WRITERS: Alexia Deegan ILLUSTRATOR: Yau Hoong Tang
Navigating the rules and demands of 21st century boardrooms requires skill, knowledge and preparedness to go well beyond the basics. Are you ready to play the game?
From the GFC to the royal commission into banking, our trust in governing boards has been tested time and time again. With the spotlight directly on higher standards, responsible leadership is under the microscope.
Successful boards require a balance of skills, of diversity, culture and gender. Robust governance, vision and culture must be centre stage with values-led leadership driving the direction.
From the corporate excesses of the 1980s, 1990s and the GFC, to shocking public health and safety violations such as the 2008 Chinese baby formula and 2004 James Hardie asbestos scandals, the banking royal commission findings, the impetus behind the #MeToo campaign and the recent Boeing 737 Max tragedies … our trust in governing boards has been tested again and again.
We rightly feel let down and there’s a growing mood to change the game.
The push is on for future board directors to widen their outlook and quicken their step – to do more to watch over us and our planet.
Leading South Australian executive and experienced company and board director, Jane Jeffreys, who works with senior executives to build strategic relevance and position their organisations for success, believes diversity of skill, culture and gender are essential in igniting the right boardroom culture – where trust is earned, and directors step out of the shadows.
DIVESITY IS KEY TO SUCCESSFUL BOARDS
“Board diversity stands out as critical,” Jeffreys says.
“Boards need to have diverse skills and to get that we need to have culture on the agenda. We need to talk about what diversity and what culture looks like now and where it needs to be. This is a priority and the discussions need to be inclusive, open, transparent and dynamic.
“Doing this helps set the tone from the top, aligns corporate values and objectives, and models the behaviour expected within the organisation itself. A diverse corporate culture should feature different views and expertise and foster a willingness to engage in robust discussion that explores alternatives, builds trust and respect – all ingredients for delivering on corporate objectives and making a high functioning board, great.”
AXA IM, a global asset management company, reviewed the board composition of the largest 1000 US companies and found there are also good economic reasons to embrace diversity. The more diverse the board, the higher an organisation’s profitability – with a 3.5 per cent economic advantage.
Companies with diverse boards also experience less profit variability. And, AXA IM identified diverse boards create a profitability ‘moat’ around their future profits, leaving the competition at a distinct disadvantage.
While our moral compass says boards need to change – this research shows that there is a very good economic reason for getting on and doing it.
Diversity helps to future-proof a company.
While traditional boardrooms have been the realm of well-connected businessmen – often CEOs and MPs meeting out of the public eye – there’s a shift to bring in new blood, to be quicker in responding, to jump into public discussions, and to be seen doing more than scrutinising books and reporting to shareholders. Jeffreys says meeting staff, being visible in the community, being seen to invest locally, regionally and globally, all exemplify that boards are changing - embracing a shift to openness, transparency and diversity.
ROBUST, ACCOUNTABLE GOVERNANCE
Experienced chair, board director and UniSA Chancellor Pauline Carr deeply understands the high standards for contemporary boards. She’s held leadership and governance advisory roles for more than 20 years and says there’s more regulatory requirements and greater governance expectations than ever – with more to come, as we continue to learn from experience, good and bad.
In an environment with higher standards, heightened community and stakeholder scrutiny (thanks in part to social media) and greater risks, Carr says robust governance needs to be part of every board’s operating DNA and this is cascading down to the performance expectations of individual directors.
Gone are the days when directors believe they're beyond review or that performance assessment is reserved for management.
“While there have been collective whole-of-board reviews for some time, it is getting very common for the performance of individual directors to be reviewed,” Carr says. “Director appointment letters are now clearly articulating performance expectations and director agreement to participate in reviews and assessments is frequently an appointment condition.
“Such reviews not only make sure that every board director is absolutely pulling their weight, but they go a long way to addressing any interpersonal or behavioural issues which can impact on board dynamics and effectiveness if not nipped in the bud early.”
