Agenda

  • Date:01 Apr 2015
  • Type:Company Director Magazine

Lifting board performance
How can chairmen use the board review process to take their board to the next level in performance and contribution? Which questions might they ask in a time-efficient manner that will provide the best insights to take the most effective steps?

These are questions that Dr Vince Murdoch, who leads Egan Associates’ board services practice, has found himself confronted with by many chairmen in his work conducting board reviews. He says despite the fact many chairmen are happy with their board’s performance, many still seek additional advice on what they can do to further enhance value. 

In an article for the company’s newsletter, Dr Murdoch says: “My response is that the most value will be provided by constructing questions that address three different, though interrelated, high leverage areas.”
These are:

  1. The value the board provides.
  2. The leadership of the chairman.
  3. The relationship between the board and the chief executive officer (CEO).

Given most boards are busy,  Dr Murdoch says choosing one question from each of these broad areas should serve chairmen well in gaining the insights they are seeking.

1. Value addition or creation

  • How does this board create great value for the enterprise?
  • What changes in composition, size, diversity, tenure will help us to add more value?
  • How can we contribute more to the strategy of the organisation?
  • What assistance can we as a board provide in networking or alliances?

2. Leadership of the chairman

  • If you were chairman what changes would you make in the way this board is being led?
  • Can you identify what support you can provide to the chairman in leading this board?
  • What changes does the chairman need to make (leadership style, dynamics, discussions)?
  • How can the chairman use their strengths to greatest advantage?
  • Where should the chairman devote time and effort most to lead this board most effectively?

3. Inspiring the CEO and senior management team

  • What does this board offer the CEO and senior team in the way of inspiration?
  • How do you challenge/inspire the CEO to go beyond the numbers and seek greater innovation?
  • What are you doing to enthuse the CEO about the next big idea (e.g. M&A activity, disruption to the supply chain, innovative products and services, different HR practices, refinancing, R&D) for the company?
  • What has the board done to review customer needs, understand new and current markets, and invest in digital “savviness” so that it can provide greater insights for the CEO and senior team?

Dr Murdoch adds that if the board chooses one question from each of these three areas and faithfully answers the questions it chooses, the responses will provide it with a roadmap for how it can achieve a new level of performance and contribution.


Michael Smith re-elected as chair
Michael Smith Hon DLitt (UWA) FAICD was re-elected chair of the Australian Institute of Company Directors (AICD) for a second term in March.Smith first joined the AICD board in 2011 and was elected chairman in 2013.

He is also chair of iiNet, Lionel Samson Sadleirs Group and Pioneer Credit, deputy chair of 7-Eleven Stores and Automotive Holdings Group, and a director of Creative Partnerships Australia and Giving West. Smith is one of Australia’s acknowledged authorities on strategic marketing. In 1979, he formed The Marketing Centre, which for more than 30 years provided advice to many of Australia’s most iconic brands.

Since 2009, he has been the principal and managing director of boutique strategic development consulting firm Black House. In March 2014 Smith was awarded a Doctor of Letters from University of Western Australia for his contribution to the business sector and the arts.


Workplace reform could boost Australian jobs
Research conducted by KPMG into the impacts of the workplace relations system on resource sector productivity and investment has shown that the industry’s recommended reforms could add up to $30.9 billion to Australia’s GDP and create up to 36,000 additional jobs.

KPMG estimates that if key workplace reforms advocated by the Australian Metals and Mines Association (AMMA) were fully implemented, they could collectively support resource sector productivity growth of up to five per cent and investment of up to eight per cent. This would grow national GDP by two per cent and employment by 0.3 per cent.

The KPMG research report, Workplace relations and the competitiveness of the Australian resources sector, was released to coincide with the Productivity Commission’s acceptance of submissions for its wide-ranging review of Australia’s workplace relations system.

In building its quantitative analysis of changes in workplace relations, KPMG consulted a range of resource employers including AMMA members and found AMMA’s reform options could have the following impacts:

  • Agreement making and  bargaining: Reducing the costs associated with project delays, unproductive operational practices, and excessive increases in wages and conditions.
  • Strike action: Reducing the risk of actual and threatened industrial action on major resource projects – minimising risks to project timelines, costs and loss of production.
  • Union site entry laws: Reducing the administrative, compliance and productivity costs of excessive and unnecessary union visits under the Fair Work Act. AMMA says access should revert to the pre-2009 position of being undertaken on a reasonable and orderly basis.
  • Adverse action laws: Reducing the rising costs and prevalence of employers having to defend themselves against legal claims and a “guilty until proven innocent” reverse onus of proof that employers say encourages unmeritorious claims.

