Being a director on an ASX board comes with its risks. Leading directors discuss 7 reasons to be wary of being on an ASX board, and why it's still worth it..
Joining a board is still an attractive role for many executives looking for the next stage of their careers, but directors say they are more cautious and being more rigorous in their due diligence.
âThe depth of discussion and the understanding have gone to a new level,â says Rebecca McGrath FAICD, chair of OZ Minerals and a director of Incitec Pivot, Goodman Group and Investa Property Group.
By the time discussions about a board role progress to a second conversation, potential candidates are well informed on what analysts might be saying, or raising questions about the issues stakeholders or activists are focusing on.
âThey really want to understand what theyâre taking on, what the current and future issues are, and the status of those issues,â says McGrath. âThere may be litigation or pending transactions. Or the board might be thinking about transactions or changes to the company that well-informed, well-researched candidates should be thinking and asking about.â
They want to know who owns the company stock and the active investors, the interest groups, the companyâs position in relation to big accounts, and its reputation in the market. They also want to know about upcoming or potential litigation and are seeking briefings not just from the in-house counsel, but also from external lawyers. Likewise, potential directors want to speak not only to the chief financial officer, but also the external auditors, says McGrath.
Kim Anderson, a director of Carsales, WPP AUNZ and Marley Spoon, as well as chair of non-listed, bank-owned (CBA, ANZ, Westpac) payment engine Beem It, says potential directors are more cautious when she sounds them out about board roles. In an environment where activist shareholders are using remuneration votes to send messages on a companyâs environmental, social and governance (ESG) performance, potential directors are mindful of a boardâs governance record. Likewise, they want to ensure boards are rigorous around their continuous disclosure obligations.
Nicola Wakefield Evans FAICD, a director of Macquarie Group, Lendlease, the Clean Energy Finance Corporation and AICD, speaks to potential directors on behalf of these organisations, but also in her capacity as chair of the 30% Club Australia, which aims to increase female representation on boards.
While there is no less enthusiasm from candidates to become non-executive directors, there is a lot more attention on the number of board roles a candidate has â both from outside and from the candidate themselves â because of the increased workload for directors, she says. âWhere you make an approach to somebody, often, if they decline, itâs not because they donât want to be a director. Itâs because they feel they donât have the time and capacity.â
It is something that Tim Nelson, managing director of executive search firm Korn Ferry Australasia, has observed. Prospective board members want to be sure they can make a contribution to the board and are more discerning about the board and the company environment they are considering joining. âReputational risk is top of mind for a lot of directors,â says Nelson. âThe days of tapping someone you know are over.â
Additionally, he says, where four or five board seats was considered manageable for directors a decade ago, three boards in regulated industries or financial services is considered the new benchmark. This has shrunk the pool of available and experienced directors.
Former David Jones CEO Paul Zahra GAICD agrees that market pressure for short-term performance, media scrutiny, increased personal liability and reputational risks mean that joining a board is ânot for the faint-heartedâ, but says that can be a good filter for prospective directors.
âWe need to have spirited and confident people on boards,â says Zahra, a director of Laser Clinics Australia and chair of the PwC Diversity and Inclusion Advisory Board, the Australian Institute of Music and the Pinnacle Foundation, which supports LGBTIQ+ Australians.
Why a director's job is harder
1. Risk and liability
Directors say that the risks they face in carrying out their duties have increased considerably in recent years, in both size and scope.
Former lawyer and AICD CEO John Colvin FAICD says directors in Australia have âhuge amountsâ of personal liability. Colvin points out that Australian directors or executives can be held personally liable for more than 100 separate breaches of the Corporations Act 2001. Additionally, the maximum penalties faced by directors under the Act this year increased from $200,000 to the greater of $1.05m or three times the benefit gained (or loss avoided) from the breach. Maximum prison terms increased from five to 15 years for serious criminal breaches of several sections of the Act.