CULTURAL CHANGE IS ON THE HORIZON
An interesting trend in the past 18 months is the intense focus on culture and the role that boards are now expected to play in this space. This has clearly emanated from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. And, as Carr notes, it’s also reflected in the ASX governance guidelines.
“While it has always been a board’s responsibility to set the tone, today this is more specific, including a board’s role in leading the values and instilling a culture of acting lawfully, ethically and responsibly,” Carr says.
“The reality is that there’s no single measure of culture but a culmination of measures. Large organisations face additional complexity with potentially different cultures across different departments, regions, countries. It’s a big challenge for a board to get its head around that and how to track and align culture and ethics.”
Getting the culture right means identifying standards and values and looking at where problems could potentially arise. While this sounds sensible enough, there are organisations that still avoid the analysis for fear of what they might find.
It took 80 courageous people filing sexual abuse and misconduct complaints going back decades to highlight a rotten corporate culture at Miramax and bring one-time movie kingpin, board director and blockbuster-maker Harvey Weinstein, to account.
Board director and chair, publisher, adviser and UniSA Arts and Culture Professor Ruth Rentschler OAM says boards in the arts, entertainment and sports have been club-like in the past, but they are changing.
“Arts boards have definitely professionalised over the last 15 to 20 years, moving from insular, social sets to broadly-based and well-chosen individuals appointed to boards to put the organisation mission first. But it hasn’t always been smooth sailing,” Prof Rentschler says.
“Cases like Weinstein show us there’s been bad behaviour in these sectors for a long time, so to change we need to also call out individuals who behave badly.
“By extending the debate beyond the boardroom and into the public sphere, we start to identify and question the wider societal tolerance of bad behaviour. That’s where the #MeToo campaign made such an important mark, by showing there is a big problem in our community where we have allowed sexual misconduct and inappropriate treatment of women to prevail and it’s time to stop.
“We need to ask: are board directors acting inappropriately inside the boardroom and how about outside? What are the relationship dynamics inside the boardroom? What do we know about gender and race composition on boards?
“These are questions that every board director should consider, whether full profit or not-for-profit.”
CUSTODIANS OF VISION & CULTURE
Australia’s Chief Scientist Dr Alan Finkel shared his views about future-proofing directors in an address to the Australian Institute of Company Directors governance summit in March this year.
He believes directors must be ablaze with a sense of a company’s mission and trajectory, backed by relevant and abundant experience, and make it their mission to go beyond what they are told.
But above all, Finkel says, they must be custodians of that vision and culture.
“After seeking advice, I learned that a powerful way to maximise trust and transparency is to capture the expectations for confidentiality, courtesy and other board behaviour in a written ‘charter’, adopted and owned by the board,” he says.
“The charter captures the key board practices and expected behaviours without having to go back to layers and layers of company constitutions, corporate law, ASIC regulations and ASX requirements. It’s owned by the people who pledge to adhere to it.”
People are a significant theme in this debate. Finkel calls this the ‘bandwidth of humans’. Carr agrees and sees the weight of responsibility on boards and directors growing ever heavier.
“We are all having to do more evidence-based decision making. Boards generally need to do more on the risk side too,” Carr says.
“Most companies have come quite a long way but if you look at all the companies that have set a risk appetite, I still don’t think we have enough who have formally sat down and thought about what their appetite and tolerance is for various risks, and then cascading that down to the management team to follow through with the workforce.”
CHANGING OF THE GUARD
The tougher governance standards being pursued by full profit boards today has raised the bar more widely, with governments and the not-for-profit sector following suit in a positive step. The next challenges, according to Carr, relate to the very changing of the guard itself.
“I would like to see in the next 10 years that board directors are properly trained, qualified and have high-level relevant experience,” Carr says. “There should be thought given to developing a pipeline for potential directors, so we can create the next generation of culturally diverse and ready board directors.
“Over the next decade, my fear is we are also going to see a number of very experienced board directors drop out of the sector because of the increased personal liability the office holds and that will be a shame.”
