A Format for Directors' Information Systems

For a comprehensive analysis of the role of directors see Louden J. , The Effective Director in Action, AMACOM (New York: The American Management Association, 1975).

See, for example. Berger R. O. Jr. Donnelson J.G. , “What Directors Need to Know … and How to Get it to Them,” Financial Executive (September 1974).

This is consistent with the approach of Berger and Donelson, ibid., who state that “in order to do their jobs effectively and to be protected from unacceptable legal involvement, directors should be given financial information which is germane to their real world responsibilites. Considering the restraints on the available time, directors should be given information which is reasonably complete yet free of cumbersome detail.”

We intentionally emphasize the role of the environment in the management process, since management performance is affected by environmental-uncontrolled factors (competition, government actions and regulation, macro and industry variables).

Mace M.L. (ed.), “From the Boardroom,” Harvard Business Review (November/December, 1975).

Elements of the system appear in Barnea A. Sadan S. Schiff M. , Conditional Earnings Forecasts: Objectives and Means (Vincent C. Ross Institute, 1979); and in Barnea A. Sadan S. Schiff M. , “Conditional Performance Review,” Management Accounting, (November 1975).

For an illustration and an explanation of such a method, the reader is referred to an article by Parket George G. C. Segura Edilberto L. , “How to Get a Better Forecast,” Harvard Business Review (March/April 1971). Further information is furnished by Barnea Sadan Schiff , “Conditional Performance Review.”

A correlation coefficient is a measure of association which is defined over the range − 1 to + 1. The closer the value is to + 1, the higher the direct association between the variables, and the closer the value of the correlation coefficient to zero, the lower the association between the variables considered.

Such forecasted values can, in general, be obtained from sources outside the firm. It can be expected that such variables will be of aggregated nature (such as macro-economic or regional variables) which usually attract the attention of individuals and institutions for purposes of national or industrial policy formulation. Thus, forecasted values of such variables will, in general, be available from such sources. For example, if GNP is a macro variable pertaining to the description of the economic environment of the firm, then the forecasted GNP for the next period as published by a number of government and private sources, can be used to form a range of possible values of the variable.

In Figure 1 we consider a single external variable. This may be appropriate for large diversified corporations. There is no difficulty, however, in considering several external variables. If the relationship between outcomes and external variables can be described by a stable functional form, then Figure 1 could be replaced by an algebraic equation. See Barnea Sadan Schiff , “Conditional Performance Review.”

Barnea Sadan Schiff , Conditional Earnings Forecast.

The numbers in the cells are averages representing management expectations regarding micro effects. Note that switching costs are incorporated by evaluating best policies for every sequence of external events.

Drucker Peter F. , Management: Tasks, Responsibility Practices (New York: Harper and Co., 1974) p. 630.

Brown Courtney C. , “The Impact of Change on Directors,” The Corporate Director, New Roles, New Responsibilities (New York: A.D. Little, Inc., 1975), p. 13.