All articles in Volume 12 Issue 10

Getting growth back on your agenda 

28 May quote

The board’s greatest source of influence was in the questions it asked and the decisions it made, Australian Institute of Company Directors chairman Michael Smith FAICD noted last week. In his opening address to Company Directors’ annual conference on Hamilton Island, Smith pinpointed some of the ways directors could best ignite growth in their own organisations, rather than just complying with their legal duties, signing off on accounts and mitigating risk.

“Insightful questions asked about corporate strategy around the board table enable better strategic thinking, deliberation and decision-making,” he said.

But he added that as directors adapted to a high degree of volatility and change in their environments, they were required to engage in a wider flow of information.

“We need to increase our awareness of what is changing, how things are changing and, in turn, make more effective judgements and decisions,” he said.

“While our individual knowledge has held us in good stead to date, we need to think about how we can adapt, so that we’re not tripped up into thinking that the paths we have taken before will secure our future.

“We know that it is human to suffer from confirmation bias, so it is important that we also try to remind ourselves of how to be aware of it and take steps to ensure we prevent this from hindering our ability to consider new ideas or new markets.”

Smith noted that the link between innovation and growth was clear, but it also required directors to have the courage to potentially abandon some traditional strategies: organic growth, incremental product innovation or process improvement, or even growth by acquisition.

“What other, more inspiring growth opportunities can we explore?” he asked, noting that theory suggested that the pursuit of growth started with an open mind as to what was possible.

“We need to keep asking ourselves how we can change the world for the better just like entrepreneurs do,” he said.

“How can we create or grow new markets and commercialise the best ideas through exploring and believing the ‘adjacent is possible’? In other words, we need to not accept everything we have believed to be true or sacred, but instead consider how we can create a better future. Rather than just detect, we can also create new trends (such as Apple has done so famously), so we’re not just responding reactively to the trends others might establish.”

Smith added that in order to achieve their growth objectives, directors would need the ability to articulate their strategic vision beyond rhetoric.

“In an era of increasing distrust and scepticism, we need to be authentic and transparent about why we are pursuing growth and align around a central vision. We need to consider how the stories we might tell inspire our people and encourage customers to do business and engage with us.

“To this end, we can leverage what is emerging from the field of neuroscience to better understand human motivations, habits and behaviour. What do we really understand about our customers and their goals of growth and contribution?”

Smith added that growth would take root in directors’ ability to truly listen and demonstrate compassion and empathy for their stakeholders, whether they be customers, employees, suppliers or society at large.

“We need to be cognisant of how the focus on a company’s single best interests – which we are of course required to do at law – may be in contradiction with the emerging fields of co-creation, collaboration and collective impact that are being explored in various communities.

“The rise of stakeholder activism (such as class actions, GetUp and Occupy Wall Street) means that while seeking to ignite growth, we also have no choice but to deeply consider the direct and indirect consequences of our decisions and corporate actions in a broader context. There is clearly an expectation that socially responsible businesses must do whatever they can protect and enhance the well-being of all in our economies and societies.”


Making "clean business" your choice

Doing “clean business” that is corruption-free is a choice and one which directors can, and must, make to protect their organisations from reputation damage, financial costs and legal liabilities.

So warned Dr Bandid Nijathaworn, president and CEO of the Thai Institute of Directors, when addressing a forum at Company Directors’ national conference on Hamilton Island last week.

He said corruption had become a difficult problem, which impeded competition, skewed the playing field, destroyed innovation and harmed the creation of value in an economy.

He noted that anti-corruption enforcement had come a long way and that many developed and developing countries were stepping up their efforts to address it and were introducing anti-corruption laws.

Among them were China, where president Xi Jinping’s campaign against corruption was growing into one of the broadest in the country’s modern history, and Brazil, where the rigorous Clean Companies Act came into effect in January 2014.  Changes have also been proposed to the UK’s Bribery Act 2010 which could see regulators getting tougher on companies which fail to prevent their staff committing financial crimes.

International initiatives included the G20 Anti-Corruption Working Group, the Organization of Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials and the United Nations’ Convention Against Corruption.

Nijathaworn urged directors to ensure the conduct of their organisations was consistent with the regulations of different countries. “These are converging into one principle and evolving into more demanding standards for companies,” he said.

He also cautioned that enforcement of anti-corruption was being supported by greater cooperation between countries around the world.

“Directors need to understand that the public also expects companies to have special responsibilities and to tackle this problem. This is because companies are seen as being on the supply side of the corruption equation,” he added.

“In addition, there are increased expectations from stakeholders, including shareholders and investors, for boards to have a clear stand on corruption, especially in countries which have very active anti-corruption policies.”