In addition to economic modelling of proposed workplace reforms, KPMG also explored the competitiveness of the Australian resource industry. It found that  between 2007 and 2012, Australia has gone from being one of the most competitive markets for coal production to being 66 per cent more expensive than the global average, a cost increase of 189 per cent.


The big question

Question
The shareholders of a private company wish to convene a meeting at which a resolution to remove a director of the company will be put.

1. What period of notice is required for calling of the meeting?
2. What majority is required to pass the resolution to remove the director?

Answer
1. In the absence of any provision in the constitution which enables directors to be removed without a general meeting, a general meeting of members would be required. Assuming that the company is not listed then at least 21 days (or such longer period as may be specified in the constitution) notice of the meeting must be given to members (Section 249H(1) of the Corporations Act).

However, in the case of a public company the persons intending to move the resolution must give notice of the resolution to the company at least two months before the meeting is to be held and the company must give the director a copy of the notice as soon as practicable after it is received (Section 203D). This removal right is in addition to and not in substitution for any other right of removal of directors in the constitution. However the constitution cannot restrict the removal rights in Section 203D.

2. Subject to any contrary provision in the constitution, the resolution need only be passed by a simple majority.

This Q&A is taken from Director Assist, a complimentary member service operated in partnership with IFX. Answers are provided by a network of specialist practitioners. For more information go to: www.companydirectors.com.au/assist.


Avoiding groupthink
Boards may make better decisions if directors have some understanding of the psychology of decision-making. In an article in Harvard Business Review, “Making dumb groups smarter”, Sunstein and Hastie explore the idea of “groupthink”, which they describe as the tendency of groups to go astray and to fail to live up to their potential.

The authors note that groups err for two main reasons: (i) incorrect informational signals from other group members; and (ii) reputational pressures, which lead individuals to silence themselves or change their views in order to avoid a penalty (often being the disapproval of others). As a result, groups run into four problems, which may lead to poor decisions:

  • Amplification of many individual biases and mental short-cuts (e.g. overconfidence, the sunk-cost fallacy etc.).
  • The “cascade effect” or “herding”, where group members follow the statements and actions of those who spoke or acted first.
  • Polarisation, where members take more extreme positions than those held before deliberations.
  • “The common knowledge effect”, where information held by all group members has a greater influence on group judgements than information held by one or a few.

The authors conclude that a central goal in group decision-making should be to ensure that groups aggregate the information their members actually have and do not let faulty informational signals and reputational pressures get in the way. They describe several ways to achieve that goal, including:

  • Leaders and high-status group members can encourage others to express their own views by refusing to take a firm position at the outset, and indicating a willingness and desire to hear uniquely held information.
  • Informing the group that each member has a different and relevant role, or distinctive information to contribute.
  • Encouraging authentic dissent or, potentially, appointing a “devil’s advocate” or “red team” (for example, to construct a case against a proposal or plan).
  • Voting anonymously to insulate group members from reputational pressures and reduce the problem of self-silencing.
  • Structuring incentives to reward group success, thereby encouraging information disclosure.

The application of behavioural research to the issue of group performance has important implications for boards. In particular, it demonstrates that board decision-making may be improved by:

  • Educating board members on potential individual biases and mental short-cuts, as well as the nature of and reasons for group errors.
  • Adopting certain practical safeguards and correctives to help facilitate effective decision-making. The chair will play an important role in this regard.

Stay informed
This is one of many articles featured in the Australian Institute of Company Directors’ Centre for Governance Excellence and Innovation, a resource centre for key governance issues. To find out more visit: www.companydirectors.ccom.au/cgei


No more 100-member rule
The legislation to abolish the so-called 100-member rule finally passed both houses of federal parliament in March after a concerted campaign by organisations such as the Australian Institute of Company Directors to argue for a better system of shareholder democracy.

The legislation came into effect on 19 March and is an important piece of deregulation.

It will protect listed companies from having to convene extraordinary general meetings (EGMs) at considerable expense in circumstances where there is limited chance of resolutions receiving a majority vote.

The 100-member rule allowed as few as 100 investors in a company to call EGMs.

Its abolition will not be to the detriment of shareholder democracy as a group of 100 shareholders will still be able to place a resolution on an annual general meeting agenda.

Similarly, they can also request that a company distribute a statement outlining their concerns to all other shareholders.