IOUs is growing faster than sales, it means that customers aren't paying up as quickly as they used to—or, perhaps, they aren't paying at all. If so, why aren't they? Maybe the company's customers are struggling or going bankrupt. If the board members of telecom-equipment makers, circa 2000, had asked company executives whether or not dot-com customers were paying their balances due, maybe the telcos wouldn't have crashed so hard. Or perhaps management has been extending overly generous payment terms in a desperate attempt to pump up sales (0% financing, anyone?). Whatever the story, if the cash drawer is filling up more slowly than usual, you'd better know sooner rather than later. |
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Source: Fortune Magazine |