Along with breaches of the Corporations Act, directors can be held personally liable and face fines or criminal prosecution for breaches of the Income Tax Assessment Act 1997, occupational health and safety regulations, environmental laws and competition law. Additionally, there has been an upswing in class actions, particularly relating to disclosure.
âIt seems to be a knee-jerk reaction. When anything goes wrong, weâll just make directors more personally liable, not only civilly, but criminally,â says Colvin, who notes there are calls to make directors liable for underpayment of staff. âOne of the biggest problems Australia has now is the criminalisation of business activities.â
Colvin notes an asymmetry between the liability directors face and that of people in other professions. He asks, what happens to the federal Treasurer if he or she makes a shockingly bad decision and millions of people lose money?
On top of this is the risk of directors getting caught up in litigation and class actions
70%Â of directors believe there is a growing expectation gap around the role of a listed company board.
57%Â call for improved reporting of non-financial risks from management.
80%Â highlighted they are also doing much more in their roles â including more âdeep divesâ and devoting greater time to âconnecting the dotsâ and contemplating emerging issues.
47%Â want shorter board packs that more clearly identify priority issues.
Source: PwC survey of 112 ASX 300 non-executive directors, October 2019
2. Compliance and regulatory burden
Graham Bradley FAICD, chair of HSBC Australia tells of recruiting two new directors â Grant King and Geoff Wilson. Come board meeting day, he says the board kicked off in the morning, but the agenda was jammed with risk, compliance and all the governance work. âIt was 4pm before we sat down and started to talk about the business,â he says. âThe rest had to be about regulatory compliance. A lot of capable people will find they do not want to spend their time [on a board]. And a lot of people who would make very good directors would not want to serve on a listed bank board.â
Of particular concern to directors is an upswing in the regulator and compliance burden on boards. Eileen Doyle GAICD, who sits on the boards of Boral and Oil Search, says while the fundamental responsibility of a director hasnât changed, the compliance burden has. âThereâs so much more time now on compliance and extensive discussions on risk; so directors need to spend most of their time on strategy and building core competencies and recognising that risk and reward go together. They need to spend time discussing strategies and taking risks in the long-term value interests of the company.â
Sally Herman GAICD, chair of the risk committees at Suncorp and Investec Property, a member of the audit and risk committee at Premier Investments, and a director at Breville Group, says boards need to adjust. âThe workload from a board perspective is making sure the company has the tools and the skills to be able to manage compliance on a day-to-day basis, and therefore gives the board confidence that the big issues are being dealt with,â she says.
3. Expectations on directors and scrutiny
Expectations on directors are unrealistic, with a belief that companies will be solving societyâs problems, says Doyle. âThereâs not necessarily an understanding of the role that a director has. Weâre also in a society now where there are so many single-issue activists and not a lot of listening or fact-based discussions on a whole lot of important issues to that society.â
Wakefield Evans says there is a mismatch between stakeholdersâ expectations of the tasks directors and boards should be doing to what theyâre actually supposed to do legally, and how our governance structures are set up. This is challenging the role of the director, she says.
4. Workload
The intensity and degree of rigour of directorsâ work has increased as they review issues and court judgements as well as new requirements and findings of regulators and inquiries such as the Australian Securities and Investments Commission (ASIC) and the banking Royal Commission, says McGrath. Interactions with management have also become more intense as they adopt a posture of âdonât just tell me, show meâ. âItâs taking the time to understand the diagnosis or the root cause or the drivers of some of these issues, and being modest enough to ask âIs that something that could happen to us?ââ she says.
