Monday, June 20, 2016

Monday Forum - what is the role of the board?

Interesting piece in today’s Australian Financial Review by Adele Ferguson reporting in part on the results of a Spencer Stuart, Harvard Business School and Women’s Corporate Directors Foundation survey of 4,000 global directors. The directors included 136 Australian based directors.

According to the survey, 74 per cent of Australian directors ranked the economy as a key political issue compared to 65 per cent globally. Whereas 18 per cent of global directors ranked political instability as a key issue, the comparable Australian figure was 27 per cent. Almost half of the Australian sample viewed the regulatory environment as a major stumbling block to achieving their strategic objectives.

The picture that seems to emerge of the Australian cohort is an inward looking group worried about their own navels, with an almost obsessive concern with compliance issues.

Adele then raises a broader question, the role of the company board. Quoting John Stanhope, the Chair of Australia Post, she poses the question how can a director who meets a few times a year set the tone for the company? The Spencer Stuart survey reports that the average time Australian directors spent on board matters each year was higher than the global average, 218 hours as compared to 158 hours globally. And yet, that’s not a lot of time to try to understand a complex business. Should we therefore limit the number of director positions a person can hold? Or can technology provide an answer by making information more accessible to directors?

In another story in the AFR, James Eyers reports on the rise of regtech in the financial sector, the use of technology to make regulatory reporting and compliance less burdensome and more accessible. Again, we have the same emphasis on technology, compliance and reporting.

In considering all this, I wonder if we have not all been guilty of over-complicating things, blurring responsibilities between board and management, creating a corporate governance overlay that doesn’t help. Corporate governance - the mechanisms, processes and relations by which corporations are controlled and directed – has always been around. However, the use of the particular words “corporate governance” and the sometimes over-whelming obsession with the concept is quite recent.

So for today’s discussion, I pose two simple questions. What is the role of the board? What is the relationship between board and management?


Anonymous said...

Hi Jim, before considering your two questions, I'd just like to make a couple of observations on the source research behind that AFR article:

1) Regarding 'key political issues' the writer states, and you repeat, that "almost half" consider 'regulatory environment' a key issue. In fact this figure is 67% - see page 8 of the pdf which contains the earlier, correctly quoted, stats for 'economy' and 'political instability'.

2) The writer immediately goes on to talk about "compliance risk" - which you turn into "compliance issues" - as if that was what is meant by 'regulatory environment'? I don't equate those terms; am not even sure I equate your term with the writer's.

3) Of more interest to me (in that same pg8 table) was the 38% attached to 'cyber security' and the lowly 12% for 'corporate tax rates'. So much for our election campaign!

Not to bore too much further, but it is interesting also to note the respondents' self-assessed ratings further on in the report. The scale is 1-5 (poor-excellent).

Just about every factor is rated as between 3 (average) and 4 (above average) - sounds like self satisfied complacency to me :)

Lastly, early in the report it is noted that US Fortune 500 companies have a 5-7% board turnover rate, but for respondents to this survey, some 13% were appointed in the last 12 months. I'm thinking this 'global survey' is seriously deficient as to its actual reflection of some of these issues.

And I won't bring up the mens/womens thing - oh yes, why not? - which seems to indicate that while the female directors are more worried about lots of things, they are also more confident they are being well handled. This does not compute; or maybe that's the point :)

ps may come back on your interesting questions

Anonymous said...

But back to your questions: What is the role of the board? What is the relationship between board and management?

Up front, my comments are directed to public companies, not privately owned.

T0 think of the role in political terms:

1) the board acts as a 'house of review' much like our Australian Senate; the 'government' role always lies with the management or executive group - aka the House of Reps.

Boards provide:
2) credence and influence to decisions of management, but don't drive the business.
3) a 'credible buffer' between investors/stakeholders and management.

4) 'Activist' boards are a waste of space; how can part time (no matter how expert) board members ever provide more than overview, and/or caution?
5) Further, why would you employ a MD on $millions plus performance bonuses, just to have his (hopefully) best efforts second guessed by a group of part-timers?

Going back to politics,
6) maybe think of boards as The Greens or the crossbench; i.e. the 'conscience', without the ultimate day-to-day performance responsibility?

That last is where maybe Meridith Hellicar, for instance, crossed the line between review and action.


Jim Belshaw said...

Where did you find the original, kvd? I couldn't find it. You make some interesting points.

On boards, I completely agree with you re activist boards. To my mind, Boards also set delegations and provide a check to executive decisions. I don't think they are like the Greens. Boards do have a formal decision role. Boards also are important in selecting and removing CEOs. A good board provides a sounding board and wise caution for a CEO.

One of my problems with Ms Ferguson, and I fully accept the role she has played in shining a light on certain types of malfeasance, is that a Board does not need to know business detail, while director involvement in multiple roles including directorships provides a degree of objectivity and broad experience. It a director makes one ore even three company(ies) dominant, then they can become immersed in detail and suffer from scope creep, becoming involved in things they should not. The key of a good board member lies in asking good questions.

Anonymous said...

Jim, there's a download option for the full 38 page pdf on this page:

And yes, I was unsure about extending my poor political analogy too far. I take your point about boards having a 'formal decision role' - but it is (or should be) one of final approval for items presented/generated by executive management - not initiatory action per se.

There's lots more to think about on this very interesting subject, but I don't wish to hog your time or space. One such issue is the short term nature of executive performance reward, compared to the (hopefully) much longer timeframe in which really successful companies should plan and operate. They haven't got that balance right yet. See Kloppers at BHP, Mike Smith at ANZ.


Jim Belshaw said...

Thanks kvd. Will download tonight.c