Nijathaworn’s advice to the boards of Australian organisations operating on a regional or global basis was to:

  • Set a clear tone from the top of how the company is going to do business.
  • Ensure they are updated on the latest corruption policies and regulations, especially in the jurisdictions the company operates in.
  • Understand the steps management is taking to ensure the company is fully aware of the regulations.
  • Ensure clear policies are in place on how the company will handle corruption.
  • Ensure there are adequate internal procedures in place to prevent corruption and bribery.
  • Ensure these are supported by regular reviews of the code of conduct and the procurement, supply chain and other policies.

During the forum, the Australian Institute of Company Directors’ general manager of policy and advocacy Rob Elliott FAICD warned that Australia was coming under pressure because it still allowed so-called facilitation payments. Also known as "grease payments", these are low value payments designed to persuade government officials to do a task that they are already obligated to do.

“It is an area where many countries – particularly the UK, US and Canada – look at Australia and describe our regulatory settings and definitions as being out of step and not world best practice. It’s an area we will have to address pretty quickly,” he said.

Nijathaworn added: “Facilitation payments are risky because you don’t know what you are getting into. They are also complicated because different laws in different countries have different definitions of what they are.

“There are two ways you can tackle them: You can study the law and take your approach on a country by country basis, or you can take the standard and safer approach and just not allow them.”


How to drive innovation

How do directors in larger companies drive innovation? Gregory Ellis MAICD, CEO of Scout24 Group, had plenty of advice on this when addressing Company Directors’ national conference on Hamilton Island last week.

Now based in Germany, Ellis was CEO of the REA Group, the global online real estate advertising company that grew from realestate.com.au, for more than five years.

Ellis noted that innovation beyond start-up size companies was difficult for many reasons. For instance, he did not believe Australian CEOs or C-level executives had the right skills and capabilities to drive an innovation based agenda. In addition, director liability and developments like the “two-strike” rule for listed companies had caused an over personalisation of how directors looked at their jobs, forcing them to become defensive, rather than offensive, the latter a crucial requirement for an innovation growth agenda.

He suggested that the world was set to enter a consumer-led revolution over the next 10 to 15 years, where individuals would have the ability to significantly influence economies, politics and social agenda like never before because of the internet.

He believed that dissatisfaction with hierarchical political and business agendas was rising. “The hierarchical structures of governance and managing companies are about to disappear before our very eyes,” he said.

In addition, the internet allowed so much information to be out there that no one person could keep up and decision making needed to be pushed out to the edge of the market.

He encouraged directors not to be afraid of this future, but to embrace it with a new approach to governance.

“My view of an innovation growth based agenda comes down to a market relevant strategy that can be articulated to the market, but more importantly, to your employees as a purpose (why we do what we do),” he said.

“The organisation needs to become purpose-driven and really mean it, and to be aligned on it from the chairman down. A purpose is not a mission statement. It is a fundamental belief as to why the company exists. A purpose sets every dynamic that happens in the company, from your recruitment policy to your learning and development policy to your risk-taking framework. It is not just about why. It is actually what drives the archetype inside your company. You need an operating world that is philosophically aligned to a purpose and not policy and procedure aligned.”

Ellis noted: “Innovation does not come from boards and from C-level positions. It comes from the people who are the closest to the market. At REA, we pushed responsibility and decision-making to the edge of the company to match the market speed and we were able to do that within a governance framework.”

He said the CEO also needed to be supported for innovation to be successful. “This is not about remuneration. It is about making sure he or she is set up for the environment of success.”

He observed that with so much information available online and the increasing speed at which decision-making had to happen, the board had only two options: It had to meet more regularly to discuss market movements and the options available. Or, it had to trust that management was on top of things and providing it with regular updates.

Ellis encouraged non-executive directors to become familiar with what the internet was and how it worked, noting: “It’s the ultimate disruptor.”

He added: “The ability to survive in a complex regulatory world of compliance is vital, but the development of your strategic skill is absolutely critical. You need to be very good at strategy because your job is to help the CEO work out where the market is moving and why.

“You also have to honestly assess whether you are the right person for this board and whether you are prepared for calculated risk-taking.”

Ellis also cautioned: “I am not sure whether the skills and experience of a board, generated over the past 20 years, are going to be current for the next 20 years. So as a board member, you must not lose the wonderful heritage and experience that you have, but you must apply a lens that is relevant for the modern economy that we are working in, rather than consistently applying a standard set of frameworks.”


How to manage a feisty CEO

Alison Monroe MAICD might be considered a feisty CEO, having founded her own business, selling it to a new owner and then becoming its group CEO. But she also has sound advice for boards on how to deal with spirited leaders or founders.

Monroe founded Sageco, an ageing workforce specialist back in 2004 with two partners after seeing how hard it was for older Sydney 2000 Olympic Games volunteers to get back into the workforce. In June 2013, her company was acquired by The Donington Group, which last month made her its group CEO. She is also the only female director on the board of its parent company, HREXL.

Of her experience, she says: “I have had to very quickly learn how to wear the different hats of shareholder, director and employee and, of course, try to take off the hat of original founder. That hat can sometimes get in the way of good business sense when you have an emotional connection.”

