The innovation imperative by Australia’s Chief Scientist

Robo-directors are operating in the world and there is one that has sat on a Hong Kong venture capital firm board since 2014. But there will still be a great need for human directors until 2050, according to Australia’s Chief Scientist Dr Alan Finkel AO.

Great session this morning with Dr Alan Finkel on what makes a good director #GovSummit19 @AICDirectors annual conference pic.twitter.com/PIaw5qFigO

 

 

AI lawyers are now beating humans at reviewing non-disclosure contracts and AI stockbrokers are now ubiquitous on Wall Street, he told the Australian Governance Summit on Day Two.

“Robot directors are good at their jobs and are getting better,” he said. “But director bots will still lack something vital - artificial general intelligence – relating to human insights and experiences. Experts tell us human directors are likely to be with us till 2050 or longer. So shareholders, experts and governments will have to look to us for quite some time yet.”

"The challenge for the future is finding highly capable people who think like good humanists AND like good engineers."- @sciencechiefau Dr. Alan Finkel #GovSummit19

 

 

To operate effectively, directors need to think like good humanists and then like good engineers. They must act as custodians of vision and culture with heightened olfactory systems – the sense needed to smell a rat or smell smoke.

“You have to be capable of asking and answering questions that AI can’t answer. And the best question to ask is should we do this – not could we do this?”

Integrity is another vital factor. The best organisations prioritise this with four practices:

  1. Teach integrity to new staff
  2. Reinforce integrity to existing staff
  3. Make sure employees are not penalised for following integrity procedures
  4. Avoid any incentives leading to risky/dishonest behaviours.

“It takes much more than an occasional statement to achieve integrity,” Finkel says.

But directors can rest assured that their jobs are safe for some time yet and won’t be displaced by robot directors just yet.

“The sort of director that you want to be is not the director [AI] will displace. Robots don’t have noses, can’t have fun, and can’t tell humans what they ought to do.” – Dr Alan Finkel AO @sciencechiefau #GovSummit19 pic.twitter.com/PizUryetxr

 

 

On the question of innovation in the economy, new metrics need to be developed by industry to measure innovation, such as driverless cars used in mining, says Finkel. At present the only measure is commercialising technology from universities to research and development.

The Chief Scientist office is currently researching for Federal Government developing a new suite of metrics to measure innovation across the economy and will report to the government by June.


The power of inclusion: Unlocking the value in doing the right thing

In the last five years, CEOs have taken more of a leadership role in Indigenous affairs issues, the summit was told today.

“In the last five years, more CEOs see themselves having a clear leadership role in this space,” Shelley Reys, Partner, Management Consulting KPMG Australia, and CEO of Arrilla Consulting told the conference. By taking an active role on the issue, they enhance brand and reputation, and they see Indigenous skills as GOod leadership skills to have.

 

 

Indigenous issues have evolved in the corporate space over the years, says Rey. “I think corporates used to see this as a feel-GOod exercise limited to human resources. But there is a fresh business case thinking about how getting involved can help organisations do what they do best.”

It is GOod for boards and directors to now realise: “If you are not involved there is a GOod chance that your competitors are.” Most organisations are now involved in the Indigenous space one way or another in all sectors across Australia, where there have been now 1,000 Reconciliation Action Plans (RAPs) adopted. More businesses should also adopt this program, she adds.

Jill Hannaford, Technical Services Leader of GHD says she encourages members of her board to promote Indigenous issues by encouraging presentations from Indigenous staff and talking to stakeholders. “I think that understanding piece is so important.”

Michael O’Loughlin former Sydney Swans player and the owner of ARA Indigenous Services, says more girls are being encouraged in sport and this is one way to increase gender diversity. But at the corporate level, it is very important to allow Indigenous stories to be told to increase awareness.

 

 

In a contribution to the Summit reader, Shirley Chowdhary GAICD, CEO of the GO Foundation and Deputy Chair of YMCA NSW, says inclusive GOvernance can be so much more than inviting diversity to have a seat at the table.

“Naively, I thought that inviting diversity to have a seat at the table was enough,” she told delegates during a session on the power of inclusion: Unlocking the value in doing the right thing.

“My time at GO has taught me that inclusive GOvernance can be so much deeper and more powerful.”

The GO Foundation is committed to creating workplaces where Indigenous Australians can bring their authentic selves to work every day.

