What makes for a good finance committee member?

• Position: BOARD COMMITTEES - Dialogue with Bill Boothby - Appointment of James C. Smith - Appointment of Harish Manwani - Interview

Ed. Note: One board committee you don't hear much about is the finance committee. But recent research done by EY's Center for Board Matters shows that 38% of S&P 500 companies have a finance committee (see table). It has been 30 years since DIRECTORS & BOARDS published a major report on the workings of the finance committee ["The High Art of Strategic Investment," Summer 19841. At that time we wrote: "Of all the major standing committees of the board, perhaps the one that has the lowest profile and is the least documented in the management literature is the finance committee." Contributing to that report was Willard S. Boothby Jr., a former chairman and CEO of investment firm Blyth Eastman Dillon & Co. and a major corporate director in the 1980s, serving on several Fortune 500 boards, often as chair or member of their finance committee. Bill Boothby died in March 2014 at the age of 92. His death spurred a review of his primer on the role of the finance committee. (He was chair of the finance committee of computer manufacturer Sperry Corp. when this interview took place.) Following is an excerpt.

What have been the primary duties of the finance committees you have served on?

The finance committee's basic objective is to watch over the financial health of the corporation. First of all, a full review of the corporation's financials is undertaken. This involves capitalization structure, balance sheet, funds flow, earnings statements, inventory positions, and other areas of importance. The source and use of funds is critically important to review. Also, certainly over the last four or five years, when many corporations had a very high proportion of their capital structure in short-term variable-rate debt, it has been critical to monitor the overall debt position, short-term and long-term, fixed and nonfixed, and evaluate what further impact changes in rates would have. We look at the stockholders' equity position and how it relates to the overall balance sheet.

We take a very close look each quarter at pretax interest coverage in relation to earnings and cash flow. A very thorough review and discussion of the capital budgets should be made before they are presented to the full board. Bank lines should be reviewed, discussing the various sources that the corporation would use for backup lines of credit, including the number, size, geographical disposition, and the quality of the institutions themselves.

Commercial paper is another important area--reviewing how much paper is authorized in relation to the overall capital structure of the corporation. It's important to get a report on treasury activities and how those funds are being managed to make sure that the corporation always has a strong current liquid position. Also, short-term investment policy should be reviewed, i.e. how are these assets being invested. It's important to know that they are secure and can be drawn down on short notice to meet the corporation's needs. Additionally, monitoring the investment performance of all the savings and investment assets is important.

With the very wide swings that we have had in the value of the dollar in relation to foreign currencies, we review total exposures in the foreign...