5directors

The fallout from the Financial Services Royal Commission leads a long list of challenges for boards in 2019. But a key task is accelerating work that began years ago to equip boards for a more volatile, uncertain, complex and ambiguous business environment. That’s not to say directors should ignore shorter-term issues. A slowing global economy, the US-China trade war, Brexit and the pace of US rate rises will influence board thinking in 2019.

Locally, the house-price correction, easing domestic economy, Federal election, policy and regulatory change, energy prices and the Aged-Care Royal Commission will add to governance complexities. A change of government, suggested by the polls, will also challenge business.

In the background is the unrelenting force of technological change and digital disruption. Cybersecurity, artificial intelligence and the Internet of Things have morphed from future megatrends to issues that will determine industry winners and losers in a blink.

The Governance Leadership Centre asked five company directors about their top governance issues for 2019. Their focus was on driving governance change that ensures boards are better able to deal with rising regulatory and community expectations.

Here is a snapshot of their responses:

Nora Scheinkestel FAICD

Chair of Atlas Arteria and a non-executive director of Telstra Corporation, AusNet Services and OceanaGold Corp.

The list of governance issues for Australian boards is shortening as key trends converge. This time last year, the Edelman Trust Barometer showed a material decline in public trust in business, government, media and most institutions. It set the tone for the year ahead and that was confirmed in the banking Royal Commission hearings and many commentators and politicians reinforced the message that business couldn’t be trusted.

However, the 2019 Edelman Trust Barometer has shown a modest improvement in trust in Australian business though much more needs to be done. The reality is that there are different kinds of trust today. People may not trust major institutions but will trust a stranger to drive them in an Uber car or babysit their children. Perhaps the trust that business should aspire to is the one created by people knowing that, over sustained interactions, they will get what they expect.

Boards and executive teams must be satisfied that their organisation’s products or services are fit-for-purpose and true-to-promise. Directors need to call out poor behaviours and rigorously hold management and themselves accountable. Trust today requires radical, real-time transparency and being agile and proactive in communicating when things go wrong.

Our governance model is predicated on trust but it’s not blind trust. It is earned by repeated dealings where questions are asked, responses given and then the facts bear out whether what was promised was delivered.

If there’s a problem, even if you don’t have full information, let key stakeholders know and involve them in finding a solution.

Boards need to lead in creating a culture that is agile and open.

The banking Royal Commission’s findings raise serious issues and provide important guidance for industry broadly on how we can all improve the way our organisations perform and are governed. But, I still believe most people turn up at work each day wanting to do the right thing by their firm, their customers and their colleagues. And that most organisations want to be responsible in their dealings.

Ultimately, boards must continue to manage multiple stakeholder needs and these do not need to be incompatible. If the organisation does not deliver a sufficient financial return to the funders of the firm, it won’t secure the capital necessary to address a broader range of stakeholder needs. Equally, if it does not have a strong social licence to operate, it won’t attract and retain the best talent or community support necessary for its operations and therefore won’t be able to deliver returns to shareholders.

Boards in 2019 must be alert to these different demands and continue to find the right balance that ensures the long-term sustainable future of the organisation and the appropriate growth and risk appetite that will deliver it.

Diane Smith-Gander FAICD

Non-executive director of Wesfarmers and AGL Energy. Chair of Safe Work Australia and Chair of the Asbestos Safety and Eradication Council.

The first challenge for boards in 2019 is ensuring their organisation delivers on the promise of integrated financial reporting. Information that helps stakeholders better understand organisation sustainability goes to the heart of the banking Royal Commission and its recommendations for higher accountability and stewardship in financial services.

The information that integrated financial reporting can produce will help boards with their assessment of organisation sustainability, strategy, compliance and risk. It will also provide more transparency for stakeholders and expand conversations with investors.

Yet the uptake of integrated reporting in Australia has been frustratingly slow. There have been a few earlier adopters and some good work on climate-change disclosure and reporting. But it’s time for more companies to take the plunge and embrace integrated financial reporting.

