The directors of a company are people hired (and at times fi red) by the shareholders to be stewards of their investment. However, they need to balance this with their primary fiduciary duty as a director which is to act in the best interests of the company. Collectively, a board of directors has overall responsibility for running a company and setting and implementing its strategy.
In fulfilling the strategic aims of the company, the board will be
responsible for making sure not only that the company has the necessary
resources in terms of investment, assets and people, but also that there
are appropriate operating controls and procedures for managing business
risk and making sure that all monies that flow through the business are
properly accounted for.
What is a successful business?
The media love to report on successful entrepreneurs and tell of how they
beat the odds as they built their business and became household names.
The media also enjoy revelling in the collapse of mighty organisations
and unpicking the journey to their downfall. So what is it that defi nes
business success or failure?
Many descriptions are used to describe success, including "the business
is profi table", "revenue is growing" and "share price is rising". All these
attributes are elements of success though individually they do not embrace
the totality. To be successful in business is to "create a sustainable superior
return on investment".
The core element of this defi nition is "return on investment" (roi).
The business, having been built from money provided by investors, has
a responsibility to reward those investors for risking their money in the
venture. The roi is a measure of the reward being generated. The concept
is similar to a savings account where an amount of money is placed on
deposit with a bank and the investor earns interest on it. The investment
in a savings account is seen as low risk and consequently the return that
the investor will make is similarly low.
Therefore, if a deposit of $1,000 is placed in a bank and the gross
interest earned over a year is $50, the roi can be expressed as being 5%.
For a business to be successful it needs to reward investors by making
them wealthier than they would be by putting their money in a savings
account. Why should they accept the greater risk of investing in a business,
with all the uncertainty it faces, if they are not going to be any better off?
The return that investors would require might be double or more than a
savings account depending on the perceived risk, which will be related to
factors such as the nature and maturity of the business.
The return in a business is derived from the profi t it generates compared
with the money invested to achieve that profit.
