Keynote speech - ARITA National Conference 2016
Tuesday 31 May 2016
Good morning Michael and thank you for your introduction.
Ladies and gentlemen, I am delighted to be speaking today on behalf of the Australian Institute of Company Directors.
Like ARITA and its members, the AICD has a genuine interest in encouraging the well-functioning economy that’s necessary for Australia’s continued prosperity.
Firstly, let me introduce you to our organisation.
The AICD is the largest director institute in the world with more than 38,000 members. Our membership represents a broad section of the Australian community – from small-medium businesses, to the not-for-profit sector, government authorities and listed companies.
Our mission is the pursuit of excellence in governance. Our goal is to make a positive impact on all aspects of Australian society and the economy.
Our education programs for directors set the gold standard in Australia and internationally. Our advocacy on behalf of directors is equally important and well-respected.
Our over-arching goal is achievable because directors control a number of levers that make a significant contribution to Australia’s economic and social outcomes.
These levers can boost productivity, employment and the overall well-being – financial or otherwise – of the nation.
It is therefore critical that directors be allowed to operate in a way that helps them pull these levers to maximum effect.
Unfortunately, this is not always the case.
This conference coincides with a crucial debate playing out in Canberra and in boardrooms across the country. The debate involves the need for a significant revamp of insolvency laws.
Like ARITA’s own members, company directors have a real interest in restoring the economic value of under-performing organisations.
Existing insolvency laws frustrate innovation. They can have the perverse outcome of forcing directors to close up shop if there’s even a hint of insolvency.
Surely, this was never intended to be the case.
These laws and our markets punish failure. They encourage short-term decisions and actively punish long-term actions requiring patient capital and extended timeframes.
This helps create a situation in which boards are unwilling to take well-judged risks and are instead governed by over-detailed planning and group-think that eliminates opportunities to innovate.
The biannual Director Sentiment Index conducted by the AICD consistently proves this is the case. The index results for the second half of 2015 found that almost 75 per cent of directors believe there is a risk-averse decision-making culture on Australian boards.
85 per cent claim the risk of personal liability has caused them to take an overly cautious approach to decision-making at some point.
Importantly, this applies not only at the backend of the business life cycle – but also at the front end.
The potentially severe consequences of inadvertent breaches of insolvent trading laws are one reason why early stage investors and directors are reluctant to get involved with start-ups.
The implications for Australian entrepreneurs seeking capital to start or grow their business, or seeking directors for their boards, are significant. Not only are local directors reluctant to join start-ups, so too are offshore directors who have much to offer.
Comments made by a Insolvency Law Review Committee set up by the Singaporean Government in 2013 sum up the issues with our laws neatly.
In considering and discarding our insolvency laws as a reform model, this committee said:
“Australian provisions are considered to be some of the strictest amongst the major jurisdictions … [They do] not strike the best balance between …. protecting creditors against the reckless or unreasonable incurring of debts by an insolvent company … and the interest in allowing the directors of a distressed company a fair opportunity to take reasonable steps to avoid the company’s financial ruin.”
That is a fairly compelling statement in and of itself.
But the Singaporean committee went further still by saying:
“The Australian approach is not suitable in the Singapore context in that it tips the balance too much in favour of an early invocation of insolvency processes.
“The entry into formal insolvency procedures often has severe consequences on the company, and may in itself bring about the untimely end of the company.
“Further, the above legislative framework does not appear to provide sufficient avenues for informal workouts outside of formal insolvency procedures.”
This is an outsider’s view of our existing legislative framework. It highlights that it is not just local business that has an issue with our laws. It shows that an international observation by a qualified voice can yield exactly the same conclusion.
The Australian Government rightly moved to address concerns about our insolvency regime in November last year, as part of its National Innovation and Science Agenda.
This agenda included several proposals that have the potential to change the game on insolvency laws.
A subsequent Treasury consultation paper elaborated further on these measures. Submissions to that paper closed on Friday.
Today I want to talk about the measure that we believe has the greatest power to assist in driving economic growth and productivity. That measure is the creation of a safe harbour against liability for insolvent trading.
The AICD believes the objective of insolvency laws should be business recovery. Unmeasured millions of dollars and thousands of jobs are lost each year under our current regime which pushes business into administration too early and too quickly.
We strongly believe that the right insolvency regime will see part or whole businesses trade through difficult times and in doing so create new wealth and employment for Australians.