Another challenge for 2019 is ensuring boards do not get left behind in the race for data. Management is embracing data analytics, artificial intelligence and machine learning to cut costs and grow revenues. Using data to support good governance seems dull by comparison.

I fear governance is at the end of the queue in the data race. There is only so much directors can do. We need data analytics and algorithms in the boardroom and directors with the skills to use them. Technology can interrogate data at a level of granularity that is not even remotely possible for human directors. We need algorithms that think like directors and provide another layer of analysis and resource that is combined with board intuition and experience.

The third challenge is director talent. More board talent is gravitating to the private sector because there are potentially higher rewards and less risk compared to governing listed companies. I fear we could see a talent drain in listed-company boardrooms quicken in 2019 as extra regulation, risk and workloads make these directorships less attractive.

Also, the notion of director tenure is ripe for re-evaluation. The idea that a director automatically serves for a three-year term, then probably one or two more terms, is antiquated.

As business becomes more volatile, a board might need a certain director for one term and a different director for the next term as the organisation changes. Boards need flexbility to bring in directors with different skills, depending on their organisation’s needs.

Graham Bradley AM FAICD

Chair of HSBC Bank Australia, EnergyAustralia Holdings and GrainCorp.

In terms of governance issues for 2019, boards will consider if they are responding sufficiently to the Australian Prudential Regulatory Authority’s (APRA) report on the Commonwealth Bank last year, which I consider to be the most influential report for Australian governance in a decade (APRA’s report implied that boards should dig deeper within their organisation).

The recommendations of the Financial Services Royal Commission reinforce the thrust of the APRA CBA report. Boards of large listed companies have had time to reflect on APRA’s report and I suspect we will see significant board change in 2019 because of it. Boards will sharpen their focus on how they spend their time, their understanding of customers, organisation culture and whether financial incentives in their organisation encourage desired behaviours.

A tougher regulatory approach after the Royal Commission is another possibility. I suspect regulators will be likelier to impose the letter of the law rather than exercise their discretion and work with organisations. It won’t just be the APRA or the Australian Securities and Investments Commission (ASIC): environmental regulators are already coming down harder on business than they have in the past and other regulatory bodies are likely to follow suit.

My concern is that self-reporting and self-disclosure by companies might not be as effective with regulators as in the past. Companies won’t win any points with regulators if they take problems to them early, so may be more inclined to sit on issues longer because they know they will be hit by penalties anyway. Also, if regulators are too officious and frank then open discussion with companies could be inhibited. Regulators need to walk a fine line and not over-react.

In terms of business issues, the US-China trade war is a key consideration. It is already affecting Australian companies that export to China and others that import Chinese equipment for the telecommunications industry, for example. The trade war will add to business volatility.

Energy prices remain a business threat in 2019. I fear that rising energy prices will force more Australian companies to move to the US and other countries with lower energy costs. The destruction of Australia’s competitive advantage in energy will have huge ramifications.

Moves to abolish enterprise bargaining in favour of old-fashioned industry awards – likely if Labor wins the Federal election – would be a retrograde step. Enterprise bargaining is far from perfect, but it has enhanced labour-market flexibility and responded to changing work trends. Boards will have to consider the effect of a more rigid labour market.

A new Federal Government, which many feel is a real possibility, will be another board consideration this year. New Ministers and new bureaucrats in government departments can hold up policy development for six months or more. Business and the community tend to underestimate the value of continuity in government and are often unprepared for political change.

Keith De Lacy AM FAICD

Company director, former AICD Queensland President, former Queensland Treasurer.

2019 presents new challenges for directors and corporates. Old challenges remain – technology and disruption, and the national and global economies, exacerbated somewhat by uncertainties around trade and political instabilities.

New challenges emerge in the socio-political environment. Directors are no longer primarily held to account for commercial performance, but increasingly for corporate social responsibility. Some say the social activists have finished their long march through the obvious institutions and are turning their attention to the corporate world, the citadel of capitalism.

