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 Commission  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.

The focus on the board’s compensation committee has never been sharper. The components of compensation plans and the link between compensation and company performance are under intense scrutiny from shareholders, employees, policymakers, the media, and other stakeholders. The Report of the NACD Blue Ribbon Commission on the Compensation Committee revisits NACD’s 2003 Report of the NACD Blue Ribbon Commission on Executive Compensation to highlight the new environment in which compensation committees—and, more broadly, boards—are now operating. It recommends that the compensation committee and board work together to establish an executive compensation philosophy that supports the company in creating long-term, sustainable value.

The report includes ten specific recommendations for compensation committees to consider when evaluating their compensation philosophies. It also provides practical tools, such as sample compensation committee charters, a compensation committee assessment, and guidance on executive employment contracts.