It’s a wrap

This year’s AICD Essential Director’s Update focused on the governance challenges exacerbated by almost two years of global pandemic. This is a round-up of the major talking points.

The AICD Essential Director’s Update was the second EDU to be held in the shadow of COVID-19. Most of this year’s events were a hybrid of virtual and face-to-face, but Sydney, Melbourne and Canberra were online-only due to lockdowns. Directors heard from Lisa Chung AM FAICD — a non-executive director of Australian Unity, AVJennings and Artspace, and chair of The Front Project — and David Thodey AO FAICD —chair of Tyro and Xero, and former chair of CSIRO and CEO of Telstra.

While companies’ responses to the global pandemic was unsurprisingly a focus, directors also heard updates on many of the governance challenges they’ve been grappling with for several years, including digitisation, cybersecurity, climate change and ESG, and sexual harassment.

COVID-19

We still have a lot to learn about the COVID-19 pandemic and company boards should continue to plan for a world where the coronavirus is still prevalent, Thodey told directors. “Rather than waiting for the world to return to pre-COVID times, which I’m sure many of you are not, it is better to build plans and approaches that will allow us to coexist,” he said.

Future thinking on workplace health and safety should from now on include how to manage a workplace that has been subjected to a virus. The COVID-19 pandemic has made us more accustomed to the virtual world and while face-to-face contact has many advantages, directors can take some of the learnings from virtual meetings and apply them to in-person meetings, as well, said Thodey. In particular, meetings can be shorter, better planned and with structured discussions.

“We now bring in international speakers or speakers from around the country without even thinking about it, by bringing them in on video,” he said. “It’s really important we keep thinking about that. It’s so easy to become constrained around thinking we need to have people in the room.”

Virtual/hybrid annual meetings can benefit by allowing people from around the world to participate. Chung noted that until 31 March 2022, companies can hold virtual AGMs regardless of any constitutional requirement for in-person AGMs and Treasury is considering permanently allowing organisations to hold virtual/hybrid AGMs if their constitution permits. She cautioned that with the reform looming, directors should consider if their company’s constitution needs amending to accommodate virtual/hybrid meetings in the future.

Driving digital adoption

The pandemic also accelerated the adoption of many digital technologies as organisations quickly changed the way they work and serve customers. But Thodey warned the adoption of these technologies on its own does not mean we’re really driving the digital transformation that technology allows. “Digital transformation refers to the transformation of business processes, business models through the adoption of new technology,” he said, adding we are, at best, 30 per cent through the transformation.

Companies need to frame technology changes in the context of the business changes the company is driving, he said. Boards must make time on the board agenda to understand the technologies impacting their business to continue down the journey of understanding technology. “This understanding of new technologies really is as important as understanding financial statements,” he said. “You just can’t delegate it.”

In the Q&A, Chung said it was up to every board member to be across technology. Having a digital specialist won’t solve the problem because while they might understand the technology, it’s the directors and managers with deep knowledge of the business who need to understand how technology and digitisation can actually be applied and produce better, more efficient and cheaper outcomes.

Cybersecurity

The increase in digitisation of business is accompanied by an increase in cyber risk, and directors need to act, said Thodey. “This is serious stuff. This is real money, real threats to your business. I just encourage you not to wait until there’s an issue. Start talking about it. Bring people in who have experience in this area and you can then start to understand how you would respond.”

Ransomware attacks — where hackers lock up a company’s data and seek payment to release it — create a lot of ethical and practical challenges, said Thodey. Having experienced such an attack, he said it forced him to rethink his ethical position that he would never pay a ransom to a cybercriminal, although he didn’t end up doing so on that occasion. He suggested boards undertake simulation exercises with their management teams to rehearse how they would respond to a cybersecurity incident and who would make which decisions. “Lastly, you really need to make sure it’s on the risk register, and start to look at mitigants, what you can do to avoid it.”

Climate and ESG

The hot topic of ESG and climate change was also covered, with Thodey saying listed companies, investors and regulators are setting the pace in terms of ESG transparency targets and delivering continuous improvements. He highlighted the increased importance of transparency. “In many instances, these non-financial measures have been used in the assessment of companies for debt raising and the evaluation of senior leaders and boards,” he said. “No matter what aspect of ESG you’re looking at, it’s got to be real. It can’t just be tick-the-box. It’s got to be consistent with your culture and you’ve got to embed it into your organisation, because people are not looking for superficial answers. These are deep-seated considerations and, in some instances with boards, have really significant financial implications.”

Hundreds of millions of dollars of capital are required to move to reduce carbon emissions. Boards need to lead on emissions reductions and it needs to be part of the board agenda, not just something left until annual reporting.

Sexual harassment

Sexual harassment was a major issue at last year’s EDU, and remains so this year. Since then, the government has passed legislation making it explicit that sexual harassment in connection with a person’s employment can be a valid reason for dismissal, and extending protection to unpaid workers, such as volunteers and interns. Chung noted that federal Sex Discrimination Commissioner Kate Jenkins’ Respect@Work report found that too often, when a claim arises, employers have prioritised corporate reputation and legal and financial liability. But, she warned, “by today’s standards, companies might consider whether there is a greater potential risk to corporate reputation where proven cases of sexual harassment are concealed and subsequently leaked”.

Chung suggested that without compromising a victim’s desire for privacy, companies and boards might reconsider whether it is appropriate to seek non-disclosure or silence from a victim in exchange for a financial settlement. “This is the point at which unacceptable conduct, such as sexual harassment, meets organisational culture and values and corporate reputation,” she said.

Not-for-profits

Two years into the COVID-19 pandemic, Chung noted it continues to have a devastating impact on many NFP sectors, including performing arts, and that NFP boards need to build resilience and future sustainability. Commenting on proposed reforms to the Australian Charities and Not-for-profits Commission (ACNC), she said the AICD opposes the proposal to disclose information relating to impending or current investigations, unless the registered entity consents on the basis that it could have a detrimental impact on its access to natural justice and permanently damage its reputation.

The AICD is also concerned about the government’s plan to widen the definition of unlawful activities for charities, putting them at risk of deregistration. “The changes may inhibit a charity’s willingness to speak out or advocate on an issue for fear of falling foul of the new regulations,” said Chung, a member of the AICD’s Not-for-Profit Chairs’ Forum. “And the ACNC commissioner still has a wide discretion to remove charities from the register based on a reasonable belief that a charity is likely to break the law, even if they have not committed an offence, nor intended to.”

High-performance board

Thodey finished his presentation with some thoughts on what makes for a high-performing board, highlighting the importance of a good working relationship with management — one which is challenging and supportive at the same time.

“As board members, we’re really responsible for creating this level of trust and respect in the boardroom,” he said. “So you can have open and transparent discussion that appreciates diversity of view and perspective and allows boards to work with management in a productive way.”

He noted boards need to be well- organised, have good etiquette and clarity of accountability, and also create the environment and time to reflect on their own performance. “I know we do these performance reviews, but it’s actually about doing it every meeting.”