Opening Address: Australian Governance Summit - Trust, Innovation and Sustainability

AICD Chairman Elizabeth Proust AO FAICD opened the Summit by discussing record low trust in Australian institutions.

I would like to begin by acknowledging the people of the Kulin nation as the Traditional Owners of the land that we are on today, and pay my respects to their Elders past and present, as well as the Elders from other communities who may be here today.

I’m also pleased to welcome Angus [Armour, AICD CEO and MD] to his first Australian Governance Summit as CEO. In the past he has served as Chairman of the Berne Union, the Asia Regional Cooperation Council and as a board member of CEDA. Angus also serves on the boards of the European Australian Business Council and the Mohammed Bin Rashid Innovation Fund of the UAE.

The AICD Board is confident that under his leadership the Institute will continue as a strong and dynamic organisation, with a clear focus on our purpose, our strategy and the needs of our members.

Ladies and gentlemen, thank you for joining us at the 2018 Australian Governance Summit.

This event is about directors and the unique opportunities and challenges we face in carrying out our responsibilities.

As such, it’s fitting that one of the key themes this year is Trust.

Trust is society’s most fragile asset.

Last year I spoke about the Edelman Trust survey which found that trust in institutions of all kinds – business, government, the media and not-for-profits – had reached record lows in Australia.

I’m sad, but not surprised to say, that the year just passed did not see a great shift in that result. Indeed, together with, interestingly, Singapore, Australia is one of just two nations to register consecutive falls in trust across those four key institutions.

Throughout 2017, successive scandals – in the finance sector, the arts, the not-for-profit sector, and governments – overshadowed any positive steps towards regaining trust.

They also shone a spotlight on workplace culture and forced directors to consider what role we have in shaping those cultures.In addition, as we continued to grapple with technology, particularly automation and Artificial Intelligence, concerns about what their impact will be on not just individuals, but society as a whole became more pronounced.And millennials, who are rapidly becoming the largest generational cohort in the workplace, continued to show that they have different expectations of businesses’ social contract and responsibilities than their Gen X or Baby Boomer predecessors.

Taken together, these elements show that the governance needed for the future will take not only vision, but also a willingness to change our mindset. To reconsider how we make decisions and in whose interests we make them.

It’s easy to think of this as people just wanting more than companies can – or should – offer. But the fact is the tenets of organisations’ social contract are changing as the world changes, and directors must engage with that, rather than dismiss it, if we are to rebuild trust.

So where do we start?

In my view, culture is crucial.

The culture of our workplaces has probably never been under greater scrutiny than it is today. And boards have a crucial role in shaping, monitoring and changing our organisational cultures – across all sectors.

If we’re not setting and requiring the cultures that our staff – and the wider community – expect, we cannot hope to repair the trust divide.

A good culture can be a competitive advantage. Conversely, poor cultures damage employee and stakeholder outcomes, and when they result in visible failures – be they regulatory or ethical – they erode trust.

In that vein, it is welcome that the most recent AICD Director Sentiment Index found that the vast majority of directors – 92 per cent – are actively trying to change the culture within their organisation.

But what needs to change?

There is no one size fits all approach to culture.

I would posit however that boards can play a role in regaining trust through improved culture if their decisions are consistently in line with three key pillars:

• Accountability
• Transparency; and
• Ethical behaviour

The lack of accountability and transparency in instances of financial or ethical wrongdoing is undoubtedly a driver of the trust deficit between Australians and their institutions.

These may sound like straightforward principles – yet when stakeholders or politicians or commentators ask who is being held to account for failures – whether it be in corporate Australia or in the not-for-profit sector, the answer has too often sounded hollow.

Without greater accountability and transparency, a culture of ethical behaviour cannot take hold and there is no pathway towards regaining community trust.

In addition to ensuring these values underpin our decisions, we of course need to model the ethics we want to take hold in an organisation. If we fail to model the cultural traits we ask of employees or volunteers, we can hardly be surprised when the desired culture fails to appear.

