Global Shift

Recent Australian and overseas political events should compel boards to reassess their governance capacities in an increasingly regulated, volatile and uncertain market.

A possible hung parliament in Australia, Britain’s decision to leave the European Union (Brexit) and Donald Trump’s success so far in the US presidential campaign, reinforce the danger. Boards that lack understanding of public policy formation and government have a problem.

Taken together, these events suggest a global shift towards populist politics and a gradual move by electorates to the Left. Support for economic rationalist policies is weakening as voters seek greater government intervention and push back against decades of deregulation and globalisation.

If this trend continues, the inevitable conclusion is higher industry regulation and compliance, public-policy indecision and economic stagnation. The trend adds to expectations of constrained investment returns continuing this decade.

Sovereign risk in developed nations, not only emerging ones, will become a bigger board consideration. The Brexit vote initially crunched the share prices of Australian companies with significant UK operations. A Trump presidency would have significant implications for the US economy, global trade and emerging markets.

In Australia, a Coalition government with minority party support, and a volatile Senate, could spark another round of leadership changes, an early election and a possible change of government. It is too soon to know how events will play out (as this column was being written) but Australia’s sovereign risk is rising.

AMP chief economist, Dr Shane Oliver, said: “In Australia, it is arguable that we are seeing the greatest Left/Right divide in any election since the 1970s, with the ALP being a long way from the economic rationalist policies of Hawke and Keating.”

The threat of growing global regulation and a possible push by governments could force boards into a quasi-regulatory role.

Earlier this year, I interviewed several of the world’s leading governance thinkers about the evolution of governance over 10 years. The report appeared in the February issue of AICD Company Director Journal and is available on the AICD website for members.

Philip Armstrong, director of governance at Gavi in Switzerland, said: “Governance will move towards a much more regulated environment over the next decade. Financial crises will continue to be seen as much of a political as an economic issue, and governments will need to be seen to respond with tougher laws. The big challenge for boards over 10 to 15 years is that governance will be seen as a parallel form of regulation.”

Dr Roger Barker, director of corporate governance at the Institute of Directors (UK), said: “There is a real danger that governments push boards towards much more of a mandated, supervisory role for corporations … the trend is heading towards boards becoming quasi corporate policeman.”

The AICD Director Sentiment index has regularly identified director concerns about excessive regulation. In the latest survey, more than 60 per cent of directors perceived governance regulations as onerous. Three-quarters said regulation and the risk of personal liability had led to a risk-averse decision-making culture on Australian boards.

Business concerns about excessive regulation and public policy uncertainty will surely intensify in the next few years, given unfolding political trends.

Electorates in developed countries are reacting to growing inequality, stagnant wages growth and higher unemployment – conditions that have characterised the global economy since the 2008/09 GFC. A potential move towards more isolationist economic policies and greater government intervention in the global economy cannot be ruled out – particularly if societal, technology and demographic trends add to rising inequality.

Greater need for government skills on boards

Boards must be prepared for this climate of greater political uncertainty and electorate unrest. The starting point is ensuring the board has at least some directors with deep understanding of public policy formation, regulatory settings and government, and relationships in federal and state politics.

This is, arguably, a skill in short supply on many listed-company boards. Unlike the US, Australia does not have a tradition of senior business people moving between industry and politics – and the divide between business and Canberra, sadly, is widening.

Directors who bring strong public policy skills and can govern across a range of areas will be in stronger demand on listed-company and not-for-profit boards.

Boards, generally, have been reluctant to recruit politicians for fear of being seen to favour a political party (although several former politicians are on listed-company boards). There have also been concerns that former public servants lack commerciality or cannot govern beyond their core competency –unfounded, given the success of former senior public servants who have transitioned to corporate governance in the past decade.

More regulated industries, such as financial services, understand the benefits of recruiting former public servants to boards.

Expect a continuation of this trend as boards recognise the need to improve their skills diversity in public policy and government analysis. And for more industries to recruit government experts to their boards as higher regulation spreads across other sectors.

In such uncertain times, governing for performance will require deeper understanding of politics, regulation and the electorate. Boards that outsource these skills to external advisers, or do not understand the threats and opportunities of higher regulation in Australian and overseas markets, will be found wanting.

Tony Featherstone is Consulting Editor of the AICD Governance Leadership Centre and a former Managing Editor of BRW and Shares magazines.