In 2017 GO commissioned KPMG Indigenous Services to look into the correlation between further education and better outcomes for Indigenous students. They found that it can improve employment prospects, earnings potential, health and wellbeing.

“The example that I live every day at GO gives me hope for the future of boards and management in Australia,” she says.


Joining a start-up board? Understanding what your start-up needs

Misconceptions coming on to boards

Xinja founder Eric Wilson told delegates the two common misconceptions for directors coming on to boards are: 1. It’s not difficult and 2. You’re not there to run the business. “Calm down,” says Wilson.

Blackbird Ventures founder Rick Baker continued, “Most startups will fail. Those stressful situations you deal with as a director. Your job is to be unemotional, this is how we’ll solve this. You have to remember this is everything for the founder.”

“When you get that first bit of bad news from a founder, it’s important you react in the right way or they won’t come to you with bad news again,” Baker adds. “Don’t add to the stress.”

“Most startups will fail. They’re stressful situations you deal with as a director. Your job is to be unemotional and say this is how we’ll solve this.”

Blackbird Ventures’ Rick Baker (@rcsbaker) #GovSummit19

 

 

Startup to listed companies

“Readiness is function of business model and governance. The purity of guidelines for ASX or AICD won’t necessarily work for a startup,” Belinda Gibson FAICD said. The notion that you need to list to raise capital doesn’t ring true at a time when Uber and Lyft are still private companies that have reached unicorn valuation, according to Sally Ann Williams of Google.

Remuneration

Williams warned directors not to join a startup board for the money, and the panel agreed. “You don’t join a startup for the cash,” Wilson said. “We pay $1,000 a meeting and grant options at the end of the year. “Money is like the scoreboard. If you’re focused on the game, the scoreboard will take care of itself,” Wilson said. Standard directors’ pay is zero, according to Baker. “Generally the directors are investors, we want directors to get incentives from investing.”

“Money is like the scoreboard. If you’re focused on the game, the scoreboard will take care of itself"

- Eric Wilson (@EricatXinja), Xinja founder, on startup remuneration.#GovSummit19 pic.twitter.com/YYspvAeYLA

 

 

Satisfactions of startup boards

“You may not be doing it yourself but your ability to support the founder is huge,” Wilson said. “Being part of the journey of some of these companies is one of the most fulfilling things I’ve done in may career,” according to Baker. “To see Canva level and become world class business leaders is just this wonderful experience”

On CEO and director relationships

“CEO and founders are probably your shareholders - you’re their boss but they’re also your boss. It’s a very difficult pathway to navigate,” according to Wilson.

Moving a founder CEO on can be hard. “I have no prescribed way of doing it or doing it well, it’s very very difficult. You do have this problem, who’s the boss of who. I’m often a minority shareholders. My job is to work for the CEO and founder and help them,” Baker said.

“You may not be doing it yourself but your ability to support the founder is huge,” Wilson said.

Recent NFP reviews: implications for the for-purpose sector

Large charities will face increased pressure on their boards to justify the basis on which they reward management in not-for-profits, the summit heard today. “With improvements in Australian Charities and Not-For-Profit Commission enforcement powers we are likely to see the ACNC more robust in holding people to account,” said Matthew Turnour FAICD.

"Large charities will face increased pressure on their boards to justify the basis on which they reward management in not-for-profits." Matthew Turnour #nfp #GovSummit19

 

 

Turnour is a member of the review panel which produced the Australian Charities and Not-for-profits Commission Legislative Review 2018. A report has been finalised and has made 30 recommendations ranging from lifting reporting thresholds to $1 million for some charities and recommending that the board power to remove NFP directors be abolished.

“The ACNC Review recommendations are aimed at pulling back the overburden on good charities but for those charities which have transgressions we want to see more discipline,” says Turnour.

One of the recommendation is to establish over the next 15 to 20 years one uniform framework for regulating not-for-profits.

Governing across jurisdictions

US-China relations, Brexit and troubles in India and Pakistan are the symptoms of broader global volatility, delegates heard at the ‘Governing across jurisdictions’ panel. Frank Cooper FAICD, Woodside Energy Non-Executive Director warned delegates against entering into global markets with presumptions. “There are behaviours and customs in particular countries that can bring you foul of anti-bribery and corruption obligations. It’s important to have in-house experience in these areas.”

