Financial Oversight Under Varying Economic Conditions

As fiduciaries, directors are expected to provide oversight of the company’s financial performance. The US stock market authorities require board members to possess “financial literacy,” with Nasdaq defining it as the “ability to read and understand financial statements” and the New York Stock Exchange leaving the definition to boards.

Under any and all economic conditions, directors must pay close attention to the financial performance of the companies they serve. This means maintaining awareness of what the company currently owns and owes (the balance sheet); what income or loss the company has most recently sustained (the income statement); and the state of its cash inflow and outflow (cash flow statements). It also means assessing the realism of any financial projection that management proposes.

Oversight of financial performance requires keen attention to trends and caution signs in financial statements. Ideally, this study will take into account external economic trends. While companies can do poorly during economic booms, and well during economic busts, few businesses are permanently immune to economic trends. High interest rates and inflation can put unique strains on company finances, as can broad trends such as slow economic growth.

This report provides an overview of the basic elements of financial oversight as well as digging deeper into key areas of financial performance that directors should assess, a series of questions to ask management about the company’s financial performance and a glossy of key financial terms.