What does our post-pandemic future look like?

This year’s Australian Governance Summit held in Sydney was attended by 1,200 directors and staged in a hybrid format for the first time, with half the attendees taking part online. Debate was lively on a number of issues and speakers explored topics ranging from #BlackLivesMatter and the #MeToo movement to the resurrection of the aviation and tourism sectors, leadership and innovation in a post-pandemic world, new ways of working, stakeholders vs shareholders, and how Woolworths navigated the turbulence of recent times.

The need for organisations to recognise the importance of governing for social purpose was a major theme of the 2021 Australian Governance Summit, and the large gap between the stated values of some companies and their negative actions was highlighted by a number of speakers. The destruction by Rio Tinto of the Juukan Gorge sacred Indigenous sites was a shock for many shareholders and showed a disparity between the company’s stated principles and its actions, HESTA Super Fund Chair, Nicola Roxon GAICD told delegates.

HESTA, an institutional investor, owns $300 million of Rio Tinto shares and $2.5 billion in the broader mining community, Roxon said. “So when that terrible incident happened, HESTA started working with the mining industry and Indigenous communities [to make] sure it does not happen again.” HESTA is working with 14 miners on this issue. “By working through an institutional shareholder, the mining companies can work together.”

The damage carried out to the heritage sites led to a review by Rio Tinto of all its agreements and a parliamentary committee is also looking at how business engages with Indigenous communities, she says. HESTA is now looking at how to strengthen the whole sector and carry out advocacy around the incident. “We are trying to think about the long-term,” added Roxon, who is also Chair of VicHealth and a Director at Dexus LifeStyle Communities.

A continued mismatch between community expectations and the actions of mining companies will cause a sustained downward spiral in value for mining companies, she said. Companies should carry out an independent stakeholder audit and ensure that strategy is aligned with the interests of these groups, said Pru Bennett GAICD, Partner at Brunswick Group and Chair of the National Foundation for Australia-China relations. “Use that to inform your strategy.”

She has been surprised by a lack of understanding amongst some directors about who their stakeholders are. “I have had to explain the difference to boards between asset managers and asset owners,” she told the audience in the session titled Nowhere to Hide: Shareholders, stakeholders and the role of the board.

Intangible risks are now estimated to make up about 90 per cent of the risk register for many companies, and directors need to address this in their strategy approach, she added. In this context, there has been a major increase in the number of shareholder proposals on climate change, which is the number one issue for asset managers.

The United Nations Sustainable Development Goals are also important for directors, who need to ask themselves if their organisations impact any of these goals in a negative way, and what they can do to minimize the impact. Breaches can carry reputational risks for companies and directors alike, Bennett points out.

When addressing the issue of maximising diversity on boards, Mark Morey, Secretary of Unions NSW, said including workers on company boards would be one positive step. The panel agreed wider diversity in all respects is needed. “Most boards I go to are pretty white,” he said. Underpayment of staff is also an issue which has come to the fore. “I think boards are starting to think about this... the social part of ESG needs to play a stronger role.”

Consumers expect companies not to mislead them, lie to them, or sell them something that’s not right for them. “It’s pretty simple”, said Choice CEO Alan Kirkland MAICD. “When it comes to the role of directors, consumers do hold boards accountable.” Directors need to understand exactly how their products make money and ask questions. “Maybe in the past, directors have not asked deeply about these things.” But they need to in order to avoid reputational and compliance risks, and to do the right thing.

Woolworths draws on strong culture to deal with crisis

Woolworths, with nearly 200,000 staff, has spent nearly $700 million on measures to deal with the COVID-19 crisis, which amounts to two per cent of company sales, Woolworths Group Chairman Gordon Cairns told the Summit in a speech on Creating an Achievement Culture at Woolworths. “We have never had a question from investors as to whether that was the right thing to do.”

This included $681 million in remediation costs, on equipment, hiring extra staff (including stood-down Qantas staff), measures to protect customers, security and other requirements.