“If you have purpose beyond profit and values which can motivate people both in this room and people from different cultures, then it’s much easier to communicate. This requires humility from board and management.” - @JingminQian #GovSummit19

 

 

Jingming Qian, non-executive director of the Abacus group and AFR 100 Women of Influence 2018 recipient, spoke to research showing Asian companies more significantly value seniority as well as humility. “The expectation of the leadership for humility, caring and communication is different. A good leader is expected to be caring and humble.” This links to company pursuit of purpose and vision. “If you have purpose beyond profit and values which can motivate people both in this room and people from different cultures, then it’s much easier to communicate. This requires humility from board and management.”

“[In my time] as an institutional investor, if a board raised their future plans for intl expansion, I would always review the board’s composition. If there were no directors who had experience in doing what they wanted, I knew it would not succeed.” - Dr Sarah Ryan #GovSummit19

 

 

Dr Sarah Ryan, Woodside Energy Non-Executive Director, covered her experiences as director on a Norwegian board for over 10 years. In Norway, boards are required to have employee representatives and 40% female representation. The requirement could prove challenging for employee representatives when they needed to return to the work with the burden of highly confidential information. But she emphasised, “It works really well in Norway. They do a world-class job.”

Our CEO & MD Angus Armour FAICD encouraged directors to consider the complexity of culture and to challenge preconceptions. “When we think about adapting to international cultures, you probably mentally default to difficult government environments. That’s not the only business environment. For example, #MeToo originated in the US and American society is very litigious. If you’re looking at where people lose money and end up in court the most, it’s the US. Culture is complicated no matter where we go.”


Future Trends – preparing for the next cycle of change

Not enough is being done in Australia by corporates to address ethics issues at board level, the summit was told.

Banking and finance leader Mark Devadason said ANZ Bank has an ethics and governance committee that other corporates could emulate. “There needs to be a dialogue at board level where board members can interrogate anyone from sustainability or anyone else in the business, where they can look at human rights conduct. Organisational change is not happening enough in Australia but I have seen this in other areas round the world.”

With 15 million of the 40 million slavery victims worldwide in the private sector, other companies such as Fortescue Metals and Nestle had also addressed modern slavery well, but this was yet to take place broadly in Australia.

“My experience is that boards are not digging deep enough into this issue and are relying on wordsmiths in the corporate affairs department. We need to inquire deep into our supply chains,” he said. The next big cycle of change in terms of future trends is that capitalism needs to adapt to a rapidly changing world,” he added. “I see a trend towards a more responsible business model.” The responsible use of capital and the protection of human rights deep into corporate supply chains must be high on the agenda.

"Most companies in our supply chains are just not prepared for the impacts of climate change."

- Mark Devadason (@Azabumark1)#GovSummit19

The United Kingdom Home Office has indicated it will call out laggards on modern slavery reporting. Devadason serves on the board of the Hong Kong based NGO the Mekong club – which advises business how to work on modern slavery. “My suggestion is you don not wait till your brand is in tatters, you need to get on top of the issue now.”

"Let's get away from the idea that talking about the impacts on society is very messy."

- Nicholas Davis (@nickdavis97)#GovSummit19 pic.twitter.com/WRoPtlfDDw

Nick Davis, Head of Society and Innovation, Member of the Executive Committee, World Economic Forum, says four trends are occurring in technology governance.

  1. Technology is a strategic board issue as an ethics issue but in the last few months the technology sector has been asking for more regulation.
  2. From ancient to agile approaches – a huge movement from boards and partners asking how can we do this better?
  3. From pure compliance to competitive advantage – technology is being seen as a lever.
  4. From kit to culture - educating all in the business form the board to the frontline.

Drone specialist Catherine Ball says the reason why drones are important to boards is they will affect how businesses work and have health and safety and risk implications.

"The best way to predict the future is to create it."

- Dr Catherine Ball (@DrCatherineBall)#GovSummit19

There are drone ambulances on the way and Uber Elevate plans to be flying passengers around by 2023. Small drones are already estimated to be saving 100 lives a year from bridge inspections to safety audits and finding people trapped in floods.

Exo skeleton suits are being developed which will allow workers to lift hundreds of kilos, which can prevent injuries and workers compensation payouts. “That’s not a moral quandary, that’s a legal quandary. It’s going to be central to how we think about risk.”


