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Financial Governance & Financial Literacy at the Board Level

Financial Governance is easily one of the most complex topics found under the umbrella of corporate governance, and every board member at the table has a different level of understanding.

What is Financial Literacy?

Financial literacy is a skill or competency that is defined as:

“The ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are reasonably comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the issuer’s financial statements.”

This definition comes from Canada’s securities commissions, and is considered the standard across Canada, not just for companies that issue securities to the public, but for all corporations including not-for-profits and co-operatives.

It is up to each board of directors to determine what “financial literacy” means for their own organization and needs, and to decide what level(s) of financial literacy are needed or sought around the boardroom table.  A small, straight-forward organization will need quite different levels of financial literacy in board members than a large, complex commercial enterprise.

Instead of thinking of financial literacy as a “yes/no”, “you have it or you don’t” question, it is useful to think of it in terms of degrees or levels:


Five Degrees of Financial Literacy

1 - Knowledge of mathematics

2 - Knowledge of basic statements (Income Statement & Balance Sheet)

3 - Knowledge of the Notes, Cash Flow Statement and MD&A

4 - Knowledge of the assumptions behind the financial statements

5 - Knowledge of GAAP and Auditing


How much financial literacy should we have on our Board?

Board members who serve on the Audit Committee should have a level 3 or higher level of financial literacy. 

Having said that, it is difficult, if not impossible, to function effectively as a board member unless you have some basic understanding of the financial statements, since these play a central role in budgeting, planning, monitoring, evaluation, compensation, accountability, and disclosure.

What if we have board members who are not financial experts?

Only level 5 financial literacy requires a detailed knowledge and understanding of GAAP and Auditing.  As the securities commissions said: 

“In our view, it is not necessary for a member to have a comprehensive knowledge of GAAP and GAAS to be considered financially literate.”

All other levels of financial literacy can be learned, even after an individual has been elected to the board of directors.  There are a host of training programs and courses offered in Canada by accounting and audit firms, educational institutions and colleges, governance, and other professionals.

Each year, your board of directors should approve a board development plan that includes looking at enhancing levels of financial literacy among Audit Committee and non-Audit Committee board members, so that you achieve and sustain the right level for you.


Do you want to level up?

Governance Solutions has developed a pair of programs to ensure every board member, governance professional, director, manager, business owner, and investor can obtain the information that will bring them to the next level of financial knowledge. 

Basics in Financial Literacy Program
Starts on October 6th.

Designed for executives, board members, and organizational leaders navigating the early stages of financial literacy.  
These highly interactive sessions will familiarize you with practical tools, and then engage you in board simulations to gain practical experience in implementing what you’ve learned, giving you the confidence you need to truly understand your organization's income statements and balance sheets!  

This program is aimed at an audience that is early in the Financial Literacy spectrum; people seeking to be confident at level 2.



Financial Governance for Non-Financial Leaders Certificate Program 
Starts on November 2nd

Designed to explain essential financial concepts to leaders and executives, from all organizations and sectors, who don’t have an accounting or finance background (non-accountants!) but already have some financial knowledge. Using current real-world examples and practical case studies, you’ll learn from organizations that have made recent headlines. Where did they go wrong?  Where were their red flags?  What can we learn – and therefore hopefully avoid their pain? 

This program is aimed at an audience that is at level 3 and beyond.

  

 

Not sure about your Financial Literacy level?
Take the Financial Literacy Assessment by Governance Solutions and find out!  

 

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