After reading the latest (fourth) draft edition of the ASX Corporate Governance Principles and Recommendations, to go live this year, it is easy to agree. In more than 50 pages, the old-fashioned principle of increasing shareholder wealth is not mentioned. The subject of diversity takes up almost five pages.

I supported the principles and recommendations when they were first promulgated in 2003, with the common-sense approach to corporate governance and the ‘if-not-why-not’ reporting obligation. We understood, as directors, our duties and obligations. Any directors worth two bob knew they had to retain a social licence to operate.

How insulting to have that rammed down our throats by save-the-world activists who see the business sector as the enemy.

All ASX principles, standing alone, are no-brainers. But the focus, and language surrounding them, allows them to become weaponised by these activists and used to promote agendas. Company directors become confused about their duties.

Welcome to the new governance reality. And it is not only the ASX principles. ASIC has been banging on about culture and creating a new fuzzy liability that can be taken up and weaponised. And so, too, with APRA and its treatise on banking culture. It adds up to increasing liability for directors and confusion about roles and responsibilities.

To some extent, these developments mirror the world we live in. I have never seen the business community held in such low regard, seemingly alienated from most of society. There is little comprehension about where wealth is created. Business is the enemy.

It seems 2019 will herald a new Government with a high taxing, anti-business, class-war agenda. They see company tax cuts, so necessary to retain international competitiveness, as ‘a hand out to the big end of town’. They accept policy advice from the most radical ACTU in generations – things like industry-wide industrial bargaining, a step back in time if anything is. And CFMEU demands on coastal shipping, no matter what the cost to the economy or cost of living. And energy policies inevitably leading to massive increases in electricity costs.

Perhaps in government, Labor won’t be as bad for business as they threaten to be. But we can only take them on their policy pronouncements. It does show how the business sector is losing the battle for the hearts and minds if a party can sail into government on such a platform. Business is being outspent, outmuscled and outcontested in the public arena.

As directors we have to deal with the world as it exists, not as we want it to be. There are so many more forces to deal with these days, many of them vague and invisible – harassment, bullying, sustainability, climate change and the list goes on.

Boards should be prepared to argue their case and not roll over and get into virtue signalling – as some banks did by refusing to fund new coal mines (a lot of good that did them).

Boards should use every opportunity to promote the value that business brings – the wealth companies create and disseminate, the jobs they deliver, the dividends to the Mums and Dads in the super funds of Australia, and their social and sustainability deliverables.

Peter Hay FAICD

Chairman Newcrest Mining, Vicinity Centres

A key board challenge for 2019 will be to not over-react to the findings from the Financial Services Royal Commission. Clearly, change is needed in the banking sector. But the risk is boards get distracted by banking-sector issues and lose sight of their job.

I find it strange that organisational culture and sustainability are suddenly the flavour of the day with regulators. Good boards have always recognised the importance of organisation culture and having one that encourages high performance, openness and doing the right thing. Good boards have always tried to ensure their organisation has profitable and sustainable growth, and a strong handle on risk.

There’s a perception, amplified by various reports and inquiries, that boards are not sufficiently diligent or need to spend extra time in their organisation and have more information. The risk is that directors devote extra time in 2019 to issues that do not add a lot of value.

I have always believed that, having set strategy, the board’s main task is to hire the right CEO, incentivise him or her fairly, monitor performance including in relation to culture, provide guidance as needed, and let the executive team do its job. It’s concerning if boards head towards a quasi-management role – a trend that the governance community should resist.

The core issue for boards in 2019, and all years for that matter, is to be absolutely confident the organisation has the right CEO to meet the Board's strategic and cultural goals . Boards must be satisfied the CEO is interested in world’s best practice in the particular industry, open to innovation, able to build and maintain a strong management team and organisation culture, and leads from the front by his or her actions and values.