investment

George Savvides, FAICD, recalls regularly having to read 500-page board packs in some previous directorships. The board’s Chair studiously led the meeting agenda through the pack, along with replay presentations from executives, often leaving insufficient time for quality reflection, conversations and questions among directors.

The meeting became a “comprehension test” for directors, Savvides says. “The board turned itself into a data-processing machine. Too much time was spent on ploughing through endless factual reports and not enough on human factors that make all the difference to organisational culture and customer experience.”

Many boards face similar challenges. A common frustration among directors is too much time on compliance and box-ticking in board meetings and not enough on strategy and its alignment with organisation culture, values, employee and customer experience. The risk is boards get bogged down in decision-making quicksand as more data is added to board packs.

Savvides understands this challenge well. As a former CEO of Medibank Private and Sigma Pharmaceuticals, he oversaw the preparation of board reporting for hundreds of board meetings.

As the current Chair of Macquarie University Hospital and Kings Transport, Deputy Chair of SBS and an independent director of Ryman Healthcare, Savvides spends much time going beyond the board packs to understand each organisation’s people and culture and the way the CEO and leadership team shape culture and values.

He is a great believer in having board-meeting time to meet staff and customers through site visits and observe how employees operate the business.

Twenty-five years of experience as a leading CEO or Chairman has given Savvides an important perspective on understanding the organisation’s “intangibles” – culture, value, ethics, leadership style and what customers and staff think about the products they offer.

Some of this intangible value can be captured in board papers but Savvides says it is more effective to balance two-dimensional reporting with board member site visits and contact with company staff and customers. “This makes for more comprehensive governance,” he says.

Savvides’ work as a director of Sodia, a consultancy that helps organisations align their brand, leadership and culture, has reinforced his belief in the value of human capital. “Research consistently shows that outperforming organisations have an aligned culture where staff work together to serve customers through a common sense of purpose, inspiring extra discretionary effort and consistently do the right thing, “he says.

“When things go wrong, it’s often due to misalignment of strategy, culture and people. That’s hard (for directors) to pick up in a two-dimensional risk-management report.”

Human capital and governance

The Financial Services Royal Commission has shown the need for boards to spend extra time on governance of organisation culture, leadership and customer experience.

Problem after problem exposed by the Commission related to interconnected intangibles, such as organisation cultures that spawned rogue behaviour, and institutional blindness toward customer interests.

Savvides divides board information into the tangible: layers of compliance-focused facts, financial reporting and risk management used for rational decision making by boards; and the intangible: information that drives governance intuition about the organisation’s DNA and is harder to capture in board packs. Information that is better experienced through observation.

“On a scale of one to 10 between tangible and intangible information, most board packs struggle to get past a three or four,” says Savvides. “That is, board information is heavily weighted towards detail-data heavy tangibles and is becoming more so as compliance expectations rise. In some board packs you can count on one hand the pages that relate to the organisation’s human capital, even though reputation relies far more on human factors and behaviour.”

Savvides uses another analogy of left-brain and right-brain boards. The left brain is thought to be associated with linear and analytical thought. The right brain is said to be more intuitive, thoughtful and subjective – the part that drives instinct and intuition. High-performing boards move between left-brain and right-brain thinking as needed – and create time for directors to pursue both modes of thinking on their own or through group discussion.

Savvides says too many boards default to left-brain governance, drowning in reporting. “They are typified by analytical, factual, methodical, objective information processing – a decision process that is big on brain and low on organisation heartbeat. Because information for boards is delivered mostly through a two-dimensional document (board pack), it will bias toward Left Brain governance.”

Importance of intangibles

Experienced directors understand the need to seek information on organisation intangibles. They attend industry conferences, visit organisation sites, meet senior and junior staff and talk to customers and suppliers. Well-connected directors try to “join the dots” for their organisation, gaining insights that go well beyond data in static board packs.

But board papers remain the primary source of information for directors; getting the most out of them is critical for director productivity and board decision making. Anecdotally, board packs are becoming longer and more detailed. Some bank board-packs are thought to exceed 1,000 pages, such is the regulatory environment and compliance focus.

Technology is helping (board packs delivered on iPads, for example), but it is a big ask for non-executive directors to read thousands of pages of board packs each year for a single directorship, let alone comprehend all that information to make governance decisions.

“It’s easier for boards and management teams to fill the information basket with more and more facts,” Savvides says. “It’s harder to align that information to strategy and be clear on what is needed and what is not. Compliance information is important, but there’s no reason why a large organisation cannot have a quality 200-page board pack rather than a 500-page pack that has lots of information with marginal benefit that directors feel obliged to read. The real cost is the time it takes away from directors having thoughtful conversations in the board.”

Savvides says good boards structure board papers around the organisation’s strategic goals and provide information for directors in between board meetings, such as an update from the CEO between board meetings when directors can ask questions.

Such boards create opportunities for directors to exercise left-brain governance. For example, a conversational dinner for directors and the executive team the night before the board meeting. Or a presentation on a people and culture issue on the afternoon prior to a board meeting.

Savvides says: “The purpose is to reduce the amount of time directors spend wading through voluminous information, so that they have more time for reflection and discussion on issues such as culture, staff and the customer experience journey."

In some cases, it’s about providing less information rather than more, and freeing up directors to focus on corporate reputation and the things that add most value to the organisation and its stakeholders.”

Keith DeLacy, AM, FAICD, says the quality of board information and decision making ultimately relies on the relationship between the CEO and the Chair. In healthy relationships, the CEO ensures the executive team gives the board the information it needs to make decisions. In unhealthy relationships, executive teams can hide or sugar-coat bad information in the board pack or unduly emphasise information that makes them look good.

DeLacy is a former Queensland Treasurer, former Chair of Macarthur Coal and a former Queensland President of the Australian Institute of Company Directors.

“The relationship between the Chair and the CEO is everything. I used to say that if I get the right CEO, 80 per cent of my job is done,” he says. “Sometimes it takes a while to build trust, but it is the essence of good decision making. (Boards should) encourage management to be frank and open, and reward them for this. Directors should spend time getting to know all the senior management (with the sanction of the CEO, of course).”

DeLacy adds: “It is a good idea for the board to be routinely circulated the minutes of the executive management team meetings. It enables the board to understand more completely what the issues are in the different divisions of company operations, (so that there are) no surprises, no left-field bullets.

“A good board-paper template is also important in the decision-making process. If directors are familiar with the process they are more able to focus on the issues that matter.”