A safe harbour mechanism would allow directors of companies in financial distress to take reasonable steps to turnaround viable businesses outside the framework of formal insolvency.
At present, companies have few options other than calling in administrators or their lenders calling in receivers.
Like ARITA, directors have been calling for new insolvency laws for years. The proposed reforms will encourage appropriate entrepreneurial risk-taking by directors. Their greatest achievement will be to recalibrate our insolvency laws so they better promote business recovery.
It isn't the US Chapter 11 law – and we are grateful to avoid the complexity and cost of that regime.
Let me be clear that our support for these proposed reforms is not designed to protect unscrupulous or negligent directors. Nor do we wish to provide life support to “zombie companies” that have little or no chance of long-term survival.
Directors are bound by the strict requirements of the Corporations Law – including their basic duties to act with care and diligence, and in good faith. They are also legally obliged to not use their position improperly and cannot use information to gain an advantage for themselves or someone else to the detriment of the company.
We in no way propose a watering down of these four main duties of directors or any of their other legal responsibilities.
It is not in the interests of the community – or the vast majority of competent directors – to protect those who abuse their position or neglect their roles. Misconduct in the director community must not, and cannot, be tolerated.
This is the business case for insolvency law reform. We believe it is a clear, irrefutable argument that underscores the need for legislation that will encourage the innovation and sensible risk-taking that’s required to reignite Australia’s productivity.
Our productivity growth has been poor for much of the last decade. Recent gains are well below the long-term average of just under 2 per cent per year.
This is partly due to the extended mining investment boom. But it’s also due to what academics call “the great complacency”. That is, as soaring commodity prices allowed our national income to keep rising, productivity was left to languish.
Now that commodity prices are falling, a renewed focus on improving productivity becomes all the more important. Without sustained productivity gains, growth in our national income will continue to slide and that will mean lower living standards for us all.
The devil will be in the detail of the new insolvency regime. The key to legislative reform lies in the design of workable laws with no unintended consequences.
The AICD has spent considerable effort in recent months determining exactly what these laws should look like. Our in-house legal experts have considered all the issues, conducted extensive research and consulted with external stakeholders, including ARITA. We have also consulted widely with our members, who include a large number of leading company directors.
Although ARITA and the AICD are aligned on the need for reform, we differ in our view of what an effective safe harbour would look like.
We recognise these are complicated issues with multiple stakeholders and varying perspectives. We hope that public debate and the submission process end in balanced, considered and effective reforms.
So let me tell you about our own approach to the development of an effective safe harbour for directors.
To us, a workable safe harbour would do the following:
- It would put the onus of proof on the person alleging a breach;
- It would encourage directors to attempt a turnaround outside formal insolvency while balancing the interests of members and creditors;
- It would focus on the reasonableness of what is being done by the director to effect a recovery; and
- it would be flexible enough to apply irrespective of a company’s size, industry, sector and circumstances. It would also apply to a single-director business or a board of largely independent, non-executive directors.
Treasury’s consultation paper proposed two options for insolvency law reform.
We believe that of the two models put forward by the Government, Model B – with some modifications – better achieves these objectives than Model A.
Our reasoning is that Model B rightly focuses directors’ attention on working towards a rehabilitation of their business through a series of reasonable steps.
What might actually constitute the “reasonable steps” suggested by Model B should depend upon a company’s individual, specific purpose.
While we would welcome ASIC guidance on what these “reasonable steps” might include, we caution against the Government or ASIC taking a prescriptive, tick-the-box approach to such an important matter.
The complexities of business, and troubled business at that, demand a more principles-based regime instead of a dogmatic approach.
Model B is simpler and would avoid unnecessary red tape proposed under Model A’s adviser accreditation system.
It would leave directors in the drivers’ seat, which is appropriate given they bear the risk of liability for insolvent trading.
The other advantage of guidance is that it can be updated as economic and regulatory conditions evolve, according to the times and circumstance. This, of course, would involve appropriate public consultation.
So, as I said, our preference is for a safe harbour based on the Model B proposed by Treasury.
However, there are some tweaks we believe should still be made. These changes would allow Model B to operate even more effectively than the draft framework in Treasury’s consultation paper.
As it stands, Model B requires directors to act in the best interests of the company. This would include considering creditors’ interests if a company’s solvency begins to look doubtful.