Woolworths has performed well despite this setback, partly due to the work the company has done over the past five years to improve culture and care for customers and staff. “My view is if you get the culture right, results follow,” Cairns said. Profits are up dramatically, and the share price has performed well, he reported. And a recent Roy Morgan survey showed Woolworths as the most trusted brand in Australia.

Cairns also emphasized the importance of appointing the right CEO in creating an achievement culture. This is the most critical responsibility of the board, he said.

Leading an achievement culture

In his discussion on creating an achievement culture, Cairns outlined how Woolworths supports the mental health and wellbeing of staff. As a large employer, they deal with a significant number of mental health issues each year including suicide and domestic violence, he said. The company has developed measures to assist those who need help. As an example, they found the reason staff who were victims of domestic violence were forced to remain in abusive relationships, were mainly financial, so the company offers financial assistance to these employees.

Cairns spoke of the importance of “stories and symbols” in creating cultural change and gave the example of himself and CEO Brad Banducci relocating from large corner offices to the office floor, to send a signal to the organisation.

In a frank speech he also addressed the issue of Woolworth’s $500 million underpayment of their staff and said the mistake was self-reported with an apology by the company to regulators. In addition, the CEO offered $3 million of his own short-term incentive payments and Cairns gave up 25 per cent of his remuneration. “We screwed up,” Cairns told the AGS. “There was no excuse.”

Woolworths is clear on its “noble purpose” and has taken some bold moves, suffering nearly $2 billion in write-downs due to the closure of the Masters Home Improvement subsidiary, he said.

The company is “obsessive about customers”, polling 50,000 supermarket shoppers every month and 30,000 bottom line customers in order to get feedback. “And then we score ourselves against that feedback.”

At the board level, each of the nine directors rates and reviews the other directors on 20 different key performance indicators, and “these reviews must be consequential”. And every director has an obligation to dissent. “And what I mean by that is if you do not agree, then you cannot sit there and say nothing”. This leads to enormous insight, better decision making and means decisions are collective, says Cairns.

Looking ahead to the post-COVID-19 future

Business should lead the economic recovery in Australia but avoid turning the vaccine rollout into a workplace issue, said Nev Power MAICD, Chair of the National COVID-19 Commission and Perth Airport. “I think this issue is overblown.” Australia has a historically high vaccine take-up rate and most Australians are willing to be vaccinated, he said in a session on National Recovery.

As the vaccine rollout takes place and nears completion in October, the domestic situation will normalise and business can have confidence that the States will not have to resort to border lockdowns. However, business should continue to keep up COVID-19 safe practices such as physical distancing in their workplaces. “The vaccine rollout offers hope to fast-track recovery, but it is not a silver bullet.”

Directors and business leaders need to embed the lessons of 2020 into the DNA of their organisations and use the ingenuity we saw at the height of the pandemic to recover into 2021 and beyond. “How we approach economic recovery will shape our future for years to come.”

Government support can’t continue forever and the JobKeeper program is due to end in March. “Temporary support needs to end before it becomes counterproductive,” he said. “Over 2021, we need business to drive reform and meet the challenges of disruption.”

The Commission will this year focus on the transition in workforce and in business. Directors also need to operate under changed circumstances, think ahead and employ resilience in the face of continued economic uncertainty, plus assess the risks and pressures to shape strategy. “Our economic success is inextricably linked to suppressing the virus,” Power said.

Australia’s response has been very successful in health and economic terms. “Australia is the envy of many nations which have not fared as well… Business leaders will drive Australia’s economic comeback.”

AICD chair John Atkin FAICD opened the conference by highlighting the dramatic societal and economic changes that have occurred since the March 2020 Summit and referenced the hybrid format of the event as “the new normal”. He reflected on the theme of the conference ‘Accelerate: the new pace of change’ saying that with the pace of change itself accelerating, businesses will need better boards.

What has served organisations well in the past was not appropriate for the challenges of today, he said. This would require greater cognitive and generational diversity and continuous learning and development by directors. “We need to go back and examine how our boards are composed and how they work together. And we need to welcome the next generation of directors.”

