Macquarie Group chair Peter Warne FAICD says the important lesson in performance is to make sure you get the best people. At Macquarie’s recent AGM, Warne told of asking CEO Nicholas Moore, as a newcomer to the board, ‘What’s Macquarie about?’
“He said it was about getting the best-quality people we can hire and have them solve our clients’ problems, which I thought at the time was a bit trite,” Warne says. “But that’s exactly what Macquarie does. You need to attract, motivate and retain talented people. It’s about getting them to listen to customers and come back with solutions.”
Warne says the authority around developing strategy at Macquarie is devolved to its people, with a bottom-up approach. “The strategies get pumped up from the business when they see opportunities, then it’s up to the centre (risk management) and the board to challenge and see how we can add value.”
There’s nothing like an immovable deadline, intense public scrutiny, a big budget and complexity of execution to test an organisation’s capabilities. In April, the board and executive of the Gold Coast Commonwealth Games Organising Committee turned in a gold medal performance. After eight years of preparation, the event came in on time, within its $1.5 billion government budget, and was beamed to an audience of more than 1.5 billion people with no major dramas, albeit some controversy over the closing ceremony.
“You need to retain talented people and it’s about getting them to listen to customers and come back with solutions.” – Peter Warne FAICD
Bronwyn Morris FAICD, director of the Gold Coast 2018 Commonwealth Games Corporation and chair of RACQ, says it demonstrated the importance of discipline, collaboration and agility. She says the discipline of early work on the Games bid book by CEO Mark Peters was vital in ensuring financial performance — as well as a close-knit executive team and an effective board chaired by former Queensland premier Peter Beattie AC.
A chartered accountant by background, Morris had a close-up view of the financial and operational risks as chair of the finance and audit committee. “As we got closer to the Games, we were meeting monthly and it was important to be close to the Games team. At one point, we had 1000 risks in the risk register, but had an amazing collaboration with government agencies.”
Morris says it showed the importance of collaboration, particularly when it comes to levels of assurance from different areas of the organisation.
Christine McLoughlin FAICD, incoming chair of Suncorp Group, chair of Venues NSW and director of McGrath Foundation, views effective board performance, dynamics and composition through three lenses. “First is the current business and industry context, second is preparedness to operate in a range of future contexts and third is the foreseeable trends that will either enable or impact the business.”
”Good directors make an effort to understand the communities in which their business operates.” – Christine McLoughlin FAICD
She says that looking through these lenses immediately points to the need for a board with a diversity of skills and mindsets and a commitment to continuous learning. “This assists in creating a discussion that underpins excellence, high performance and growth, provides meaningful stewardship and strengthens the organisation’s reputation as a good corporate citizen, which, in turn, will add value for shareholders. Good directors make an effort to understand the communities in which their business operates and their range of sometimes conflicting expectations.”
At a time when there’s heated debate about how deep the board should go in holding management to account, Peter Hearl FAICD, a director of Santos and Telstra, says it’s important for directors to find ways to get underneath potential issues and keep executives focused on performance.
“Boards in this new world need to be more surgical in their demands for action... keep peeling the onion back to get to the truth.” – Peter Hearl FAICD
“Boards in this new world need to be more surgical in their demands for action. Keep peeling the onion back to get to the truth. It needs to be done constructively, not as nitpicking. It gets to the quality of the questions to ensure the upward flow of information to board members.”
The long game
Research from KPMG, KBA Consulting and UTS argues that companies should work smarter to grow success.
What do Ansell, Cochlear and Qantas have in common? They are top-performers that created significant shareholder wealth in recent years.
According to research by Melbourne firm KBA, none of the wealth created over the five years to 30 June 2017 ($0.7b for Ansell, $3.6b for Cochlear and $7.7b for Qantas) came from beating existing expectations. In fact, it all emerged out of establishing new and higher expectations to be delivered in the future. The research unlocks a new understanding of the economics of listed companies.
“Truly successful companies don’t create wealth by exceeding short-term profit targets,” says KBA managing director Denis Kilroy. “They do it by harnessing innovation and creating capabilities, leading to the establishment of new and higher economic profit expectations, which they either meet or go very close to meeting over time. They then repeat this year after year.”
KBA’s research has covered the ASX 100, the S&P 100 and the FTSE 100. One study assessed the performance of the 120 largest ASX-listed industrial companies over the seven years to 31 December 2016. It revealed 49 that created significant wealth over five rolling three-year periods; 26 that, at minimum, preserved wealth but in most cases created some wealth; and 45 that destroyed wealth over the same five periods.
None of the wealth created in aggregate by the 49 top-performers came from exceeding expectations. It also came from establishing new expectations to be delivered in the future.
KBA’s research, which was augmented by interviews with the chairs of nearly 70 ASX 100 companies by the Colvin Consulting Group, also identified an innovation premium worth 26 per cent of the value of the ASX 100 (attributable to products, services or businesses that don’t yet exist). This was 20 per cent for Qantas and Ansell, and 30 per cent for Cochlear.
KBA and the Colvin Consulting Group are now aiming to conduct a more comprehensive syndicated study of ASX 300 companies.