The aim of this particular element is to encourage pre-insolvency restructuring while deterring reckless trading, betting the house or the sale of assets for nominal value.
We do endorse this approach – but we believe it is incomplete.
As a result, we have recommended that safe harbour protection be extended to directors who, knowing that solvency is doubtful, permit a company to incur a debt in order to realise the value of a viable business or valuable asset. This would result in a better return to creditors.
There can be important benefits to securing business or asset sales outside formal insolvency. Enterprise value can be better preserved and a “fire sale” discount avoided.
The idea that directors who act in a reasonable manner to preserve value and returns should somehow not be afforded protection is unsound. It is a concern we strongly believe should be addressed in the final version of these reforms that will eventually be put forward by the Government. I know that ARITA shares this view.
Our chief concern with the alternative model, Model A, is that it’s simply not practical.
Under this model, the safe harbour defence would only be available if, at the time the debt was incurred, a reasonable director had an expectation based on advice from an experienced, qualified and informed restructuring adviser that a company could return to solvency within a reasonable period.
This means before the safe harbour would arise:
- The restructuring adviser must have been appointed and provided with appropriate records. It must also have investigated the company’s situation;
- Further, the adviser must believe the company can avoid insolvent liquidation and be returned to solvency within a reasonable period. That view must also be communicated to directors;
- After that, the directors must have considered the advice. Remember, this is advice that will inevitably be subject to many assumptions, qualifications and exclusions;
- Finally, the directors will need to have formed the necessary expectation about their company and started taking reasonable steps to return it to solvency within a reasonable period.
Such a lengthy and convoluted process fails to capture the realities in which directors of a distressed company invariably find themselves.
The directors and a company’s advisers are likely to be considering multiple issues and exploring multiple options at any one time. Any of those issues may be out of the directors’ control – or contingent upon some third party or external event or information.
For these and other legitimate reasons, it may take some considerable time to form a solid opinion on a company’s prospects.
As you are aware, it will take more than a matter of days to source, collate and analyse all the information that is necessary to come to the right conclusion in such delicate matters.
Model A appears to ignore these common-sense practicalities and instead propose a form of safe harbour that could be unworkable or inequitable in the real world of day-to-day business.
Under its proposed terms, directors would be exposed to personal liability even if a company became technically insolvent. They would be unable to wait until they received restructuring advice and have no opportunity to form a proper opinion about their company’s future prospects.
This type of safe harbour would be illusory. It would not provide the protection that directors so badly need. It would fail to meet the basic prerequisites or fit with the general philosophy that I outlined earlier in my speech.
As I stated, the aim of a safe harbour should be to promote economic activity by restoring the value of under-performing organisations. The so-called Model A as proposed by the government does not, in our view, appear to be in the spirit of this fundamental principle.
We don’t believe, either, that an “accredited restructuring adviser” should be mandated as proposed by Model A. While seeking this type of advice may be entirely appropriate in many instances, it will not always be the case.
In fact, it would be problematic to demand it.
It may be far more appropriate for a small to medium-sized businesses to seek advice from a local industry specialist or even another experienced company director rather than an “accredited restructuring adviser”.
Another big problem with Model A is that it casts the onus of proof on directors. In layman’s terms this means that directors would need to prove they did not breach the law, rather than their accusers having to prove their allegations.
This is contrary to generally accepted legal principles. And the injustice of it is even starker when compared to the legal framework that applies in other developed nations.
As the Chief Justice of Western Australia, The Honourable Wayne Martin, has observed, the “laws of Australia which expose directors to personal liability in the event that a company trades while insolvent are arguably the strictest in the world”.
To add an additional requirement for directors to prove they are innocent to this already strict framework is unfair.
This is especially so given that any examination by a court of whether the safe harbour is available will, by definition, expose directors to the application of hindsight by those who are questioning their decisions.
Ladies and gentleman, there is not one of us in this room who would not love to have hindsight at our ready disposal when faced with complex decisions. Each of us here today has made decisions in our business and personal lives that – with hindsight – were the wrong course of action.
But that doesn’t mean that we deliberately set out to make the wrong decision. Or that we were in any way negligent in our decision-making. It’s a fact of life that sometimes even the best-planned, most thought-out strategies fail to produce the intended results.
As Scottish poet Robert Burns first put it way back in 1785 – “the best laid plans of mice and men often go awry”.