A key driver of the higher workload for boards is the increased regulatory burden, particularly in financial services companies, not only in terms of complying with regulations and requests from ASIC and the Australian Prudential Regulation Authority (APRA), but also in measuring risk. âIn particular, thereâs been much more attention paid to emerging risks and non-financial risks,â says Herman. âTo be able to have an effective discussion about those probably requires directors to do more continuing education than ever before.â
From a board perspective, she says, much of the additional compliance workload comes from making sure the company has the tools and the skills to be able to manage compliance on a daily basis, and it therefore gives the board confidence that the big issues are being dealt with. Additionally, until two or three years ago, interaction with regulators was mostly carried out by executives, but now it increasingly takes place at board level, as well.Â
5. Technological complexity
Directors are also required to get on top of technology as it upends business models and transforms markets. Anderson says they have to âlean inâ a lot more than they have in the past âbecause most businesses are either transforming digitally or have transformed or will be transformingâ.
The advance of technology is also making it more difficult for directors to balance short-term performance pressures from some investors such as funds reporting quarterly and short-sellers against other investorsâ desire for long-term outcomes.
Companies increasingly have to pivot or transform, and this requires significant investment, not just of money but also time. âIt is increasingly important for management and directors to be able to communicate that transformation to the market, and [indicate] what that transformation is going to involve,â says Anderson. âIf you donât then, yes, shareholders will get agitated and will start to vote against the companyâs direction and strategy.â
6. Proxy pressure
The growing input of proxy advisory firms has been increasingly in evidence at Australian AGMs in recent years. And proxy advisers are demanding a lot more of directors, particularly around remuneration, says Anderson. She spends a lot of time âmanagingâ proxy advisers, ensuring they have the right information for their votes and in turn talking to shareholders because of what she calls proxy advisersâ cookie-cutter approach.
âWeâre having to spend more time speaking to shareholders and explaining to them why weâre making certain decisions,â she says.
7. Risk vs reward
Increased personal liability for directors and a heavier workload raises the question of the risk-reward equation. âIf you look at the workload of directors coupled with the risk and potential liability, I donât think weâre being paid appropriately,â says Wakefield Evans. âBut it seems to be one of those issues people donât want to talk about.â
Noting directors havenât had a pay increase since the global financial crisis of 2007â08, she says many people are unaware of the risks directors take on.
âItâs the risk you could lose everything, which ordinary people donât have. [People say] if you need the money then you shouldnât be a director, which I donât think is appropriate.â
Doyle says the âincredible scrutinyâ on directorsâ pay â and on directors themselves â has resulted in the hours a director is spending in the role increasing faster than their pay. âRight now, probably the financial rewards donât quite match the hours they spend doing the role.âÂ
Why itâs still worth it
Despite all the challenges of being a director in 2020, all the directors interviewed agree it is still a worthwhile and satisfying role. For Suncorpâs Sally Herman GAICD, the rewards come from sitting at board tables where decisions are being made that could potentially change how that sector interacts in the Australian economy. âChanges that have a potentially national significance, itâs a very rewarding place to be,â she says. âItâs an important role.
We need to continue to find the very best people to sit on listed and unlisted company boards. It is up to us to make it an environment where risk and reward is acceptable.â
As a non-executive director, Macquarie Groupâs Nicola Wakefield Evans FAICD enjoys being able to sit across several different companies in different sectors, each with its own set of employees and stakeholders â and different challenges. âOne thing that is underrated in what directors do, is we have an ability to see where change is coming, where we can have a role in driving innovation,â she says.
Boralâs Dr Eileen Doyle FAICD argues directors make long-term contributions to the sustainability of a company because they typically sit on a board for nine to 12 years. âThe average CEO is only around for five years or so,â she says. âIn many ways, directors are the consistent influence.â
Paul Zahra GAICD enjoys working with startups and companies using technology to make inroads into the customer base of larger and more established companies. âItâs an exciting time to be in business for high-growth companies. The world really is their oyster and that kind of expansion is wonderful to oversee from a board level.â
He says that while the past few years have been gruelling for boards, in the wake of the banking Royal Commission, there is an opportunity to reposition the role of boards and directors, and demonstrate greater leadership. âI believe we will see a new era for public boards and, given the challenges of the past, one that is more positive, rewarding and closely aligned with shareholder and customer interests.â
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