The forward governance agenda
AICD Chair John Atkin FAICD and MD & CEO Angus Armour FAICD announced the AICD’s forward governance agenda focusing on four main areas:
- Directors’ duties
- Standards and professionalism
- Enhancing accountability
- Governance and remuneration
The AICD will invite member views on its agenda through an Issues Paper to be released in March 2019.
The AICD supports the current formulation of directors’ duties. But the AICD will lead a conversation in the director community and with stakeholders to test the understanding and application of the best interests’ duty in practice We need to determine what elements and approaches make practice ‘fit for purpose’.
As Commissioner Hayne has noted, in acting in the best interests of the company, directors will consider complex stakeholder issues beyond shareholders, particularly over the longer-term.
In a survey released today by KPMG and the AICD, members nominated employees and customers as their most critical stakeholders - ahead of shareholders and institutional investors.
The revised ASX Principles released last week have a strong focus on culture and values, and call for a ‘tone from the top’ from the board.
The language of a ‘social licence to operate’ has sensibly been excluded, but there remains a clear focus on the ethical and responsible behaviour that underpins reputation and standing in the community.
There is a gap in perception between what boards believe they do to consider stakeholder interests, and the community’s view.
The community needs to trust that we - as directors – take account of stakeholder, ethical and societal issues as part of our duties.
Standards and professionalism
The AICD will strengthen our Member Code of Conduct and clarify its application. We need to be clearer about the expectations of membership.
The AICD will update our Professional Development framework so that it reflects the standards of practice and ethics our members expect. We will provide the appropriate resources to our members as a benefit of membership. Professional Development opportunities should be challenging and accessible.
The AICD will continue to advance the standards of a director as a professional, through our education and advisory work, and through our advocacy agenda.
At the heart of the public’s distrust of institutions is a belief that when things go wrong there are few consequences.
Directors must start by convincing the community that boards are accountable. We must also be open to ideas to strengthen accountability.
The AICD will consult with stakeholders and practicing directors on proposals to enhance accountability.
One measure in public debate is annual director elections for listed companies – a model applied in the UK, and one that increases the visibility of board accountability to shareholders.
Another concern in the community is ‘over-boarding’ and whether there should be guidance on the number and nature of board commitments.
These are complex issues where the AICD will work with members to consider all relevant impacts.
Governance and remuneration
Ethical decision making sits at the heart of director practice. Boards must set the tone that misconduct is dealt with swiftly and visibly.
The AICD will take the lessons of the Hayne Commission and other inquiries into good practice principles for governance of culture and remuneration – relevant to NFPs, to private companies of any size, to superannuation funds, to listed companies alike.
Working with members and stakeholders, the AICD will provide more guidance and practical frameworks to support directors.
On remuneration, for example, balancing short and long-term interests between different investors, shareholders and stakeholders creates an incredibly challenging environment for boards.
The AICD will partner with investor groups and stakeholder organisations to focus on the long-term in the governance of remuneration.
Session – The Future of Corporate Governance in Australia
ANZ Bank chairman David Gonski AO FAICDLife has called for boards to examine where they have gone wrong in the past, as has occurred at the ANZ board.
“We have looked at what has been done by my board ANZ and where did we go wrong,” he told the Australian Governance Summit 2019 today. “We did think in the short term and find fixes to things to fix things quickly but did always not think through to the longer term,” he told 1500 delegates during a panel debate on the future of corporate governance in Australia.
Three things should be addressed in this examination by boards - Long termism, getting complexity under control and having accountability. “We have not been great on accountability all the way down. But at times we have to find who is accountable and act upon it.” The coming of the BEAR legislation will allow ANZ to map accountability right from the top to the bottom with 40,000 staff.
New laws are not needed as current rules allow for all stakeholders to already be taken into account, he says. Complexity is a challenge at ANZ due to the number of subsidiaries and puts a lot of stress on how the organisation works.
Penny-Bingham Hall FAICD, who sits on the boards of Bluescope Steel, Dexus and Fortescue, chairs remuneration committees on a number of boards and says that in that role as chair she talks to investors once a year. “There are also other things companies need need to do – what does the register look like?” Another question is how to sell the value proposition over the long term to investors.
Heather Ridout AO MAICD told the conference that as chair of AustralianSuper, she has always looked long term. After the Hayne Royal Commission and the APA report on the Commonwealth Bank, “We have been doing a deep dive into ourselves.” With only 750 people, the organisation has grown assets under management very fast. “Managing complexity is a very big issue.”