That directors somehow be excluded from this widely-accepted reality is inappropriate. Courts around the world, particularly in the US, commonly recognise this fact so it is illogical to argue that our own insolvency system should somehow be different.
When a company is close to the brink of insolvency, directors are often confronted with making difficult decisions in short time frames – under considerable pressure and based on complex information that may later prove imperfect.
Where directors act honestly and reasonably, the AICD considers that they should not be liable, even if that decision later proves to be flawed with the benefit of hindsight.
Placing the burden of proof on directors perpetuates the unfair and overly harsh legislative approach for which our insolvency regime is currently criticised.
Not only is the AICD opposed to this as a matter of principle, but we also believe it will deter directors from seeking to rehabilitate businesses outside of formal administration processes. Put simply, it will undermine the reform’s objectives.
A final fundamental problem with Model A is that the safe harbour can be used only after directors are actually found to have committed a breach.
So even if the safe harbour allows the company to be salvaged, directors are saddled with significant reputational damage.
Such a finding of breach can cast an irremovable stain on an individual’s reputation. A good name is a valuable asset upon which board appointments will be based, a model which fails to preserve a director’s reputation when invoked is not a safe harbour.
Under Model B, this would not be the case.
I will now make some brief comments about another of the proposed measures that will also provide greater certainty for distressed companies. This mechanism will provide a moratorium on the operation of so-called ipso facto clauses during formal insolvency.
An ipso facto clause enables one party to a contract to terminate an agreement upon the formal insolvency of the other. It would mean that a cleaning company, for example, could refuse to continue cleaning office space even if its contract with the other party still had some time to run.
The proposed moratorium would allow companies in voluntary administration to preserve key contracts such as this so they can continue to trade.
In other words, it would allow companies to remain viable while restructuring. It would keep the core of the business viable during voluntary administration rather than becoming a carcass for creditors.
Importantly, the moratorium would not affect creditors’ rights if an insolvent company fails to meet any contractual obligations.
There is much at stake with Australia’s new insolvency regime. It is not just about the mechanics of the legislation. It is about changing Australia’s attitude to business failures and an existing corporate culture that restricts entrepreneurial risk-taking by directors.
As the Government recognised in its reform proposals, our current culture stigmatises and penalises failures, irrespective of the cause of those failures.
We have a long way to go to catch the entrepreneurial Americans who live by the mantra … “If you haven’t been in Chapter 11 you’ve never been in business”.
We probably don’t need to go that far in Australia but we do need to shift our culture to one that encourages responsible business rescues – and to one that recognises a lot can be learnt from mistakes.
As former EU Justice Commissioner Viviane Reding has observed:
“Henry Ford’s first automobile company went out of business after 18 months, but he went on to found one of the most successful companies in the world.
We should not be stifling innovation – if at first an honest entrepreneur does not succeed, he or she should be able to try again. Insolvency rules should facilitate a fresh start.”
This is the philosophy that should be adopted here in Australia. We are hopeful that our new insolvency regime will go a long way towards achieving that goal and we will continue to encourage robust debate about the final shape that our new laws will take.
Ladies and gentlemen, thank you for taking the time today to listen to my explanation of this complex and technical topic.
I have outlined the AICD’s position to you and look forward to hearing more about ARITA’s own views, as well as the other stakeholders who are contributing to this important conversation as it unfolds. We all have much to gain from a new, improved insolvency regime and it’s events like this one today that will help us put the right reforms in place.
Thank you again to ARITA for the opportunity to speak today. I hope you all enjoy and benefit from the rest of the day’s proceedings.
Opening Address - Australian Governance Summit
Thursday 3 March 2016
Ladies and Gentlemen
Good morning and welcome to the inaugural Australian Governance Summit. When we conceived this event, we knew that it would be popular with our members but the fact that it has sold out at close to 1000 registrations has surpassed all our expectations.
We have traditionally held a three-day conference – more recently, overseas – every second year. However, we have been cognisant that this format carries a significant cost and is not accessible to a large number of our members. Hence, the short-format domestic conference.
I am pleased to advise you that the Australian Governance Summit will now become an annual feature here in Melbourne in the first week of March. In 2017, the summit will be held at this venue on Thursday 2 March and Friday 3 March. Our objective is for this conference to be the premier governance event in Australia – your support here this week has put us on this path.
We are presently reviewing the purpose, format and demand for the international conference and will be consulting with members on this.