UniSA high-performance governance specialist, Dr David White, says capability planning should also extend beyond traditional board boundaries.
“Associations and other membership-based bodies are developing much needed management and directorship into a profession and that’s a step in the right direction,” Dr White says. “But we also need to strengthen others in the mix, such as specialist governance advisers on culture, performance, and risk and compliance to ensure we continue to raise the bar and don’t repeat the mistakes of the past.”
In some of the worst cases of misconduct in our time, occurring at some of our biggest companies, it is the humans at the top being called to account.
It’s a sorry fact that we have had to suffer misconduct and poor performance to work out what to do next. As late as the end of April this year and in the face of a reported 13 per cent drop in first-quarter profits, those in charge at Boeing were still saying publicly that nothing went wrong with their 737 Max flight controls, despite two air disasters, 346 lives lost and a rolling storm of global discontent.
According to a report in the Washington Post, by early May it had come to light that Boeing’s board of directors discussed how efficiently the new 737 Max aircraft could get to market but they didn’t delve into any detail about safety issues. The reason, the story says, was that safety was considered to be “a given”.
Within weeks, Forbes was pointing to a crisis in leadership at the company, suggesting the rush to market by boardrooms in the for-profit space was the strongest signal yet that something was very wrong with the values and culture we have at the top.
Whether discussing safety or even having safety as a standing item on Boeing’s board agenda could have saved 346 people, we will never know.
Dr White says, despite structure and process reviews, no amount of planning can completely overcome the problem of faulty judgements made by boards, executives and others.
“Of course, Australia needs to have the highest standards of professional practices, competencies and judgements for directors and management, but having more prescriptive structures and process-type governance through a ‘bigger-hammer’ approach isn’t ever going to overcome faulty decision-making,” White says.
“What we need to do is deliberately build the capability of professionals, not just in the boardrooms of corporate Australia, but across our public sector too. “We must do this to demonstrate Australia’s seriousness about governing a high-performing country. This is the way of the future.”
WRITER: Alexandrea Cannon
Alexandrea Cannon is Chair, Leaders Institute SA, SATAC; Director SA Heart, Credit Union SA, Winston Churchill Memorial Trust, Bizbuild, Hood Sweeney. She is also a graduate of UniSA's MBA.
Good governance has the capacity to verify truth and build trust. Governance expert Alexandrea Cannon explains why directors must consider governance practices, business strategies and board composition as a key part of the job.
Directors must be capable of vigilant oversight of a business. A key part of this is understanding the organisation, why it exists, its strengths and challenges, the constitution and underlying legislation, as well as the state of its resources and performance – human, financial and other. They need a deep understanding of what's happening in the environment – with customers, suppliers, competitors, the public, government, and so on. And, they must understand the role of the board – what it's there to do or not do. Often this is assumed, but it's essential to discuss, clarify and document the conclusions, clearly delegating responsibilities for the CEO, various committees, and the board itself.
Asking questions and making decisions is essential for good governance. And boards need to consider not just “can we” but, as Commissioner Hayne so eloquently put it, “should we”?
Directors need to be supported by systematic and rigourous governance procedures, such as board agendas, papers, budgets and risk assessments, as well as accurate minutes with sufficient detail so matters are documented, but not so voluminous that nobody reads them.
Board composition is more important than ever, with diversity of thought essential in today's complex, dynamic and ambiguous world. Diversity is driven from diverse backgrounds, which means rigourous recruitment policies, board tenure, and succession planning are essential.
Of course, history shows us that good people can do bad things. Sometimes these actions are inadvertent, a result of ineffective systems or processes. Other times, company policy incentivises people to do the wrong thing. Now, more than ever, boards must play a role in setting the tone from the top, not just through their own behaviours, but through the policies that are approved and actioned.
Finally, the board needs to be cognisant when selecting a CEO, as this person will have enormous impact on the performance and the culture of the organisation. The type of person who's selected sends a strong message about what's important to the organisation – about culture, ethics and behaviours – the decision is vital, so it's important to consider all the factors.