07 September 2018

Are Australian boards being set up for failure?

This article was written by David Friedlander and Nigel Hunt.

Not a day goes by when a governance group, body or self-styled expert hasn’t eulogised about new and improved ways to “hold directors to account”.

David Murray made comments last month that covered a lot of ground.  Among those we were delighted to see him express his views on how public company director expectations are completely out of hand. Equally pleasing was the chorus that came in behind him on that point.

We grapple every day with organisations – from the well-respected ASX Corporate Governance Council down – that publish governance standards and guidelines.  We comment on them as they are being formulated. We advise boards on how to navigate them.  So we do feel in a position to assess whether the balance is right. 

Our latest view on that question is this: everyone is setting boards up for failure.

It is important that boards show leadership of a company that issues equity or debt to the public. As those companies grow, it is also important for boards to consider a range of interests across various time horizons and critically to analyse management perspectives and actions. It is also important to set the cultural tone – as role models at the top.

However, the fundamental job of the board is to hire the CEO, fire the CEO, mentor the CEO through executive selection and difficult periods, regularly consider risk (and risk mitigants) and be a sounding-board for management on strategy.

If you try and layer more onto a board, you have what scientists call a doomed experiment.

Taken individually, no single one of the many missives on governance is the culprit. It is the weight of interference in the board space that in our opinion is the issue. 

The famed New York lawyer, Marty Lipton, recently issued a 3 page outline of the expectations on modern boards. It is terrifying. Especially coming from Lipton, because it reads of resignation.  He has become resigned to accept the litany of things that external parties are now demanding of directors. Even though he knows, more than anyone else, that if a board just gets CEO selection, succession and mentoring right then it has already made the gold star class.

Everyone knows from bringing up children and working in organisations that when you fuss around people, they will always end up failing. Because they won’t have clarity of direction and won’t be empowered.

In our opinion, that is what corporate Australia is doing to boards right now and has been doing for too long. Evidently in the U.S. too.

In addition, there has been huge mis-focus in so much of the governance debate. The time and effort spent on remuneration reporting cannot make sense in the context of large corporates.  Compliance is in the same category – it is a perfectly legitimate area of focus.  Just not granularly by the board so that it comes to dominate the agenda and available bandwidth when it really shouldn’t. Repeatedly, boards are being criticised for events which occur in minute parts of their business.

David Murray was regarded as brave last month. Frankly in our view his point about over-governance was just logical.  There is only so much you can do from the board table.

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