takes a different path

  • Date:01 Sep 2005
  • Type:CompanyDirectorMagazine

takes a
different path

John Ralph could hardly be called a revolutionary – but he is an agent for change who has influenced both boards and governments. Although he is winding down his corporate board duties, he still has a few ‘radical’ ideas that he discusses with editor John Arbouw

‘Excessive restraints however superficially justified by isolated corporate misdeeds, will geld enterprise. Excessive restraints will make the management of companies a less satisfying human aspiration; will reduce the flow of risk capital; will lower the volume of goods and services produced, and increase the price of those that are produced; will lessen employment opportunities, and will reduce progress in raising the standards of living.’ – Sir John Dunlop in address to the Australian Institute of Management in Adelaide, October 1971, reprinted in a book published by the then Institute of Directors

‘I knew who Pa was but this is the first time I have learned who John Ralph is.” The speaker was John Ralph’s grandson and the occasion was the commemoration of the cathedral in the outback town of Broken Hill, birthplace of one Australia’s leading company directors.
Ralph had brought his family back to Broken Hill to show them where he was born almost 73 years ago, where as a committed Catholic he learned to pray and where the ebb and flow of the Australian mining industry became part of his own bloodstream.
As a young accountant he began work with CRA, arguably one of the country’s major mining companies of the time (it became part of the Rio Tinto group in the mid-90s).
Since then there has hardly been a major board (Foster’s, Pacific Dunlop, BHP, Telstra, CBA, Pioneer Australia) that Ralph has not either been chairman or a non-executive director of. This in addition to a number of not-for-profits boards.
In 1997 Ralph was also national president of the AICD until he was called to service by the Howard Government to try and reform a business taxation system that had become cumbersome and was throwing unnecessary impediments in the way of Australia’s global competitiveness.
The Ralph review of business taxation was the first serious attempt to reform an antiquated system controlled by historically entrenched political institutions and practices which were resistant to change. More importantly, the business taxation system was hindering Australia’s competitive position.
In 1999, the Australian Government received and basically adopted the Ralph Report, which recommended sweeping changes to the basis of business taxation, including the international taxation regime. Although some of the recommended changes finally made their way to the statute book, other important improvements such as the “tax value” method (TVM) of calculating corporate tax were dropped.
When TVM was first mooted, it was labelled as one of the more “radical” ideas proposed by John Ralph.
Under the tax value method taxable income is calculated on the basis of annual changes in the tax values of assets and liabilities (including cash). This is in contrast to the current income tax law, which relies on legal definitions of income and deductible expenses and a myriad of separate rules. The tax value method would have replicated the current system, but in a way intended to be much simpler and more logical.
In 2002, the Board of Taxation exhorted the Government to drop the TVM. In essence, the concern was that, while offering benefits in some areas, the TVM would generate greater complexity and uncertainty in others.
“As such, most stakeholders believe that the ongoing benefits of adopting the concept are, at best, uncertain and certainly unproven,” the board wrote. “Adding to this is the prospect that adopting the TVM would result in substantial transitional costs, most notably for tax advisers who would both lose substantial human capital invested in the current system and be required similarly to invest in their knowledge and understanding of TVM-based law.”
Australia and its tax advisers weren’t ready for a business tax revolution.
Widely regarded as the quintessential Melbourne businessman, company director and government insider, Ralph has never been afraid to state his case.
In his career, he has battled mining unions, change resistant government institutions and in the context of today’s industrial relations debate, he was instrumental in advocating workplace reforms and enterprise bargaining in the mining industry more than 10 years ago.
Yes, Ralph can withstand the blowtorch to the belly but as one newspaper reported in 1994 his “soft speech and silver hair make his seem an unlikely belly for the location of a fire”.
Ralph has been part of the AICD and its predecessors for more than 30 years and continues to play a role as the chairman of the Corporate Governance Committee (see box story). At the AICD national conference in Perth last May, Ralph was made a life member and said “the need for such an organisation [AICD] is more critical today than ever before”.
Ralph has been steadily reducing his director workload and resigned from the Telstra board last month. During his working life he has seen several economic recessions, mining booms and busts – and numerous corporate scandals.
Like many directors, John Ralph isn’t a fan of the current rush to corporate regulation judgment, which he believes is mostly a knee jerk reaction to a relatively few minor problems but adds long-term administration burdens on all companies.
What worries him is that boards and directors will opt for safety first to the detriment of sensible risk taking and growing the enterprise.