We must welcome difference and strive for more than just age diversity, but also for cognitive diversity and industry experience. By exploring difference and fostering an inclusive environment where the quiet voices are heard, our boards can better anticipate and respond to change, and get a better understanding of how to navigate these fast-moving times.

AICD CEO Angus Armour FAICD spoke about the need for increased collaboration and regulatory reform. He welcomed new laws around continuous disclosure. 

Armour called on boards to foster a spirit of innovation and urged directors to show leadership. “We must seize this moment [to] drive Australian prosperity through increased productivity and innovation.”

Challenges for boards

Companies need to chart their own course after the pandemic and “break from the pack” in order to be successful, according to Philip Chronican GAICD, Chairman of NAB and The Westmead Institute for Medical Research. The bar had been set by organisations such as Cochlear, CSL, Atlassian, Canva and Visy. These Australian companies chose to take risks and innovate and now they are global leaders.

Chronican told in-person and online attendees that the challenge for boards is to navigate the new environment and that some sectors such as aviation, hospitality and tourism may never recover to levels of pre-COVID-19 operations. “Now that the vaccine rollout has begun, it is time to look ahead to the post-COVID-19 future.”

Speaking at the Changing Fortunes for the Lucky Country session, which looked at the devastating impact COVID-19 has had on Australia's economy, he identified five key features of the modern economy that need to be addressed.

1. A cohesive and consistent approach to matters of national significance, including fast effective decision making
2. A better regulatory system and tax regime, which includes significant tax reform
3. An attractive destination for international business
4. Diversified industrial sectors
5. Transition to a low carbon economy

There have been nearly 29,000 COVID-19 cases in this country and tragically, 909 Australians have died, Chronican said. In one month last year, between March and April nearly 600,000 people lost their jobs. “Thankfully, the situation is improving, and Australia has already re-entered a growth phase that will return the economy to pre-virus GDP levels by the middle of this year.”

Chronican said the most confronting issue last year at NAB was the significant number of customers who were facing financial difficulty due to the pandemic. However, 95 per cent of the 900,000 customers who had taken advantage of deferred interest on loans during that period had now returned to making payments as normal, he added. NAB alone deferred $60 billion in home loans and business loans and the balance is now down to $3 billion.

“As boards and directors, we need to be mindful that the world does not look the same way as before.” Boards need to work out which changes are permanent and adjust business models accordingly. In particular, supply chains have been affected and “just-in-time” supply of inventory items such as computer chips which are in short supply mean that lead times need to be adjusted. Aviation supply is not as reliable as before, with borders shut and air and sea freight taking longer.

The looming end to JobKeeper in March this year is also inevitable, said Christine McLoughlin FAICD, Chairman of Suncorp, Director of Cochlear and University of Wollongong Chancellor. JobKeeper did a “fantastic” job last year, she said, but now as it ends, some sectors will need a targeted approach for government support. Some country areas are also facing difficulty in getting staff. “So now it’s time to move off JobKeeper and to look at all the sectors [that remain] impacted.”

One of the biggest challenges last year for the board at Wollongong University was navigating to online delivery of education, she added. Hybrid learning was the biggest catalyst for the university; they crunched five years of development of the model into five weeks, she said. But students still need physical engagement so there still needs to be a model that allows this. “There is a mindset change in the sector.”

Meanwhile, Peter Hay, Chairman of Melbourne Airport and Newcrest, said the shutdown of Melbourne airport had been the biggest challenge he faced in 2020. The board met weekly in the early stages of the crisis and focused on how to finance the operation through the downturn. “It was a pretty challenging time,” he said. At a political level, the federal government’s COVID-19 Commission had not worked due to border closures by the states. “We’ve been through a real-life crisis and the level of cooperation was pretty pathetic,” he said.

Innovation essential in helping companies compete

Innovation shouldn’t be considered in isolation and as a means unto itself, but instead should be put in the context of an organisation’s competitive position and customers, attendees at the 2021 Australian Governance Summit heard.

