Getting Behind the Numbers

Among the many responsibilities shouldered by corporate directors, one of the most important is active oversight of the company’s financial performance. For this reason, all directors should be financially literate.

This was a key recommendation of NACD in its pioneering Report of the NACD Blue Ribbon Commission on Director Professionalism more than two decades ago. The defined such literacy as the ability to “read a balance sheet, an income statement, and a cash flow statement, and … understand the use of financial ratios and other indices for evaluating company performance.” The Commission recommended financial literacy as a goal for all corporate directors—not only those in public companies but also those in private companies and nonprofits.

Today, financial literacy is required for all directors serving on audit committees of companies listed on major stock exchanges. In addition, financial literacy can also include an understanding of the following elements:

• Financial governance—the respective roles of key players in the finance and audit functions
• Basic accounting concepts behind financial statements
• Key questions answered by each of the three financial statements

The chapter on “The Basics” will delve into these topics from the perspective of the corporate director. The remainder of this handbook will go into greater depth on each of the three major financial statements.