I have had the privilege to lead the AICD for a little over a year now. One of our leading members set a KPI in my first few months – to make the Australian Institute of Company Directors “a great Australian institution”.
We start this journey from a position of strength. We are the largest director institute in the world. Our education sets the gold standard in Australia and internationally. Our membership is well regarded and highly respected. Our advocacy is respected and strengthening.
We are expanding our services to meet the needs of organisations as well as individuals through partnerships that support good governance throughout.
We will always continue to lead with better, more tailored member services, stronger advocacy and the very best quality governance education, facilitators and delivery.
Ladies and gentleman, our mission is the pursuit of excellence in governance. Our goal is to make a positive impact on all aspects of Australian society and the economy.
The Australian Governance Summit is about directors and the unique challenges we face in carrying out our roles as governors of many of the most important institutions in this country. It is about the importance of good governance to the improved performance of organisations.
Good governance is a critical element in good performance. Good governance is led by the board but must be carried through every layer of an organisation to achieve best practice and maximum benefit. Governance is not a grudge purchase focused purely on compliance. Our education and advocacy promotes the significance of good governance for the community, customer, owner, shareholder, member, staff and directors.
This recognises what I call the change in the “governance equation”. What we see is more and more organisations – for profit, government and not for profit – embracing governance. It is reflected in our growing and broadening membership and in the participants in our world leading governance education.
Yet we suffer under a common misconception that directors are from the “big end of town” - a club of over-paid, cigar-smoking board members from big companies.
It’s been a long while since I’ve seen a cigar in a boardroom.
Our membership and the make-up of the people here today shows very clearly that the director community is a big tent. Directors represent a broad section of Australian society – from small-medium businesses, to the not-for-profit sector, government authorities and listed companies.
It would be equally wrong, though, to think that directors and executives of organisations outside the ASX face any lesser challenges than their peers at Australia’s biggest companies.
We all face the same obligations in carrying out our duties as directors. And we all face the same obstacles when pursuing the excellence in governance needed to drive the performance of our organisations.
Some of those obstacles are beyond our control – we, as directors, do not control market conditions, bureaucratic red tape or the black swan events that can rattle our strategy and operations without notice.
But there are many factors we can control, and others that we can seek to sway by exercising the powerful influence that comes with a directorship.
Indeed, directorship is about much more than a seat at the board table. In front of me today are a group of 1000 people who control levers that can make a significant contribution to Australia’s economic and social outcomes. These levers can boost productivity, employment and the overall well-being - financial or otherwise – of the nation.
We should all aspire to this goal. To properly achieve it, we need to address issues which have the real potential to stymie appropriate long-term decision-making in Australia’s boardrooms.
My first observation is that excessive “short-termism” is the scourge of the modern boardroom. It pervades our decision-making and inhibits the positive outcomes of our board deliberations.
So what do I mean by “excessive short-termism”?
In textbook terms, it can be described as a “concentration on short-term projects or objectives for immediate profit at the expense of long-term security”.
It can manifest itself in decisions based on very short time horizons or even through inaction by a board. A sin of omission is as bad as a sin of commission.
Short-term objectives are not in and of themselves detrimental to an organisation. Effective strategies will certainly have short, medium and long-term objectives.
And, clearly, there are times when a focus on short-term risk or opportunities is necessary. This is particularly true in a time of rapid change or during a crisis.
The problems arise when short-term decisions are made in response to the instant gratification that shareholders, stakeholders and markets demand today, because it is easier than implementing a long-term strategy.
The consequences of those decisions can be acute. It can mean that opportunities for creating enduring long-term value are rejected or missed. It can mean that executives who receive incentives for short-term achievement take significant risks which do long-term harm, not good.
I said that opportunities for long term value can be rejected or missed. This means directors can commit sins of commission and sins of omission in the discharge of their responsibility to look and act long term.
Despite this, the willingness of boards to balance long-term objectives with short-term needs is increasingly under question and we are all witnesses to the consequences.
While directors shoulder the responsibility, in the main they are responding to the short term – or worse, instant – demands and expectations of analysts, commentators and shareholders.
Add to this the mind-numbing short-termism of national policy debate on the economy in the face of genuine international instability and threats.
Excessive short-termism can be a real issue for public policy makers as it reduces the capacity for innovation and can crimp competitive advantages in global markets.
