Organizations that are financially troubled fail to prosper because one or more of three basic "financial pathologies" are present in their boardrooms:
1. All forest—no trees
2. All trees—no forest
3. Management of incremental financial events
In the all forest-no trees pathology, the board wants the big picture but doesn't want to be bothered with the day-to-day details of financial management. "Details are what management does," says the all forest-no trees board. A global understanding of what the organization is trying to accomplish is not accompanied by respect for the planning and implementation of actions that will make the goals happen. Also lacking is an assurance that the critical financial responsibilities of the organization are being handled properly on a daily basis.
For example, the board understands the big-picture results of declining investment earnings because of stock market losses. However, having not come to grips with its full responsibility in the trees arena, it doesn't consider whether the organization's financial managers have taken steps to ensure that the pension fund is properly capitalized. In fact, this issue is never discussed. The frame of the puzzle is assembled, but the pieces cannot possibly fit into a whole.
In the all trees-no forest pathology, which is perhaps the most prevalent of the three pathologies, the board lacks a clear understanding of the organization's overall strategic financial goals and objectives and concentrates only on the details of day-to-day management. During board meetings, simple agenda items degenerate into 45-minute conversations on such subjects as "how to reduce receivables." Board members appear to be itching to come to work and actually run the organization. Without an aerial strategic financial vision, the puzzle pieces have no frame. Board members and management cannot possibly interact in an intelligent and systematic way to establish and meet financial objectives.
Some portion of U.S. organizations exhibit the third pathology—management of incremental financial events. Like the second pathology, it is characterized by the absence of a comprehensive strategic financial road map that describes what the organization is trying to accomplish and how it will get there. Opportunities and problems are isolated from one another and considered to be truly separate, unrelated issues. Every financial event is handled in an incremental way.
For example, perhaps an organization needs to achieve ten major goals in the course of a fiscal year to meet its overall financial target. Aboard that addresses financial events in an incremental fashion cannot articulate the overall objective. As progress or lack of progress toward reaching each of the ten goals occurs, the board judges the events separately. Project A should have generated $2 million of cash flow but comes in at just over $1 million. "Not bad," says this board, "It's pretty close to the target." Next, project B brings in $3 million instead of $5 million. "Still not too bad," says this board. The problem is this: If each program sequentially underperforms, and no actions are taken to balance the equation, there is simply no way to achieve the overall financial target.