Can Companies Comply with the Growing Requirements for Internal Benchmarking?
There is a growing undercurrent in investment circles towards holding boards and senior management more accountable for their actions. This is, of course, fallout from the current media clamour surrounding the fallen leaders of Enron all pointing fingers at each other while claiming that they themselves knew nothing. Shareholders (i.e. large portfolio managers) have been pressuring governments to get tough on management and directors that either seek to divert funds, withhold information, rig balance sheets and P&Ls or simply badly manage an organisation. Now these very powerful investors have started a concerted effort to wrest legal protections away from directors and managers in civil actions designed to hold these individuals, their families, friends and insurance companies responsible for the failures of corporations or even just substantial losses arising from mismanagement. Up to now, they have not succeeded in being compensated for actions made on their behalf because they could never prove negligence.
Taking a page from the human resources handbook, shareholders are now demanding and receiving clear indication of negligence by setting benchmarks for their board members to attain. They are managing the performance through creative use of integrated forecasting systems complete with real-time variance analysis and subscription based reporting mechanisms that allow the managers of the organisation to know immediately when they are off track. It is becoming almost impossible for senior board members and executive managers to claim that they were unaware of what was happening because these systems are audit tested and verifiable. You can’t run from an automated email telling you that your sales are trending off benchmark by 30% for the week.
Another downside for senior management is that they are unable to claim they knew nothing of what was happening, especially where the forecasting systems are integrated with both actual operational information and the subsequent accounting results of those entries. In the newer forecast system developments, reporting a significant increase in sales not only automatically sets a cash benchmark for the corresponding receipt of revenue but it also sets an ongoing analysis of the trend required to collect all the money over a time period and posts the change in the forecast. Very few treasury systems currently provide this capability but some are beginning to develop the foundation to deliver the type of high end forecasting functionality and benchmark analysis required by new compliance demands.
Disgruntled shareholders are not the only ones calling for accurate benchmarking and real-time measurement. Boards and executives covering their positions are also demanding instantaneous ability to know exactly what is going on across the entire organisation. Not just because they are being held accountable but because they are also very nervous. They are seeing various line management figures in large corporate collapses point fingers at senior managers in exchange for lesser prison sentences. For honest managers, the best protection against being singled out is to have the information necessary to protect yourself from both zealous prosecutors and lawyers working for disgruntled shareholders. As long as you can prove you were aware and trying to rectify a bad situation through your actions, any charges of negligence will be muted.
The key to effective forecasting is two-fold, getting as complete and as accurate a picture of where you are and where you’re going and setting solid benchmarks to measure against. The first involves ensuring that the level of detail that you are receiving in your forecast is as low as it can go. However, detail requires very good, highly automated, integrated systems with exceptional consolidation capabilities, otherwise the organisation will spend too much time gathering information. The second component of setting valid benchmarks is more difficult and requires a clear understanding of the capabilities of your organisation, the current operating environment, market metrics and one of the most critical components, the ability to use past experience and data as a starting point.
Once you have all that information, you can start building highly effective forecasts and benchmarks to attain in your forecast scenarios. The benchmarks also provide the ability for good systems to identify the quality of the forecast by measuring the variances between actual data, the forecast and the target benchmark. If a forecast calls for a US$ net liquidity position of US$400m on a given date with the target benchmark at 75% within 20 days and the real number is US$200m, the system should easily identify that the likelihood of attaining the forecast is significantly degraded than if the actual position had been US$300m. This is one of the many ways that an effective forecasting system can identify critical trends for senior managers.
There will be a significant change in the variety of, and functionality within, new forecasting systems in the coming years. The following is a list of 10 items to consider when reviewing new forecasting systems:
Any system that provides all of the above with flexible reporting and analysis tools and automatic information updating from functions, such as reconciliation, is likely to be the best bet for the growing requirements of compliance benchmarking and trend spotting. Anything less leaves the organisation potentially open to competence challenges by angry shareholders. The bad news is that you will have a difficult time finding all of the above in any current treasury forecasting system for the foreseeable future.