Too many businesses are looking at innovation and tech as standalone issues and not in terms of how they compete in the market, said Andrew Stevens, Chair of Industry Innovation and Science Australia, the primary advisory body to the government on industry and innovation policy. “Innovation is the means – the end is competitiveness, success, market share and growth,” he said on the Accelerating Innovation: How boards can shape the future panel session.

Stevens, who is also a director of Stockland Group and oOh! Media, cited a survey by Industry Innovation and Science Australia showing that only 6 per cent of Australian businesses say they invest in research & development and just 30 per cent say then invest in non-R&D innovation. “If less than a third of our businesses are working on their competitiveness, we have an issue for the prosperity of the nation and we've got an issue in terms of jobs and futures for generations to come,” he said, adding that all boards have a role to play in keeping this front and centre.

Margie Seale FAICD, a director of Scentre Group, Westpac and Telstra Corporation, said that “innovation is a whole-of-business game”. Directors need to look beyond their own company and ask themselves what is happening in the ecosystem in which they operate, how their customers perceive them and what the company can provide them not just now but in five or 10 years’ time.

“If you don’t innovate then innovation will happen around you and to you,” she said. Seale said unless the board and management team really want to think about their customers and delivering great products now and into the future then innovation won’t happen. “That requires a very hungry and pushy chair,” she said.

Emma Gray, Group Executive, Data and Automation at ANZ Bank, said it is very important for boards to understand what’s happening to their customers, where the money is flowing in their industry, and to what extent their value chain is being disrupted. “If we don’t understand these things on an ongoing basis then we just miss way too much,” she said.

The next question for a board is what kind of innovation is required? Different parts of the business will require different muscles – some will need automation, while others might need significant R&D spend to develop new markets. A key question for boards to ask is how good is the organisation’s data? Having a single customer view across channels can solve a lot of problems. If management can’t answer some of the fundamental questions about the quality and governance of its data, then its efforts in AI and automation could be wasted, she said.

Black Swan events

The sudden and unexpected onset of the coronavirus pandemic along with last year’s bushfires turned boards’ attention to the next big risk and sharpened their focus on climate change, attendees at the Summit heard. “Twenty-twenty was a watershed year in terms of climate change activity in boardrooms,” said Penny Winn GAICD, a Director of Coca-Cola Amatil, Goodman Group, CSR and Ampol.

Winn said boards had, tucked away “over here in the right-hand corner” of their risk management framework, something labelled “Black Swan”. “Last year a black swan landed on several of my businesses,” Winn said in the panel discussion Preparing for black swans: Thriving through tail risk. Directors were meeting almost weekly managing finances and employee health, as well as risk.

“What came up was that this was as close to black swan as we want to get and what other black swans are flying our way? And the one that came up was climate change, so there was a step up in activity.”

Another important driver is pressure from investors. Iris Davila, Director, Investment Stewardship at Blackrock, said superfunds that invest in the Blackrock’s products are increasingly seeking to invest in companies that take account of climate change. As a result, those companies that lag are being left out of investment indices and being starved of capital.

In engaging with companies and boards on their climate risk, Blackrock seeks to improve transparency in climate disclosures so investors can make informed judgements.

Fiona Wild MAICD, Vice-President, Sustainability and Climate Change at BHP, said investors’ expectations often run ahead of what companies are doing, with the result that some companies can feel they “never do enough”. She cautioned against giving people “climate fatigue”. “We need to think about how we encourage action and sometimes it feels like you’re banging your head on a brick wall trying to work out what the expectations are,” she said.

The panel also discussed tying executive remuneration to climate change action. While some panel members expressed concern that many climate bonus schemes focus on short-term incentives (STIs) when climate change is a long-term problem, Wild said at least STIs have the power to focus executive attention on the problem straight away.

Reimagining capitalism

The private sector has an enormous role to play in dealing with the public problems we face, such as inequality, exclusion and environmental degradation and to respond to enormous global institutional pressures, said economist, company director, author and Harvard Professor Rebecca Henderson in a keynote speech broadcast live from the US.