AustralianSuper bought into Ausgrid and guidelines are being developed to manage the asset with a long term view over 40 years plus. “We will go through the transformation of that company and try to take short termism out of that company.”
Findings from the Hayne Royal Commission have sent shockwaves through the non-executive director community in Australia, according to Penny Bingham-Hall.
In a background paper for the Summit, she said. Other findings from the Australian Prudential Regulation Authority’s final report of the Prudential Inquiry into the Commonwealth Bank contributed to the impact, making the year 2018 the “annus horribilus” of corporate governance in Australia, she adds. “Combined with a general lack of trust in our institutions, politicians and big business, it has left the Australian community wishing for a happier, healthier and better governed new year.”
As a result, corporate governance in 2019 will be marked by unease about what the year ahead will bring, she said in the paper. She says directors must have the courage to not only call out bad behavior when they see it but also increasingly assure themselves that they will see it if it does happen.
Directors are focusing on their responsibilities when it comes to corporate culture and also most boards are rethinking what information pieces they get from management that are good indicators of corporate culture and how to supplement these with direct interactions with employees.
Investor and community expectations around environmental and social issues will continue to be top governance issues in 2019, with more reporting requirements related to climate change disclosure and also the Modern Slavery legislation.
Balancing expectations around executive remuneration will also continue to challenge directors. “Whilst there is now greater acceptance that one model doesn’t necessarily fit all, the jury is out on a range of new remuneration structures that have been adopted,” Ms Bingham-Hall says.
“Time will tell how these play out but the issue that all directors are juggling with is how to apply discretion to incentive outcomes.”
High-Performing boards – what’s behind their success?
The most important element in board performance is going beyond profit margins, according to Professor Kristy Muir, CEO of the Centre for Social Impact.
“What makes a good board performance is identifying clarity of purpose and who are the beneficiaries,” she told the AGS summit today. “It is important to look beyond profit margins but it needs to be identified how the organisation is meeting its purpose and how that is measured.”
This is important for both for-profit baords and not-for-profit boards.
Elana Rubin FAICD, who sits on the boards of Mirvac, Afterpay Touch Group, ME Bank and Transurban, said it is important for the board to have a good relationship with the CEO and management so that bad news can be communicated effectively.
“This is where culture comes in. It is very important when boards receive information. Boards set the tone for how management will come to the board with bad news.”
How to do you get a good measure of an organisation's culture? Michael Ullmer suggests:
- Surveys as frequently as every 6 weeks
- A good line of sight of the behavior of the CEO
- Customer complaints
- Employee complaints#GovSummit19 pic.twitter.com/cb6LkdIolA
Complaints registers and social media are a good way to track and measure customer satisfaction and the organisations which she deals with have ramped up their attention tod etail on complaints registers, she says.
The test is to ask whether your grandmother would be happy with a level of service delivered, Michael Ullmer FAICD, non-executive director for Woolworths and Lendlease says.
Some boards perform at their absolute best when they are under extreme pressure, Ken Dean FAICD, chairman of Mission Australia, and a director of Bluescope Steel and Virgin Australia told the Australian Governance Summit today.
"I think that those organisations who have tripped themselves up through not being open and transparent with the regulator won't be making that mistake again."
- Elana Rubin #GovSummit19 pic.twitter.com/zDNllBsqLR
“Some of the best board performances have been when companies are under the msot pressure,” he told delegates in a session on high-performing boards – what’s behind their success? “But from an investor point of view the performance may be at their worst.”
"I think one of the marks of a good board is having the ability to let go of a CEO if that is absolutely needed at the right time."
- Professor Kristy Muir (@KristyMuir2)#GovSummit19
A lot of people talk around purpose, which invades every way the organsiation operates from vustomersw to remuneration and beyond. “Are people who do the right thing being properly remunerated?”
Reflecting on warning signs: the amber flags
Leading business has become harder and will become harder still, so directors need to be fit for the task, Ann Sherry AO FAICD, the Chairman of Carnival Australia told the summit. Sherry, also the Chair of UNICEF Australia, sits on the boards of National Australia Bank, Sydney Airport, Palladium Group and others.