And if as boards we reward success, we need to hold ourselves accountable and punish failure. We must be transparent in doing so – explaining clearly the reasons why decisions have or have not been taken, honestly and fully.

Another key component of the trust conversation is technology – the way it is changing our workplaces and its impact on society.

Considering the volatility and unknowns that surround not only what technologies will shape our future, but how rapid or not that change will be – who can blame people for fearing that technology will harm, not help them?

This year and last, I attended the World Economic Forum in Davos. In 2017, the view was quite sanguine: “yes there will be job losses, but many new ones will be created”.

This year there was much more acknowledgment of the potentially negative impact of these technological advancements on jobs and in turn, on society.

Of course, there were few answers – but we can’t possibly hope to find answers until we at least acknowledge that there are valid questions.

It is too simplistic to say that for the jobs lost to automation there will be new ones, in new industries, to replace them. Especially if those new jobs are more precarious than the ones they replaced.

Technology is neither the cause nor the solution to the trust problem – but how we approach the governance of it – what questions are asked, what steps are taken and what regulation is put in place – may well impact people’s trust in organisations in the future.

A report by Bain & Co released last month estimated by the end of the 2020s automation may eliminate 20 to 25% of current jobs. Similar research by McKinsey estimated a range of 15 to 30%. Even at the lower range estimate, as many as 800 million workers world-wide and 3.2 million workers in Australia would be impacted.

That would truly alter the society we live in and our expectations of the availability of work fundamentally.

But if trust is our most fragile asset, people can be considered our greatest.

It will fall on leaders of organisations to consider and shape the workforce of the future… to realise that people are still our greatest asset and that their talent and ingenuity should not be replaced, but rather reimagined.

Technology is giving us the opportunity to redefine what we mean by work and workplaces. But we also need the confidence and willingness to use technology for mutual good.

While politicians have a role to play in supporting transition to work, and tax reform that saw stamp duty taxes abolished could encourage this by removing barriers to relocation, organisations have a role to play in helping their employees transition to new roles as old ones fade.

According to a 2018 YouGov poll, almost half of Australians believe businesses have a responsibility to assist in upskilling members of the community – and as the gig economy and automation continue apace, that sentiment will surely only grow.

Indeed Bain & Co research indicates that the pace of labour force displacement in the coming decade may be two to three times as fast as during other transformational periods, such as the shift from agriculture to industry or the automation of manufacturing.

The impact of technology on the workforce of the future – and in turn the society of the future – is a question we as directors need to grapple with.

After all, the productivity gains we make with technology will be for nought if society is no longer prosperous enough to utilise the goods we produce.

To that end, the AICD has engaged Deloitte on a partnership project to develop a ‘playbook’ for directors to help them navigate the future of work from a governance perspective. This project will aim to bring together the key trends likely to impact Australian organisations and provide a resource to support directors in incorporating this changing landscape in their governance questions and strategies.

Just yesterday Deloitte met with the AICD’s newly-established Technology Governance and Innovation Panel here in Melbourne to discuss this project, drawing on the real-world experience of the panel’s diverse membership to ensure it is informed by the real experience of directors.

This one piece of work will not provide all the answers – but I hope that it provides a bedrock for our members on which to build.

Organisations are also faced with the advancing age of workers, who will retire later than in the past, coupled with the influx of millennials into the workforce.

Over the coming decade, the population of those aged 65 and older will grow faster than the working age population in OECD countries for the first time in history, and that same trend holds true for Australia. This will mean greater pressure than ever before to retain, retrain and hire older workers, and a change in our views on what is an appropriate age for someone to start a new career.

At the same time we know that many millennials want a higher purpose from their workplaces. This new generation fundamentally believes it is the role of business, not-for-profits and organisations such as the AICD to have a voice on the challenges facing our country, whether they be economic, environmental or social. And as people stay in the workforce longer, their expectations of organisations’ role in the social fabric will likely expand as well.