“The penalties for directors in terms of risk are pretty high. These penalties are not simply financial but also reputational and that’s the biggest risk. Why then wouldn’t you adopt a safety course? The penalties you get for getting it wrong are far greater than the reward for getting it right,” he says.
“The result that I see is that boards are becoming risk adverse. I have made no secret of the fact that if I were retiring as a CEO today I wouldn’t join a board. There are more opportunities in private equity and without the hassle.”
While he is largely supportive of the ASX corporate governance principles and recommendations, he believes the recommendations can lead to a tick the box style compliance. He says what should have happened, and says this was discussed at the early stages, was that a set of principles were framed and the onus put on boards to say how they were meeting them.
“The ‘if not, why not’ is good in theory and there may be very good reasons why a board has taken the action it has but the reality is they haven’t ticked the box. We still have to see how the market reacts.
“If you had a system where companies provided information on how they were meeting the principles you would have a much better system of disclosure.”
In many ways Ralph is an old-school businessman who believes that if government policy is doing its job to stimulate the economy then corporations can do theirs to create shareholder wealth, not simply for the next quarterly report expectations but for the generations that come after.
For someone who has spent a great deal of his life in and around the mining industry it is a logical attitude. Rio Tinto, BHP or WMC, by their very nature are enterprises built up over many generations.
John Ralph believes in building to last but his concern is that the forces currently driving short-termism is not in the interest of shareholders.
“There are too many things pushing in the direction of short-term results such as the quarterly reports and the quick fix,” says Ralph. “It is all about today’s share price rather than what is right for the corporation in the long term.”
“I have always taken the view from sitting on boards that we are there to manage the company properly. I argue for what is best long term. You have to recognise what the market is and you have people who want to respond to the market, but as a board your responsibility is to build long-term value (see separate story: The Healthy Corporation).
“My concern is that all the pressures that work in the direction of the short-term. These pressures are on the CEOs and that is the problem. If the company is not performing as the shareholders want, and these are mainly the institutions, then the pressure comes on to change the CEO.
“So why should a CEO plan for a 10-year period when he knows his tenure time frame is more like three to five years. When I was CEO my job was to create options for the future. What troubles me is that the incentives in place at the moment are aimed at the short-term rather than what is best for the long-term.”
At the heart of the short-termism conundrum is the requirement of the superannuation investment industry to make profits by buying and selling shares. The super funds are after all the guardians of the nation’s savings, so what is the alternative?
“I could be very revolutionary and one way in which this can be thought about is to divide capital into two classes which is already done in companies such as News Corporation,” says Ralph.
“Essentially you have owners with one class of shares and investors with a different class of shares. The owners being the people who are there for the long term and who have certain restrictions on their ability to deal, similar to what a director has. They also have voting rights consistent with longer-term objectives.
“The short-term investor can trade day by day and get in and get out and their votes would have equal standing in the case of liquidation or reconstruction. This would enable more dialogue between the company and the owners.
“There is no stopping investors from changing their status and buying long-term shares but this would be constrained. All I am saying is that the people who want to trade should be able to do so without influencing the long-term interests of the company.”
However Ralph does not contemplate having a two tiered board structure as in the German model which he says was put in there by the British to prevent the rebuilding of Germany.
“While it was meant to hold Germany back it had the opposite effect but now it is having a very deleterious effect on Germany,” he says.
Considering the debate arround the News Corp structure, replicating this model for other corporations would indeed be in the nature of a revolution. But the issue of encouraging longer-term investment remains.
“What is going to happen, and this is occurring already, is that return on investment is going to reduce because there are more funds coming into the market all the time but fewer opportunities to invest.
“The result is that return on investment is going to be lower and this means the return on the nation’s retirement pool is going to be lower. This is the opposite of what you want yet the measures we are putting in place are driving in that direction.”
Ralph may be easing into retirement but will continue to chair the AICD’s Corporate Governance Committee and he will chair the Australian Foundation for Science and the Australian Farm Institute. This is in addition to his involvement with charities.
“I will still try to stir the pot a bit and spend a bit more time on the farm [on the NSW/Victorian border]. It is no accident that the Australian economy has outperformed almost every other developed economy. This is the dividend from the reform process we have put in since the 1980s and we must continue this reform.”

 