Ann Sherry AO FAICD, Chairman Carnival Australia, discussing amber flags @AICDirectors #GovSummit19 "businesses rebuild trust by doing things they said they would do" @pacificann1231 #Governance pic.twitter.com/469X79RHbQ
In the lead-up to the Hayne Royal Commission final report, NAB did a self-assessment which they made publicly available. What other people were seeing in terms of NAB was not what the board was seeing, she says. “There was stuff we knew we had to do – but we did not do them fast enough or with enough focus.” A customer focus was identified as a priority.
The Royal Commission report stands and all businesses will have to address the findings, she says.
#govsummit19 fine speech from @pacificann1231 Issues go beyond sectors to business. ‘We cannot blame everyone else, we need to start looking at ourselves.’ @AICDirectors
It is important for directors to ask the right questions, to ask how goals can be achieved, to be relentlessly curious and to tackle change when needed. “How do we evolve so as not to become the Kodak of the future?” she asked. “Change is hard and a lot of managers don’t like it.”
“Not enough time or focus is spent on the question of ‘how?’,” she says.
Carnival Australia had changed its fortunes over the years by having a clear purpose and by addressing the questions surrounding how the business operates – from regulation across diffrerent countries to resetting culture and demonstrating value to destinations where the shops had to go.
Ann Sherry quotes Dan Ariely at #GovSummit19:
Big data is like teenage sex:
everyone talks about it,
nobody really knows how to do it,
everyone thinks everyone else is doing it,
so everyone claims they are doing it.
“Carnival was about answering the how questions,” she says. “How do you grow the business which has had a reputation crisis? How do you reset culture to deliver outcomes? It was understanding the how questions that allowed us to turn that business around,” she says. “Cities and countries asked us to bring ships to them.”
Sherry says the last 12 months has been challenging what directors have been doing but they need to address the challenges harder, unsuring there is accountability.
Boards may need to adjust acting faster in the future.
A high performance culture: Driving the right culture for your business
The CEO is the chief culture officer in any organisation and CEOs set the tone for culture, Steve Vamos GAICD, the CEO of Xero told the summit today.
“The CEO is the culture executive officer. Regardless of the organisation or the industry should be held accountable for the development and quality of an organisation’s culture.”
Microsoft had changed its culture over the last few years due to a shift in mindset by the CEO Satya Nadella and others in the organsation, says Vamos, who is the former head of Microsoft Australia and Apple Australia. “There have been massive changes at Microsoft in how the business is perceived and its success. It came down to one thing. A mindset shift changed their culture.”
"The CEO is the Chief Culture Officer.
The CEO’s character sets the tone.
Beware of CEO’s who are control oriented and not transparent"
- Steve Vamos, CEO of Xero#GovSummit19
At Xero, Vamos has asked all board members to read Nadella’s book Hit Refresh.
In terms of the way forward, all boards and directors need to focus on and measure “the attributes of culture, common to all organisations and teams, that are the source of poor performance, poor practices, poor change management and poor judgement” Vamos, who also serves as a director on the board of Fletcher Building, told the conference. “You focus on the things you really don’t want in your culture.”
Bad news must be welcomed by boards and management as part of the strategy process and boards must challenge managers where possible. But in developing culture, boards must also beware of CEOs who are control-oriented and not transparent.
@stevevamos CEO of @Xero discussing culture and change within organisations. Comparing Industrial Age with Connected Age. If you want people to think you care.... you have to care! #GovSummit19 pic.twitter.com/8OZTAlZvTu
Culture is the human element of business and given the rise in stakeholder expectations, boards must make the effort to define it and measure it consistently, says Vamos. “Culture is a hot topic today because digital technologies such as smartphones, the internet and applications like social media have amplified the potential of people to have a voice and impact – for both good and bad.”
Three tips to foster a high-performance culture
- Make it safe for people in the organization to speak openly and challenge the status quo.
- Encourage hard conversations about mistakes they have made and where they could have done better
- Demonstrate genuine care about people
Directors must ask themselves how they can evolve the human element in their organisations so they are high performing. Google’s Project Aristotle identified that the core attribute of high performance teams is psychological safety. Directors need to work overtime to get people to speak honestly to them and engage properly. “The minute you walk into a room as a director there is fear.”
“If you want people to think you care, then you have to care.” @stevevamos on changing mindsets to drive the right culture. #govsummit19 pic.twitter.com/MRtMzCDPGk
The non-physical aspects of business - intangibles have also risen in importance and is notw the biggest element of enterprise value. “Investors are betting on the future value that the humans in that organisation are going to create,” Vamos told the summit.
