Highlights from the 2017 AICD Essential Director Update with Graham Bradley

The AICD’s Essential Director Update is one of the most important events in the Australian governance calendar. Held annually, the update is the AICD’s largest complimentary event. This year in a roadshow around the country, Graham Bradley AM FAICD, Chairman GrainCorp Ltd and Non-Executive Chairman of HSBC Bank Australia, presented the latest information directors need to know on culture, liability, risk, innovation and more.

On corporate culture

“What is it that boards should do to monitor culture? There's no doubt that all directors must address this issue. [The Australian Securities and Investment Commission] suggested a few questions, which directors should ask themselves.

• Is culture a regular topic at the board or committee agendas?
  
• Do directors interact broadly across the organisation to gain insights into corporate culture?
• Does the board get pertinent input from customers, suppliers, business partners, or the internal auditors?
• Are their key indicators of corporate health reported and monitored?
• Do the company's stated values match the actual experience of customers, employees, and the general community?

Now, I think in seeking to have deeper interaction with their organisations, to get closer to the organisation's culture, which is a very good thing, care must be exercised less directors inadvertently blur the line between their responsibility and that of management.

For example, it can be dangerous for directors to develop too close a personal relationship with key employees and to openly solicit comments around corporate culture and behaviour, other than in an appropriate setting.

While recognising that there's no one size fits all approach to a matter like this, and without providing any specific guidance, our regulators around the world have been more explicit in the past year about the fact that they expect boards to adopt an effective framework for fostering sound corporate culture.”

On director liability

The ASIC case against former Australian Wheat Board (AWB) Chair Trevor Flugge is a key development in director liability relating to corporate reputation. ASIC alleged Flugge did nothing when Austrade that Australian wheat sales to Iraq were in breach of the United Nations’ Oil-for-Food program.

“The judge found that Mr. Flugge used sufficient facts to enliven his duty to take steps to ascertain or to inquire into why the UN may consider payments of the transport fees by AWB to be improper.

Now, whatever the merits of this judgement, I think one sad aspect of it that ASIC brought the proceedings seven years after the relevant events and it took another nearly nine years for the judgment to be handed down. Mr. Flugge ceased to be a director in 2002, 16 years is an unconscionable amount of time in my view for a director to be under a cloud of liability.

I believe the case poses challenges for directors of companies of all kinds as to how to handle the many market rumours in direct feedback and information relevant to corporate reputation that inevitably comes across your desk as a director.”

On shareholder activism

“The investment community has made it very clear this year that they expect executive bonuses to be earned and not routinely awarded. They also expect to see bonuses reduced even to zero in cases where corporate value has been seriously diminished by reputation damaging events.

This was the case with [BHP Billiton] in 2015 after the Samarco Tailings Dam tragedy and the same thing happened at [Commonwealth Bank of Australia] in recent months. There's also been a debate about the acceptability of so-called soft remuneration targets in short term and long term incentive plans.

After many years of urging boards to focus on improving customer service, improving safety, improving people management, improving diversity, many institutional investors seem to have lost confidence in boards' ability to do this rigorously with meaningful and quantified measures and have reverted to advocating for solely financial objectives.

Fortunately, most companies have not bowed to this pressure, but have retained qualitative targets and spent more time in carefully considering and crafting measures and objectives that have suited to their circumstances. Interestingly, I didn't hear an outcry from the investment community about soft targets when the CBA recently announced that senior executives would receive no bonuses for failing to protect the company's reputation. It seems soft targets are all right, so long as the scores are zero.”

Questions from directors

Q: How does the board itself in its own interactions, in its meetings for example, embody the culture that it wants to see and also in the way it does engage management?

A: Setting the tone from the top, which is what we expect of boards, needs to start in the boardroom. I think it's important that, and executives will observe very carefully the way boards interact and the way they conduct their affairs around the board table, and the whole organisation will take its cues from that.

And so, our boards needs to be careful to ensure that they have mutual respect and courtesy around the board table. That there's constructive challenge to management, but not destructive challenge. That they conduct their affairs in an appropriate and courteous way, not like question-time in Parliament, for example.

But the other thing, which is important, is how boards respond when there is a breach of standards. How do they support management in addressing those breaches? How do they react if it's one of the senior executives who is caught short or failing at the standards of behaviour?

Because the whole organisation will take its cues from that and notice the yoke, and hope to have high ethical standards in organisation if the board isn't fully supportive of putting consequences in place, to put real teeth behind the code of conduct that they've adopted.

So, I think it is important for the boards to set the example in two ways, both how they conduct their own affairs and their interactions with the organisation, and how they respond in the cases where there's a breach of those standards.

Q: Should directors need to be licensed? Should there be a minimum education or admission standard to become a director?

A: Well, that's the debate we're going to have, I think. There's a new set of regulations being, I didn't mention in my remarks, around phoenix companies that's suggesting there should be director identification numbers to enable authorities to track down companies that are illicitly making themselves unavailable to their creditors through phoenixing.

So there's a multiplicity of interests coming together here around the notion of director licencing. I don't think it's a matter that's been fully debated and discussed. But the one thing I will say is that, in the companies I'm associated with, and I think more broadly, it's going to become more and more important that people who want to be directors do engage in professional education.

I know, for example, a leading social club that I heard about the other day that makes it mandatory for directors - it's a non-profit organisation in the Western Sydney area - but they make it mandatory for directors to have done the AICD’s Company Directors Course and pass the exam before they can be put up to be elected by their members.

So I think we are going see more and more organisations saying, "We need to have more directors who will bring a professionalism and a knowledge and experience to the governance issues that we confront."

So I think we'll move in that direction, regardless of whether there's any move for compulsory licencing, such as foreshadowed in the banking executive accountability regime.

Q: What is the responsibility of the board in moving the needle from a short term focus to a longer term focus on corporate performance and ongoing shareholder and stakeholder value?

A: I think it's a really important role for the board. There's a lot of pressures on CEOs to take short-term actions to improve short-term profits and performance. We're not as bad as the Americans, who have compulsory quarterly reporting. Most companies in Australia have six-monthly reporting. And let's hope it stays that way because the Americans, I think, end up with much too short-term focus when they're worrying about a sense of every ... on the shared price every quarter.

But those pressures will be there for the investment community, who are in, whatever they may say, are inherently short-term in their outlook. And therefore, there will be a lot of pressures on management.

So it's a job for the board to make sure that management isn't overlooking opportunities, not taking action that they could take that might impact short-term returns in the interest of long-term prosperity for the organisation. And of course, boards need to keep the time horizon of consideration in their strategy discussions, well beyond the one, two, and three years, in most cases.

So I think that is an important role for the board. And of course, it will be up to the board to help management and also directly in the case of communication with shareholders, investors to explain the rational for their long-term investment decisions and why it's appropriate that they might take actions that reduce the short-term earnings at the expense of longer term opportunities.

We've seen some cases in the last year or so where boards have backed right off after shareholder criticism of things like investing in a company in China. Now of course, if the company in China is a huge one and it's a better company, then it will be a controversial decision. But even taking minor offshore investment decisions have received an adverse reaction from some investors and boards have backed off. And I think that's a shame.

I think we've all got to be prepared to argue our strategies to our investors and our owners and to explain to them why we think we're making the right decision for the long term.