Indeed, 65% of Australian respondents in this year’s Edelman Trust survey said that business leaders should take the lead on change rather than waiting for government … which indicates there is a widespread view that business' mandate has broadened. One of the few bright spots in the Australian results was an increase in trust towards company directors and CEOs as spokespeople. Perhaps this is reflective of the greater visibility and willingness to engage with social discussion that we’ve seen from boards and CEOs in recent times.

What is clear is that demographic factors – coupled with technological change – have fundamentally altered society’s expectations of their institutions and will continue to do so. Ignoring that will only widen the trust deficit.

The danger in that scenario is that distrust drives demand for regulation, without much regard for how that regulation is designed.

Aggrieved and sceptical communities will question the ‘social licence’ of organisations that lose or exploit their trust. This creates an environment where politicians feel compelled to act, with potentially significant financial, legal and compliance costs.

The financial services sector has seen this most acutely in recent times, with the unprecedented intrusion of the Banking Executive Accountability Regime, and of course this year, a Royal Commission.

The demographic and technological changes I spoke of earlier will, by themselves, drive new forms of government regulation. The chances of that regulation being holistic and well designed, as opposed to interventionist and knee jerk, will be low if we remain in a low trust environment.

An appropriately targeted, and appropriately enforced, regulatory system is critical in retaining and building trust in companies of all types, not-for-profits, governments and regulators.

Too often, the rush to regulate for the last crisis leads to poorly designed laws that favour prescription over principles.

More considered reform requires an investment from all stakeholders – including directors and the AICD – in looking to the long-term policy needs of the nation.

Demonstrating corporate citizenship and arguing for better regulation, rather than just against bad regulation, is one part of this work.

To this end, just as the AICD continues to combat excessive prescription or unfair burdens on directors, we must also champion areas where laws need to be stronger.

As examples, the AICD has strongly supported proposals that would significantly increase criminal and civil penalties in the Corporations Act for serious wrong-doing by corporates and directors.

The AICD is also calling for measures to better target those who engage in illegal phoenixing activity – fleecing creditors and employees by shifting assets and abusing the corporate form. Penalties for wrong-doing need to act as a credible deterrent, with real teeth.

But the solution won’t be found in increased penalties and powers alone. We need our existing laws to be vigorously enforced by regulators, rather than adding more layers in response to every new issue. We also need better corporate behaviour.

Government and the director community need to work together to shape the legislative framework, with the expectations of the community firmly in mind, in order to rebuild trust and create prosperity.

Regaining trust, of course, will take time.

For our institutions, and the directors who lead them, winning back trust cannot be done with one or two year strategies, or a glossy CSR guide.

It will require directors and leaders to listen to what our employees, our customers, and our stakeholders are saying. It will require diversity around the board table and the ability to ask whose voices are not being brought to the debate. And it will mean that questions that were once the sole domain of public policy makers, must become the questions we look to find answers to.

We have an obligation to remain conscious that the decisions we make as directors have a real impact on the lives of individuals and communities, and the faith they place in our institutions.

In an editorial at the beginning of this year, the Financial Times wrote that, “A better social contract could be built on the idea of humane, mutually beneficial interdependence” between company and worker. I’d go further and say that applies to the broader society in which we operate as well.

For that to happen, there must be a shift in our governance lens, and a new way of viewing the social contract.

We need to think beyond our own boardrooms and further afield than our own immediate stakeholders, and consider how the community views our actions, and whether they would consider our actions to be fair and responsible.

Of course there will be times when the board decision and the community decision diverge, but it shouldn’t occur as often as perhaps it has over recent years.

And the narrower the gap is between expectation and actuality, the more likely we are to regain the trust that has been lost.

Ladies and gentlemen… thank you for your time this morning. It is a pleasure to serve as Chairman of the Institute and I am certainly looking forward to the program over the two days ahead. I hope you all feel the same.