“Your value is your connectedness to others not what’s in your head” Steve Vamos CEO Xero #AICD #GovSummit19 #organisationsashumannetworks
Be prepared to make hard choices and say no to undesirable products. Focus on performance and align the work of people in the organisation with strategy, Vamos says.
The way forward
A good start in measuring the character of the leadership team is to create a survey, do talent reviews and have them rate themselves as a team against these attributes. Xero receives the results of a leadership team performance survey every four months and consults staff on the purpose of the organisation, and gets feedbaxck, says Vamos.
"Beware of communication “protocols” which limit access"
- Steve Vamos, CEO of Xero#GovSummit19
Boards are responsible for hiring the right CEO, observing the character of the CEO and making sure the leadership team is strong. Non-executive directors also need to overcome their fear of asking hard questions and must dive deeper into their organisations to find out what really is the state of play.
“Unless you are obsessed about the human element you will not get on top of culture,” he warns.
Tech and the boardroom #1 Artificial intelligence and the considerations for boards
Amazon leads the top 20 companies worldwide which will invest in hiring artificial intelligence talent over the next few years, according to Professor Toby Walsh, a leading researcher in AI and Scientia Professor of Artificial Intelligence at UNSW.
“My colleagues put these stickers on a stop sign, and the computer interpreted them as 60 miles an hour signs.
…People forget about the “artificial” part of “artifical intelligence”.”
- Professor Toby Walsh @TobyWalsh #Govsummit19 pic.twitter.com/wlmSiuygZu
Amazon will spend $US227.8 million on AI recruitment on average every year, compared to Google with about $US130.1 million and Microsoft about $US75 million, according to a Top 20 research list compiled by hiring and salary firm Paysa, which was quoted by Walsh in his presentation to the summit.
"The last 50 years of economic growth has been driven by technology."
- Professor Toby Walsh (@TobyWalsh) #GovSummit19
Walsh, who is the author of the book ‘2062 – The World that AI Made’, spoke on the topic Tech and the Boardroom #1: Artificial Intelligence and the considerations for boards.
Taking a deeper dive – looking beyond the board papers
The financial results of an organisation do not tell the complete story and board members must investigate further to fulfil their duties both inside and outside the boardroom, warns Marina Go, MAICD, chair of the West Tigers NRL club, who also sits on other boards such as 7-Eleven, Energy Australia and the Autosports Group.
“One year of a super profit, for example, could be masking a poor culture that could impact negatively in the next few years,” she told the summit.
To understand culture, directors need to get under the skin of an organisation, undertake activities such as planned and unplanned site visits, hold formal and informal talks with staff and attend as many events as possible. “I have Google alerts set up for every company that I serve as a director,” says Go.
“The word culture is used extensively in the CBA-APRA report. We are starting to see the word culture becoming prominent in legislation and regulation. We all have to come to grips with what this word means.” – Graham Bradley #GovSummit19
Graham Bradley FAICD, chair of GrainCorp, turned to the CBA-APRA prudential inquiry on culture as a firm indicator on what board reporting should focus on. Calling it the ‘Harvard Case Study on culture’, Bradley pointed to the report’s emphasis on “risk management culture” and the flow-on effect that emphasis may have in legislation and regulation.
“As a board, how do you set the tone from the top if the whole management team isn’t hearing your responses to various issues?” - Graham Bradley #GovSummit19
Directors should concentrate on data which informs the greatest risks faced by the organisation and for areas of significant risk that may involve looking beyond what is presented at board meetings.
“It’s as much a red flag when safety metrics are really good as when they’re really bad.” - @marinasgo #GovSummit19 pic.twitter.com/A4QhUJhgpk
Live customer data and feedback are useful channels for understanding changing consumer sentiment and gauging whether the business is facing headwinds. “Listening to what is being said about your brand via feedback mechanisms, including social media is vital.”
Having the opportunity to speak to others in the business beyond the CEO is also important, so speaking to senior leaders in the business about he projects they are managing can be invaluable to a director’s understanding of the risks to the business strategy.
“If you are only engaging with your company at the board meeting, you are only doing half the job, or not even half the job anymore.” - @marinasgo #GovSummit19
“Directors who have an eye on culture can be in a position to identify a significant risk before it hits the financials and therefore save the company from shedding value.”
What is measured matters: Harnessing your governing team to incentivise the right outcomes
Too many ASX200 companies have remuneration structures and metrics that are too similar, the summit was told today by Ben Travers, Partner, KPMG’s Leadership, Performance & Reward team.
