Sharpening your antennae

Christian Zahra explains why understanding government and public policy is a director’s business.

A key part of the value that an effective director adds to a board is an understanding of the external environment – an ability to "bring the outside in" to deliberations on business strategy. External factors, such as the state of the economy, competitor activities and so on, are a routine part of any good board’s strategic considerations. But one critical external factor is too often overlooked – and it’s one that has the potential to make or break a business.

Government decisions can directly affect the fortunes of a company – sometimes in a good way, and sometimes not. It often depends on how switched on the board has been to the potential risks and opportunities. Recent public policy changes limiting the development environment for wind energy and coal seam gas exploration projects, for example, could seriously affect the viability of companies that just "didn’t see it coming". Conversely, low-emissions or renewable energy companies that have been alert and responsive to public policy movements over the past five years or so will have positioned themselves to take advantage of the upside potential of a price on carbon.

Public policy shifts can also have a critical effect on mergers and acquisitions and public infrastructure bids. I know of an Australian company that rejected an unsolicited offer from an overseas company, only to then suffer a serious adverse regulatory change it hadn’t anticipated, which significantly affected the business and made the rejected offer look unbelievably good. And I have seen an infrastructure company turn around a very long losing streak – with all the tens of millions of dollars of costs associated with that – through a conscious and determined "understanding the client" focus in its engagement with government.

Despite all of this, many directors and boards still dismiss the notion that their business strategy should take account of the public policy environment. Perhaps this simply results from a lack of understanding of the workings of government and of how best to align a company’s strategic objectives with public policy imperatives. Or perhaps there is just too much credence given to the view that government is irrelevant, even "hopeless", and that public policy and politics have no role in strategic business considerations.

Whatever the reasons, it’s worth pointing out that the best-managed companies in Australia and overseas are now routinely integrating government decisions and likely public policy shifts into their board’s strategy development processes. Many are also beginning to undertake serious engagement with government at senior levels – moving beyond what is generally seen as lobbying to an ongoing strategic consideration of the effect of public policy on the future of their businesses. Some of these companies routinely involve directors – in particular, the chairman – in direct discussions with government. This gives board members a first-hand understanding of government priorities and allows them to integrate policy movements into business strategy.

However, something that seems so obvious – and can have such a dramatic impact – still struggles to find a place in many Australian boardrooms. At the Australian Institute of Company Directors’ Company Directors Course I completed seven years ago, the importance of being able to assess the external environment, and respond to it, was drummed into us. We were presented with numerous case studies of companies that had collapsed as a result of boards failing to be alert to significant external threats. We were also told repeatedly that as directors it was our responsibility to seek advice on matters we didn’t understand, not just leave them to someone else to figure out. This mantra – "if you don’t understand it, you need to learn about it. Or don’t be a director" – is particularly relevant in the context of government and public policy.

It is true that many Australian companies are making efforts to bridge the gap between government priorities and business strategy. In the past 10 years, for example, we have seen the creation of new senior executive roles such as director of public policy, manager of government sector and so on. These are positive developments, but they are no substitute for director-level consideration of government priorities and public policy direction. Without an overarching strategic approach by the board, even the best government relations executive will struggle to make an impact.

An important practical step that boards can take to incorporate public policy and government decisions into their strategy development processes is to conduct an annual public policy scan or review. I have seen this work well, particularly where the consultant or company manager who has completed the review presents the findings directly to the board. This setting provides a great opportunity for directors to learn more about the public policy environment as it relates to their business, and to "bring the outside in" by discussing how the company should respond.

The trend is clear – Australia’s most effective boards are beginning to think deeply about, and seek expert advice on, public policy priorities because they know it is fundamental to the future of their companies. In the interests of better governance, and better board decision-making, we must challenge the idea that it’s just politics and therefore "nothing to do with us". As responsible directors, we should make it our business to understand public policy and government decisions, just as we do with any other external factor that has the potential to affect the bottom line.

Christian Zahra FAICD is a director of Pacific Strategy Partners, the Regional Australia Institute and the Mary MacKillop Foundation. He is also chairman of the Federal Government’s Regional Development Australia Fund Advisory Panel and a member of the Federal Government’s Ministerial Advisory Council on Regional Australia.