A director of Idexx Laboratories and CERES and author of the 2020 book  Reimagining Capitalism in a World on Fire, Henderson said free market capitalism has produced enormous benefits and prosperity but the current system is failing and governments are under threat.

Companies need to change the way they do business and move away from maximising shareholder returns to a focus on social purpose. Retailer Walmart, she said, added $1 billion to their bottom line by making their fleet more energy efficient, Tesla founder Elon Musk saw a future in electric vehicles and renewables, and firms are now raising huge amounts of capital in the alternative meat business.

Henderson said we need to rewire the financial system so that capital moves to firms that are tackling these issues, and boards have a key role to play. Directors can alert management to new business models, and encourage a focus on creation of “shared value” and the exploration of partnerships and cooperation with others - including government, an important step in responding to complex problems. “As companies move down this road, they find that they can’t live without government and should play a role in supporting government.”

Business is one of the strongest institutions on the planet, she said. “It also enjoys one of the highest levels of trust. According to Edelman [the 2021 Trust Barometer], for many the single institution people trust most is the firm they work for.”

Social movements can’t be ignored

The Black Lives Matter and #MeToo movements have shone a light on societal issues that cannot be ignored, and boards need to react to these developments, attendees of the How should boards respond to social change? session were told.

The “whooshing” nature of social media driven movements can be confronting for organisations but ignoring them is not a safe option. “I think it’s going to continue absolutely... We’ve seen with Black Lives Matter and the MeToo movement, it becomes very pervasive very quickly, but for an organisation to ignore all these things is just crazy,” said Wendy Stops GAICD, Director of Coles and not-for-profit Fitted for Work.

“I don’t think every company is going to go for every movement, but you get behind the ones that really matter the most,” she told the audience.

Asked by panel moderator Helen Dalley GAICD, why, in light of all that boards have to deal with, directors should take on the additional load, Ian Hamm MAICD, Chair of First Nations Foundation replied, “I don’t see it as a load, rather an opportunity to do more than you started out intending to do. If you are on a board, you are at the top of the organisation. You have to consider what is our organisation contributing to the wider society in which we live.”

Jenny Boddington FAICD, Chairman of Latitude Insurance said #MeToo and #BlackLivesMatter raised issues of inclusiveness for all sectors of society. “Boards need to be forward thinking and address the issues and ensure they have the very best people in roles.”

Director liability penalties ramp up

Directors should be aware that ASIC is continuing to run negligence cases against individual directors implicated in continuous disclosure failures, said Professor Pamela Hanrahan, Professor of Commercial law and Regulation, University of NSW.

Recent cases include iSignthis (for alleged breaches of continuous disclosure obligations and alleged false and misleading representations), Murray Goulburn (executives disqualified for three years for involvement in continuous disclosure breaches) and Antares (for breaches of continuous disclosure laws).

In the last decade, ASIC has focused on situations where individual directors face liability if there is a breach of company disclosure obligations. “That’s really where the regulatory action is focused at the moment.” These cases often involve a general cherry pick of individual directors. “We are still seeing those civil prosecutions come through frequently.”

Under new civil penalty provisions in the Corporations Act, directors should also be aware that they can be fined more than $1 million for supplying inaccurate documents in reporting. “The liability settings around defects and disclosure are gradually ratcheting up and all directors should keep an eye on that.”

At the bigger end of town, the inquiries into Crown Resorts show that the broader issues of governance can also have significant consequences for directors. In the case of Crown Resorts, five directors have left the board following an inquiry and report by Commissioner Patricia Bergin, which found the company unfit to hold a NSW casino licence.

In her report, Bergin questioned what was going on in the company in terms of risk management structures, the relationship with the largest shareholder - James Packer and Consolidated Press Holdings, and broader issues of governance. There were three significant breaches or problems found at Crown including Anti-money laundering compliance, exposing staff in China to risk and associating with junket operators, and analysis of risk management.