“I think if you look across ASX200 companies there are similar metrics across these companies,” he says. This has been tied to remuneration and probably too many are similar at the moment.
Remuneration packages are under scrutiny now and it is important to include some combination of fixed and variable remuneration in a package. “Some of the transparency and disclosure in general needs to improve.” Also board discretion should be exercised over remuneration packages.
Former Medibank CEO George Savvides FAICD, who is Deputy chair of SBS and serves on the board of New Zealand’s Ryman Healthcare, says remuneration packages are too complicated, with a legal construct. “It really needs to be made simple and transparent.”
"We have to get over the fools gold that is satisfaction surveys. It is not moving the needle.
..."Satisfied" is 3 out of 5. That means there is 40% dissatisfaction."
- George Savvides #GovSummit19
Kathryn Fagg GAICD, who serves on the boards of ASX-listed companies Boral, Djerriwarrh Investments and Incitec Pivot and chairs the Melbourne Recital Centre as well as Breast Cancer Network Australia, says remuneration packages can be tied to specific outcomes such as important metrics like safety to achieve outcomes. She says this is the case at Incitec Pivot.
"The way people behave dramatically impacts on whether you consider them for more senior roles, it's never just a black and white case of numbers."
- Kathryn Fagg#GovSummit19
However at Boral, safety is not part of the inventives scheme and dozens of people have lost their jobs through not adhering to safety practices.
It is important to understand that board directors need to not get too involved in management because there is a risk of confusion then over accountability, she warns.
Greg Hume GAICD, Executive Director & Group CEO, Nova Group says boards need to be on the lookout for qualitative outcomes and if there is an unexpected outcome when something is measured, then sometimes the measures will need to change. “You may need to rejig that on the fly.”
"If you're not walking the walk of the expected organisation's behaviour, you shouldn't keep your job."
- Greg Hume#GovSummit19
Hypothetical – Moral and ethical decision making in the boardroom – exploring the complex dilemmas facing today’s boards
What do you do when you sit on the board of one of Australia’s largest insurance companies and your board receives cybersecurity ransom threat for $2.7 million?
The hypothetical threat, passed on by the company secretary, is that unless the money is received, private health records of 20,000 customers including the Prime Minister will be released to the public. The fictional PM has a prostate cancer problem he does not want exposed before the election.
Hypothetical board meeting is both instructive and entertaining. Brava @MingYLong and others. @AICDirectors #govsummit19 pic.twitter.com/ZJZv9w8hau
The hypothetical situation was debated at the end of the first day of the summit. A range of crisis reactions was recorded by the fictional board panel, headed by Nora Scheinkelstel FAICD, who in real life is chairman of Atlas Arteria Limited. On the hypothetical panel, she wants to pay the ransom, but other members of the board wish to take different courses of action.
Ming Long, GAICD, who in reality is Chair, AMP Capital Funds Management Limited, has recommended that under this crisis management scenario, a holding statement would need to be issued to the market, because the information will leak out to Twitter soon.
However others disagree and wish to consult IT or crisis experts, and notify the Australian privacy Commissioner. The board cannot agree and the deadline passes. The private health records are released. The panel then debated how ethical issues relate to crisis situations of this nature and what the consequences will be of failing to keep a promise.
Board hypothetical: data breach response plan like any crisis management: plan for first 24 hours, first week & long term. Where’s the plan! @OAICgov @NorthstarNYC #privacy @AICDirectors #GovSummit19
The result? Reputational damage and a weaker bottom line resulting in staff cuts from a pool of 12,000 staff. It was all the result of human error because a staffer left a password taped to a computer.
The fictional CEO Peter Coates, who in real life sits on the board of Glencore and Event Hospitality and Entertainment, recommends that one-third of the staff should be offered voluntary redundancy. Other board members recommended redeployment and expanding the operations of the company to keep the staff. Another consequence is that the CEO will lose his bonus.
A bit of fun around the TrustMe hypothetical role play, cyber attack...Board made up of terrific expert NEDs #GovSummit19 well done @MingYLong Excellent MC Ali Moore @alimoore004 @AICDirectors pic.twitter.com/AoeyzM7C1W
The entertaining hypothetical ends with a resolution to operate in the long term sustainable interests of the company, to offer the redundancies and retraining to 4,000 people and treat them humanely.
The CEO will return to the next board meeting with a full gradual plan which identifies all risks.