healthy
corporate growth and the role of the
board
Hugh Latif
Corporate Director
Former Managing
Director AC Nielsen Canada, Toronto, Canada
Growth of corporate profits is
the real dynamo of the economy. Increased profits are the primary influence for stock
market direction. They also affect almost every area of the economy - capital investments,
employment level, monetary policy, and so forth. All are energized or depressed depending
on corporate profit performance.
Profits can, however, be either
healthy or unhealthy. Healthy profits are generated through favorable top line growth.
They must also be reasonably sustainable through the medium-to-future term. Finally, they
must be of good financial quality.
Unhealthy profits are just the
opposite. They are the result of financial engineering, not sustainable growth. Their poor
quality is evidenced by the frequent need to implement various forms of accounting
charges.
Financial engineering that
involves genuine financial strategies such as consolidation, restructuring, and improved
use of capital is fine. Financial engineering aimed at hiding strategic deficiencies,
though, is unhealthy.
In today's fast-paced business
climate with increased global competition, demanding customers, and rocket-speed
technological advance, boards must evaluate the quality of a company's profitability.
three
measures:
Here are three basic measures
that could be used by boards to monitor corporate growth, simple in concept but most
effective when applied in a timely manner:
Source of increased earnings.
What was the source of the increased profitability? Was it based on sales growth? And if
so, was it achieved through additional volumes or as a result of price increase? How are
historical margins affected and why?
What is happening with
customers and prospects? How is customer loyalty and repeat business? Where is the extra
business coming form and why?
How much of profit comes from
new business? What is the contribution of new products and services.
These and other questions on
the top line will give a good indication of the source of growth, its quality, and an
indication whether it is sustainable.
Strategic dimension: What type
of investments are being made to build revenue growth in the future? I am not talking
about traditional research and development and standard capital investments. Rather, the
proper focus here is on the commercial aspect, for example, clientele, customer segments,
sales channels, new marketing efforts, new market and customer research.
All too often these issues are
not discussed at the board level until there is a problem. Earlier review of these areas
is beneficial.
I would also include
acquisitions, joint ventures, and corporate partnerships under this category. These are
valid tools to achieve growth. A lack of acquisitions and joint ventures may indicate a
management strategy that lacks aggressiveness and innovation
Organization and structure: The
way a company is organized indicates where its priorities lie. Is the company organized
for attack or defense? Is the emphasis on growth or on satisfactory under-performance? Is
the company's climate one that fosters a winning attitude or just comfortable survival?
What is the rate and cause of employee turnover?
Open discussion with management
on these questions will help ensure that business is well organized for healthy growth.
Board members should not only
be advisors and question askers, but good business counselors as well, taking the success
of the corporation to heart. Healthy profit growth is at the heart of success."