Mental health crisis

Lifeline last year experienced a 25 per cent rise in the number of calls for help and at the same time had to close all of its secondhand clothing and goods stores, which are its main source of revenue, delegates were told. It was “an incredibly complicated set of circumstances”, KPMG Partner and Lifeline Deputy Chair Jacinta Munro GAICD, said in a session on Mindful Leadership: Governance and Mental Health. The board developed contingency plans and received significant help from corporate partners in the form of donated PPE equipment and other goods, she said.

Directors can receive mental health guidance from a range of resources, Munro added, including those provided by the Corporate Mental Health Alliance, which aims to create mentally healthy workplaces and is composed of some of Australia’s largest corporates including Coles, Woolworths, Commonwealth Bank and KPMG. “What works in one organization may also work in others.”

Boards can also survey staff and use their Employee Assistance Programs to monitor mental health. Online tools provided by organisations such as the Blackdog Institute and telehealth services can also be useful workplace tools, said Peter Joseph AM FAICD, Chairman at Blackdog Institute and Chair of The Ethics Centre.

Practical steps on mental health have also been outlined by the Royal Commission into the Mental Health System in Victoria, according to Woolworths Chief Medical Officer Dr Rob McCartney, who is also a director at Resile. He says directors and other business leaders are in the high-risk group for mental health issues and must also monitor their own situation and speak up and seek help when needed. “This is a real challenge for those at that level. They are often workaholics and try to build mental health resilience by building successes.” But the benefits of this are short lived.

The China trade question

Australia’s relationship with China is at its lowest point since diplomatic relations resumed in 1972 and is unlikely to improve in the near-term, a panel examining the relationship with Australia’s largest trading partner heard. The result has been the introduction of non-tariff trade barriers and increased tariffs on a range of Australian exports to China, along with fewer Chinese students and tourists coming to Australia and an end to ministerial contact.

Merriden Varrall, Director of the Australia Geopolitics Hub at KPMG, said governments and business leaders need to view the relationship in light of the fact that China feels it has been humiliated by the west for centuries and actions like Australia’s push for the WHO inquiry are seen as a continuation of attempts to keep China down.

John Lee, a Senior Fellow at Sydney University’s US Studies Centre said there is a mismatch of expectations from each country and Australia cannot satisfy the list of 14 grievances China issued last year without compromising its sovereignty or democracy. He said that relations could get worse, and there was little that Australia could do on its own to improve relations, although he added that we should push to resume ministerial level contact.

China's actions against Australia will have unintended consequences for its relationship with other countries, many of which will be preparing to increase their resilience against China by, for instance, considering foreign interference legislation. "If other countries completely sit on the sidelines then Australia is in for a much harder time, but if other countries respond in a way that's against Chinese interests then over time China has to gradually reconsider the extent to which it continues this coercion against Australia,” he said.

Leading through a crisis

The most important quality in leaders during a crisis is authenticity, said Shane Fitzsimmons, Commissioner Resilience NSW and former commissioner NSW Rural Fire Service. Displaying authenticity is critical and starts with the person you see in the mirror, he says. “Be the best you can be; no-one likes an imposter or a poser.”

Leaders must be aware of their limits and those of their team members, because those working inside the organisation will already see these limits, he added during the session on Resolve and Resilience: Leading during a Crisis.

It is also important to deliver information honestly, Fitzsimmons said. “Don’t sugarcoat something that’s not pleasant. Don’t give someone a dog poop sandwich and tell them it is fairy bread, because they will work out quickly what the difference is.” Investing in the culture of the organisation upfront will also yield benefits when the crisis hits, he added, when all the cracks will be magnified.

The way the Australian Public Service came together during the crisis was “nothing short of a marvel,” added Cheryl Ann May GAICD, Deputy Secretary and COO of the Department of Home Affairs. Many staff switched from policy work to processing JobKeeper applications, for example. Shutting Australia’s borders and devising a new system of exemptions was also something that hadn’t been done before and represented a major challenge, she said.