Boards of Directors
The era of SOX compliance ensured that companies accurately report aggregated past results, with BODs having a fiduciary duty to ensure this compliance. But that duty certainly does not end with compliance, and this isn’t really what BODs signed up to do. The job of a Director on a Board is to design strategy and evaluate results to adjust strategy. Strategy is fundamentally about creating value and then sharing value with stakeholders (suppliers, customers, etc.).
Robust managerial costing systems are crucial in the process of designing and evaluating strategy. BODs need assurance that their view of costs in the organization represents economic reality, leading to a strategic view of key aspects of the business that accurately reports the value being created and more importantly the potential value that can be created.
Understanding and making decisions based on economic realities requires a robust view of cost that can be used to accurately describe past strategic performance and accurately predict the future effect of strategic decisions. When BODs are not confident in in the descriptive and predictive accuracy of strategic cost model being used, strategic design and decision making is muted. Like faulty brakes on a car that demand the driver slow down, avoid quick shifts, and miss important exits, cost information that is inaccurate and aggregated handicaps a BOD that needs to be aggressive and fast with strategy design and adjustment.
For this reason, BODs should be deeply vested in how the organization describes and models costs of past strategic performance and future strategic initiatives.
C-Suite Executives (CSEs), in contrast to the BODs, are tasked with the implementation of strategy design and informing the BODs on strategy performance. Further, these executives individually have stewardship for key functions within the organization (marketing, HR, operations, etc.), and need cost systems that provide a clear cause and effect view of decisions and actions that connect their work back to the organization’s strategy.
That said, as is the case with BODs, CSEs are hampered in their strategy implementation work by accounting systems that assure reports on past performance comply with external regulatory requirements. These reporting requirements focus on organization-wide operating performance rather than on specific effects of strategy in key segments of the business.
Without cost models that represent the fundamental economics of strategically-focused decision making, CSEs are unable to effectively connect and report their work back to BODs. Clearly, then, CSE are as invested as the BODs in the quality and robustness of the organization’s cost system. However, CSEs are in a stronger position than BODs to work with the CEO and CFO to design cost models that capture the economic reality of the work they do. In short, to demand better braking systems in the “vehicle” they manage for the organization.
Hence, all CSEs, regardless of their function, should understand the importance of robust managerial costing, and recognize when it doesn’t exist. Ultimately, it is about direction, traction, and speed.