Corporate governance and the role of the chairman

Reflecting on his past experience, Ralph says the requirement of directors are quite different to what they were when he started out in 1971.
“I have been fortunate to have been involved with boards which I felt were pretty competent,” he says.
“My due diligence before joining a board was to look at the chairman and the CEO and be happy about their integrity and values and the working relationship between the two. The chemistry between the chairman and the CEO is extremely important.
And what about the current trend toward board self-evaluation?
“It is still in its early days. In some of the boards I have been on we have had self-evaluation for more than a decade. But that hasn’t been the evaluation of individual directors. Bringing consultants in is only something that has happened over the last five years.
“It is important that the collegiality of the board is protected. There is a difference between evaluating a director and a member of management. I lot of people don’t understand the difference.
“Within the management team you have a collective responsibility as well as individual responsibility whereas the board has only a collegiate responsibility.
“You have to be very careful that you don’t set up some kind of competitive situation within boards. Judging individual directors on their performance within a board is getting into dangerous waters.”
In this regard, Ralph views the role of the chairman as being integral.
“When you are chairing a board meeting the objective is to draw out the ideas of everybody. But when you get to a particular area of the business and you have directors with a pretty deep experience in that area you listen a lot closer.
“What you want around that table is to cover most bases and you want people to contribute without feeling that they are being ticked off against KPIs. Certainly you have discussions with individual directors, but as a chairman you should also have discussions with management to find out whether the board is sufficiently involved.
“It is a question of whether management has the confidence in the chairman to relay information back to the board about director performance without attribution.
“The same level of confidentiality must occur with the CEO and the board. There are obviously times to have a board conversation about the CEO without him being there. In that instance, directors are afforded the opportunity to make comments they wouldn’t be able to make if the CEO is in the room.
“What I have found is that in talking to the CEO and conveying the areas where the board feels more attention is required, it must be done without it being destructive of the relationship.”
But how does a chairman manage the removal of a director?
“First of all the chairman or the board doesn’t have the power to dismiss a director for non-performance. This is the responsibility of shareholders who elect directors. We need to get to a better understanding of how boards should be evaluated and have an evaluation process that is robust and that it is being applied without disclosing what the evaluation is.”
The process Ralph prefers is the quiet approach in terms of telling a director who is up for re-election that he does not have the support of the board.
“In almost every instance this will work,” he says. “But of course there will always be exceptions.”
An important aspect of the role of the chairman is the relationship with the CEO. Ralph says a chairman has to be constructively supportive but that doesn’t mean blind support.
“When I become chairman I usually have a brief conversation with the CEO and discuss three things.
“I want bad news by fax and good news by letter. If there is bad news I want to know immediately and become part of the solution. The second is that nobody has a monopoly on wisdom and people can hold genuinely different views on a project or a proposal.
“If the chairman and the CEO have different views it is important that the board receives both views and it should not come as a surprise. It must never be a question of winner or loser. It is the ideas we are discussing.
“The third thing is that if I am the chairman and you are the CEO, you will know a lot more than I will. I will be asking questions but I don’t want the CEO to think I am second-guessing. What I want to be sure about is that the CEO has convinced himself about the course of action. I am testing the resolve.
And what about board information?
How far should a board go in
finding out that sort of information?
“The work of the audit committees has gone a long way in providing that reassurance. However, in looking at the role of the chairman we have got to be careful that on one hand we are saying under the ASX guidelines that the chairman has to be independent and on the other that the requirements specified in the Greaves case (One.Tel, which suggested that the chairman has a greater responsibility than other directors) will become the requirements of the chairman. The only way that could be done is for the chairman to become a full time executive chairman.
“It is very important for a board not to manage a company. There is an expectation gap in that many believe that boards should be in there ensuring nothing can go wrong. But if you are there all the time as a non-executive director how does the management get on with running the company?
“There is an education process required to get people to understand the role of the board.”
Another aspect of the role of the chairman is in setting the agenda. Ralph believes the agenda should be front-loaded with strategic discussions rather than going over the numbers as the first consideration.
“If you have taken the time on something that is strategically significant then that is a could use of time. If the issue is so important that all the board time is taken up with issue number one and the rest has to be taken as read then it is a better use of board time than the reverse.
“In addition to the strategic aims, the board needs to assess the performance of management and make there is succession planning and development planning of the people. There is not a lot else that it should concern itself about.
“The role of the chairman has certainly expanded as a natural consequence of global competition. The degree to which the chairman or directors get involved is not a static situation where one size fits all.”

Corporate Governance Committee

The AICD Corporate Governance Committee was formed in 2004 and is strategic in its focus. Committee members are active in a wide sphere of influence.
The need to rebuild community trust in directors and boards is a committee objective, together with addressing the “expectation gap” and lack of understanding about the role and deliverables of non-executive directors.
The committee aims to set policy directions, lead thinking and
influence opinion around policy matters for directors, particularly anticipated policy developments.
Developing policy responses to the media, government and regulators and to pressure groups such as the Australian Shareholders’ Association is another priority for the committee:
Chairman
Mr John Ralph
Members
Professor Christopher A. Bartlett
Mr Tony Berg
Mr Graham Bradley
Mr Colin Carter
Mr David Clarke
Mr David Gonski

Mr Martin E Kriewaldt
Dr Simon Longstaff
Ms Linda Nicholls
Dr Helen Nugent
Mr John Story
Mr Ralph Evans
Secretariat
Ms Jennifer Stafford