The ideal of transforming Australia into an “innovation nation” risks failing if our business decision-makers persist in favouring short-termism over bolder long-term planning.
And, of course, we can be hamstrung by the instant news cycle and constant social media scrutiny, both of which are dominated by populist narratives that often fail to consider any real facts but quickly gain credence.
In the listed company space, directors must deal with pressure from investors, including fund managers, sharemarket activists and the increasingly powerful proxy advisers whose recommendations can determine the outcome of critical votes at AGMs.
Monthly reports on the performance of superannuation funds – for most a 40-year investment – is a demonstration of short-termism at its worst.
The pleas of sensible voices like Wesfarmers Chair Michael Chaney are too few and largely go unheard.
When he was appointed last June Mr Chaney told media – “We are running this company for the long-term buy and hold shareholders – if that doesn't suit you as a hedge fund or a short-term shareholder – I'm sorry but that's the way we're running the company."
Our keynote speaker, Chair of ANZ Banking Group and Coca Cola Amatil David Gonski has said in our Company Director magazine: “Never before, in my opinion, has it become more starkly a question of whether you are governing for the long term or the short term.”
And just last month in the US legendary investor Warren Buffet and Jamie Dimon, chief executive of JPMorgan Chase, met with other global asset managers to forge proposals that would quell public demands for short-term profits from listed companies instead of long-term investment.
Capital formation must itself bear some responsibility for poor behaviour.
Companies rise and fall every day. Investors experience profit and loss in their portfolios.
Private equity firms are an important element of efficient capital markets that can help companies find a sustainable path to success. But as the Dick Smith collapse starkly illustrates, hit-and-run private equity with no interest in creating long-term viable businesses or value do not contribute to our economy.
As Dick Smith continues to unravel, the duties of directors on both sides of the transaction will appropriately come under scrutiny by the regulators and the public.
Ladies and Gentlemen
Short-termism pervades all organisations.
Not-for-profits constantly struggle with short-termism in the form of unpredictable government funding. No listed company would be expected to operate efficiently if it couldn’t predict its income from one year to the next, so it’s unfair that not-for-profits which provide critical services to the community are expected to do so.
Financial sustainability is highlighted each and every year as the number one concern for not-for-profit directors in our annual NFP Governance and Performance Study.
It’s confounding that a sector that employs over one million Australians is subjected to such a difficult operating environment. It’s not only important services that are constantly under threat from unstable funding. NFP directors incur considerable risks when funding arrangements are changed, withdrawn or delayed and organisations are exposed to the risk of insolvent trading.
This all helps to foster an environment in which not-for-profit board decisions are coloured by factors which work against long-term strategy in favour of hand-to-mouth decisions which ensure only the short-term survival of an organisation.
Two-thirds of our members are involved in the governance of not-for-profits. In order to better represent the voice of not-for-profit governance last month we launched our Not-for-Profit Chair’s Forum. Its 29 members – from charities, sporting organisation, the arts, schools, health, aged and disability services – will help us ensure the sector is better heard by government.
Public sector boards can also fall victim to the consequences of short-term thinking by governments just as easily. Any government’s blanket refusal, as seen in recent years at the national level, to reappoint directors appointed by the previous regime is appalling governance. It stifles the stability that boards of government authorities require to perform their duties satisfactorily - and it considerably narrows the pool of candidates interested in serving in these important positons.
And the post-election “spill and fill” witnessed in Victoria with the government’s water authorities is equally appalling.
Experienced directors already question the sense in accepting government board positions due to the risk to their reputation – and the association with poor governance - that can arise if they are axed for politics instead of performance.
It is only natural that government as owners will appoint directors to fulfil their policy agenda. But there is a big difference between select appointments at an appropriate juncture and cutting a swathe through boards mid-term who still have much to contribute to an organisation.
It is very easy, then, to paint a picture that says short-termism in our boardrooms is largely the result of external forces - that directors have little or no control over these factors, and that it is therefore up to others to fix the problem.
But this is not the whole story.
As directors we must change our own behaviour to overcome short-termism and the impact it can wreak on our organisations.
One of the biggest contributors to short-termism in our boardroom is the creeping tendency towards groupthink among directors – the temptation to all go along with the majority course of action.
Groupthink is defined as a “pattern of thought characterised by self-deception, forced manufacture of consent, and conformity to group values and ethics.”