She concedes that it has been challenging to go from being an entrepreneur, with all the flexibility and speed that comes with the role, to being governed by a very traditionally-run board of a company that also has a franchise network of partners and licensees across Australia and New Zealand.

“There are many stakeholder groups with many different agendas and one of the things that resonates in my mind most nights is that you can’t please everybody all the time. But I will die trying. It is about balancing the internal relationships with the need for me to stay externally focused.”

Speaking at last week’s Company Directors conference on Hamilton Island, Monroe provided some tips on how directors could best work with and optimise the skills of a feisty CEO.

“Give them oxygen and space,” she said. “Time is a highly perishable asset and, frankly, I only have time for so many coffees in a week. I have asked the chairman to consider moving the board meetings from monthly to bi-monthly just to give me some oxygen to make some of the changes needed and to report back on the outcomes.

“My predecessor was spending two full days a month preparing the board report. I want to spend those two days out with customers, bringing in new business and transforming the organisation.”

She also believed the board should allow the CEO to take measured and calculated risks. “Of course there needs to be a solid business case and an articulated return on investment, but if we don’t take risks we won’t move forward,” she said.

In addition, she cautioned the board against “sandbagging”. “You end up just draining the energy out of the CEO in terms of the agenda. If you sign off on the strategy and everyone is lined up on this, then there has to be a trust there to empower the CEO and leadership team to execute on that and not deep dive. There will have already been so much conversation before this stage.”

Asked whether she believed the board helped or hindered a company’s growth, Monroe said: “It’s about finding the balance. As an entrepreneur you can be quite impatient, but when you are surrounded by a wealth of experience in the room that has navigated change and storms, you need to stop and listen to that. It’s really about ‘hurry up and slow down’ and that is something I have tried to do.” 


Answering the tricky questions

How many board meetings should you have each year and how long should you stay on a board?

There are, of course, no correct answers to these questions, which were among the many posed to a panel of experienced directors at Company Directors national conference on Hamilton Island last week. Nonetheless, the panel – consisting of Yasmin Allen FAICD, Elizabeth Proust AO FAICD and Peter Yates AM MAICD – provided interesting yet varied answers.

Proust, a veteran director who is chairman of Nestle Australia and the Bank of Melbourne, was the first to answer the question: With preparing board packs taking up so much of management’s time, why are monthly board meetings so sacrosanct and should we be looking at different frequencies for them?

“Partly it is habit and tradition,” she said. “I question the assumption about the tiresome and tedious nature of preparing board papers. It should be part of what the organisation does. I always groan when I open an iPad pack and discover there are 450 pages I have to read. That tells me there is going to be some muddled thinking, unclear papers and some padding in the pack. I know that it is hard, but there is something in getting people to write short, sharp papers rather than long ones.

“We are probably heading towards best practice - being six meetings a year - as long as there is enough time to have video conferences or dinners to develop relationships between meetings. But we do seem to stubbornly stick to, if not every month, having at least 10 meetings a year. The boards that seem to show they are working better have around six or seven meetings a year. However, these might be for more than a day.”

Yates, who chairs several not-for-profits (NFPs) and is deputy chairman of The Myer Family Company and a director of AIA Australia, believed that holding a board meeting every month was a complete waste of time.

“If you are steward [of an organisation], what can actually change each month in respect to your role?” he asked.

For her part, Allen, an experienced non-executive director who sits on the Insurance Australia Group (IAG) and Cochlear boards, noted: “The number of board meetings don’t matter. It is what you want out of board meetings that matters.”

Answering the question on whether there should be a set tenure for how long directors could sit on a board, Proust said: “I don’t think you want hard and fast rules. Perpetual is the only board I am on where there is such a rule. But I have tended to apply it to myself in terms of thinking about the contribution I can make and the time that I should be on a board.

“The real question is: At what point is someone no longer independent? There is no one answer to that question, but it needs to be answered.”

Yates believed tenure was essential in the NFP space. “It’s not because directors may not be independent, but I think the organisation becomes dependent on them. In the NFP space, I don’t think you should serve for more than nine years… In the publicly listed space, I think it depends on the skills mix. It is about the relationship between the skills someone brings and that of the rest of the board.”

Allen, however, believed tenure were important. “You really do need renewal,” she said.

“We have had three directors join the IAG board, all from very different industries and regions in the past two years and that has added more momentum.”

She agreed that boards should not set hard and fast rules on tenure because the unexpected could happen. “For example, you could lose a chairman at the same time a CEO departs or the board might have a high turnover in one year - for instance, if a director has to move offshore,” she said.

“Tenure is something we should be mindful of, but we do not have to be very strict and firm around it. We should work towards it. The Cadbury Report in the UK talked about independence in terms of nine years. I think that independence is more a state of mind, as has been said by many people, but I do think new blood on a board is also very important.”

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