Governance 4.0 Operating in the current governance landscape

Directors will notice a difference in ASIC enforcement under significant new governance powers introduced in the last year and oversight powers recommended by the Hayne Royal Commission Final Report, the Australian Governance Summit was told today.

3 things in the legal and regulatory environment directors need to keep an eye on, from Professor Pamela Hanrahan #GovSummit19 pic.twitter.com/UfdtE9cex2

Significantly higher civil penalties for individual directors of up to a $1 million now apply and the list of civil misconduct definitions has been expanded.

“The ‘Why not?’ litigate direction is an important correction for ASIC, reminding it that the primary purpose of enforcement (particularly in the civil penalties space) is deterrence,” Professor Pamela Hanrahan, Professor of Commercial Law and Regulation at the UNSW Business School told the summit.

“In sectors with high public impact, the pressure on regulators to pursue enforcement outcomes against individuals as well as corporations will be significant (and the political temptation to score points at the expense of sound policy will be too.) ASIC has been reconfiguring its approach over the last 18 months and has appointed five new commissioners in the past year – including the chair.

Professor Pamela Hanrahan’s summary of new penalties legislation. #Govsummit19 pic.twitter.com/6ZjEZLYG8s

Exposure to social media is also driving some changing attitudes in the community, she says. “I think we are all adjusting to a new reality where organisations are open to scrutiny by social media in a way that it was not before. Partly because of that I think community attitudes to corporate leaders are hardening.”

The community will punish inauthenticity very hard, she adds. Expectations of accountability are higher. “That’s the real experience you see when you go through a Royal Commission and are exposed to scrutiny live on the web.”

Six norms of conduct identified by the Hayne Royal Commission should be observed. These oblige organisations to obey the law, not to mislead, to provide services that are fit for purpose, deliver services with care and skill, and act in the best interests of the organisation.

“Those fundamental norms of conduct are relevant for everyone who deals with large groups of stakeholders, Professor Hanrahan told the summit.

Governance 4.0: regulators will continue to press on governance, culture and remuneration. #govsummit19 @AICDirectors

The Office of Enforcement announced on 19 February clearly states ASIC’s approach including to individuals, she says. The remaining ASIC Enforcement Review and Hayne changes will flow through, including liability changes for superannuation trustee directors and changes to the status of industry codes. The pressure on business to fill the policy vacuum in key areas will remain.

Large enterprises – for profit – for purpose and government will be expected to make explicit their purpose and values. “Authenticity will matter enormously.” And regulators will continue to press on governance, culture and remuneration.

Directors should be aware that they can be personally accountable in many ways, either directly as a principal wrongdoer or as an accessory to contraventions by the corporation or indirectly if their negligence exposes the corporation to a foreseeable risk of harm. They also face exposure through accountability statutes like the Banking Executive Accountability Regime, which will be extended.


Reflecting on the Royal Commissions

The Australian government should be careful in how it uses Royal Commissions because over-use can devalue the importance of these inquiries, the summit was warned today.

Former child sexual abuse Royal Commissioner Robert Fitzgerald said Australia has held about 135 royal commissions so far.

“The Royal Commission is such a precious tool in our armory. We have to use it for a very clear purpose,” he said during a session on Reflecting on the Royal Commissions. It is a very valuable part of the inquisitorial system.”

Royal commissions are good at investigating wrongdoing. “But if we continue to call for royal commissions we continue to devalue them. I think we have to be very careful about how we use them.”

The size and charter of royal commissions can be very wide-ranging, with serious consequences for witnesses giving evidence, he added. The Royal Commission into Institutional Responses to Child Sexual Abuse lasted for five years, had six commissioners, cost $315 million, held 55 public hearings and at its peak employed 300 staff. Protecting staff and witnesses was paramount and suicide was a real concern for some giving evidence.

“We also knew we had to get change in institutions during the life of the Royal Commission,” he said. Some of the public hearings did generate and “enormous impact.”

Fitzgerald said royal commissions bring to light many things and one aspect for him from the Hayne Royal Commission was the level of legal advice given to many witnesses who appeared. “I think the legal profession is so immersed in advising banking and finance industry they can no longer think objectively.”

Former HIH royal commissioner Neville Owen cautioned against cutting back on royal commissions, because the public has lost faith in politicians. “I think we are stuck with royal commissions,” he said. Some have dealt with really serious issues where the public has lost confidence in an essential public service. “It is better sometimes to have an inquiry outside the political process where you create a situation where trust can be restored.”