It takes fortitude to differ from the orthodoxy in this market. Investors, commentators and analysts want large companies in industries like financial services and mining to be very similar. It is easier to analyse and it is easier to comment on companies that are all the same.
The hard part is to stand alone in the market and make what you believe is the right decision against the perceived norm. This is how the great innovators all started. It is up to us as directors to take the best, not the easiest decision.
Consider if the following commonly cited symptoms of groupthink apply to your boardroom:
- Illusion of invulnerability;
- Collective rationalisation;
- Illusion of morality;
- Pressure for conformity; and
There is a difference between groupthink and teamwork. Groupthink can actually fatally undermine teamwork. Real teamwork instead fosters true collaborations that allows the skills and knowledge of each member of a board to be utilised to their true potential.
Diversity can be an important antidote to groupthink, and that is one reason we argue for it so vigorously. It can help to ensure that boards are composed of directors who have complementary attributes and offer a range of perspectives, insights, and views in relation to issues affecting the organisation; that is, they provide diversity.
Finally, I’d like to touch on the role of the board in organisational culture. It is a topic that has been brought to the fore by the fallout of various scandals at financial institutions.
We believe that directors creating and nurturing the right culture – or setting the right tone from the top - is crucial to an organisation’s success. Certainly, it can mitigate against the type of ill-considered short-term behaviour that I outlined earlier.
Poor culture has been identified as the underlying cause of corporate misconduct in a select number of cases in Australia in recent years. It is only right that it is a priority on ASIC’s agenda.
It is now well-accepted practice that financial performance is not the only measure of an organisation’s success. Boards consider a number of criteria in balance:
- Workplace health & safety;
- Public reputation;
- Broad stakeholder issues; and
As our closing speaker Lt General David Morrison said in his seminal 2013 speech: “The standard you walk past is the standard you accept.”
But by the very nature of the role of directors and the appropriate separation of governance and management – how much are we expected to know?
The reality is that the answer is more and more.
It is hard to address this topic without sounding defensive and reactionary. So I won’t. Directors realise they are responsible for culture first and last.
We also acknowledge we cannot know everything and we cannot be everywhere.
So once policies, procedures and behaviours are set, encouraged and monitored, it is about how we deal with poor culture – whether public or not.
Dealing with illegal and egregious culture is obvious. However, dealing with poor culture when the numbers are good is much harder. Bad culture can do more damage than strong short-to-medium term numbers can ever do good.
Boards must be at the forefront of the culture of their organisation. A recent UK survey of investment professionals shows the implications of getting it wrong.
94 per cent of investors said organisational culture was important to their investment decisions. One third claimed it influenced both buy and sell decisions.
And how did they identify culture within an organisation? 81 per cent said personal experience with a company informed their opinions and 79 per cent said that dialogue with company leaders – including directors - was critical.
The report stated: “Today, the focus for professional investors is on the behaviour of your executive and whether they can be trusted to operate consistently with your stated values. It is therefore, no longer sufficient to just talk about your culture. Your ability to demonstrate it in action, ‘your walk’, is critical.”
Having said that, “good corporate culture” is not something that can be achieved through black letter law.
Culture is, by definition, an intangible concept and the key to reforming it is more likely to lie in the attitudes of those who govern and run an organisation. As directors, we must be willing to consider culture from a different perspective and be open to new ideas about how to improve the ethics within our organisations.
Today, I restate the AICD’s call for all directors and executives to critically reflect on the values within their organisations and to understand how their actions may influence employee behaviour.
There is an obvious gap between public perception and the truth about directorship. It is time for corporate Australia to address that gap and rebuild trust in the fact that the majority of organisations and boards are focused on doing the right thing by all their stakeholders.
Ladies and gentlemen, directorship is a privilege that brings with it a great responsibility. To me, that responsibility includes pushing ourselves to constantly do better, to question ourselves as much as we question the executives who report to us.
If we as the country’s leading directors can commit to abandoning the short-term focus that risks becoming endemic in our boardrooms then we will help not just our organisations prosper, but also Australia-at-large.
Please, everyone enjoy and learn from the next two days. I would like to again acknowledge the support of our major sponsor KPMG, our corporate partner King Wood Mallesons and our networking sponsor FireEye.
The Australian Governance Summit will be a highlight of the AICD’s annual calendar and I am delighted to be participating in this inaugural event with each of you here.