Work in progress

Changes to the ASX Corporate Governance Council’s principles and recommendations now require boards of listed companies to explain and highlight induction processes. Christopher Niesche discovers that for many, there is still a long way to go.

Paul Rizzo has joined company boards where he has received effective director inductions and others where he hasn’t, so he knows the difference a good board induction can make.

Rizzo was one of the first directors of BlueScope Steel after it was spun out of BHP Billiton in 2002. He started off as a “shadow director” before the demerger, during which time he received regular updates on the business. After the demerger, he and other directors were handed important documents, held meetings and briefings with key executives and went on several site tours in Australia and overseas.

“Not knowing how they made steel, what the challenges of steel are, what the economics of the industry are – all those things – that induction process was incredibly valuable to me,” says Rizzo, who currently serves on the board of National Australia Bank, and has previously held directorships at the Seven Network, Foxtel and the State Bank of Victoria.

“I think maybe I wouldn’t have been quite as effective in that first phase as I was because of the induction process I experienced.”

The effectiveness of board inductions – the process by which directors learn about a company, its industry, governance and personnel when they join its board – is gaining greater focus following a recent change to the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. The guidelines state that a listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively.

Companies that do not follow these recommendations will be required to disclose the reason why and what they do instead. The recommendation came into force for the 2015 financial year, so annual reports from September and October should contain the disclosures.

The changes mean that smaller companies with poor induction procedures will come under scrutiny and while most S&P/ASX 200 companies already have induction processes in place, the effect of the rule will mean many of them will be required to disclose what they are already doing.

Detailed inductions

Indeed, the days of an induction consisting of a stack of board papers from the last two years to read through and a quick meeting with the chair are over. “Over my time as a non-executive director, the process of appointing directors and inducting them has improved dramatically,” says Rick Lee AM FAICD, chairman of Oil Search and a director of Newcrest Mining.

Lee says that induction usually begins in the lead-up to the director’s appointment, when they’re being interviewed to join the board and doing their own due diligence.

“They will have been given some information on the company to start with and, obviously, if it’s a listed company, there’s a lot of information in the public domain and most candidates will have done a bit of research themselves,” he says. “Generally, you will have met at least half the board because interviews will have been conducted at the very least with the chairman and the board nominations committee.”

Lee says that being able to access information online or on a tablet via a board portal has also made a big difference. “There is a whole lot of background information on the company on the ones I use for my boards; past board and committee papers, budgets, strategic plans and contact details for fellow directors and senior management,” he says.

James Beck GAICD, managing director of consulting firm Effective Governance says it can take five board meetings for a director to be effective without a good induction.

“Unless the director’s inducted correctly, their effectiveness is hampered,” says Beck, who notes that the figure he quotes is anecdotal but based on 10 years of reviewing boards.

A director who hasn’t been inducted properly will not only be less effective and risk making poor decisions, but can potentially waste other directors’ time by interrupting meetings for an explanation of past decision and current strategy issues.

Beck says there are several things a director should get out of induction. They should gain an understanding of the company’s business as well as the industry it is in. This should include a “guided tour” from the chief executive officer (CEO), who might also introduce them to key managers, allowing them to get a better understanding of who’s who in the organisation.

“Understanding the executive is an integral part of understanding the business,” says Beck.

Directors should also get an understanding of the skills mix of the board and where they fit into that. Reviewing the board’s formal skills matrix will stop them making assumptions about who has which skills and allow them to better interact within the boardroom.

Along with reading previous board papers, directors should also read the register of resolutions the board has previously made and go back and ask for an explanation of any decision they do not understand.

A tailored approach

While induction programs have some standard elements such as meetings with the chair, other directors, executives, site visits and a review of governance issues, they should also be tailored both for the company and for the individual director, says Robyn Weatherley AAICD, author of Eyes Wide Open: A First-Timer’s Guide to the Real World of Boards and Company Directorship.

“The tailoring component is really critical and the following up with the director is really important as well. This is a great opportunity for the company to arm that director with the proper tools that they need,” says Weatherley, who is currently in charge of governance at a superannuation fund.

“The company needs to make sure that each induction plan continues to be reviewed and remains fresh and relevant – relevant to what’s going on in its own environment and as its own businesses change.”

New directors should also get one-on-one time with key executives away from the gaze of other directors or the CEO, so they can feel free to ask difficult questions and to cover some of the basics that they might not be comfortable doing in front of their peers.

Weatherley says there is a responsibility on the part of the company and the individual director to make sure the induction happens and is effective.

“If they’re not hearing the word ‘induction’ any time after they’ve been appointed to the board, they should be actively engaging with the company – be it the CEO or the company secretary – to say: ‘this is really critical for me becoming effective as quickly as I can be. How about an induction? I think it’s really important’,” she says.

Directors also need to have the courage to speak up during the induction process if they believe something is missing from the program or if they’re not sure why it contains particular elements. By the same token, they need to acknowledge that they cannot get answers to everything they need to know immediately, says Weatherley.

It’s a point taken up by Lee, who says that directors cannot learn it all in six weeks and really have to go through a complete financial cycle to fully understand a complex company.

“Give yourself a little bit of time because when you go through a one-year cycle with two sets of half-year accounts, you’ve generally dealt with most of the issues – you have been through an HR cycle in terms of remuneration, bonuses and rem reports,” he says.

When a new member joins the board of Seqwater, the Queensland bulk water authority, general counsel and company secretary Sally Frazer GAICD tailors an induction program to the individual’s needs.

“It is important to make the personal contact to find out what level of experience they have in relation to being a board member, and in our industry, and what their particular requirements are about attending meetings,” says Frazer.

“The personal engagement is about 110 per cent of making it successful because every new director has their own particular interest or their own particular concern about how they like things done, so part of that personal engagement is to accommodate this where possible, within the existing approach.”

Becoming board ready

Typically during board inductions new directors receive a wealth of information about the organisation and industry sector, but Frazer says all the information in the world will not make them “board ready” if they do not understand how that particular board operates, governance principles and directors’ legal responsibilities. Spending time with the new member can streamline their assimilation and effectiveness as part of the board.

“This approach enables the new board member to quickly understand how the board meetings run, the purpose of information that’s made available to the board via an online portal, the kind of contact that’s made between board members and the appropriate method for contacting key people in the business,” she says.

Of course, it cannot all be left up to the chair and the company secretary. Directors have to play a role in their own inductions as well. Rizzo says all directors should do their own research beyond the official induction program.

“They’ve got to talk to people in the industry, outside the company and should go out of their way to pinpoint some key executives to talk informally with because it’s very important to understand the context of the company. The formal induction gives you the ‘party line’ in a sense, but it is nice to see what other people outside the organisation think as well as have an idea of some of the key executives who may be prepared to open up and discuss the culture of the organisation,” he says.