As we head into 2015, several international commentators have launched their predictions on what will occupy the attention of Boards this year. Notable among them are Richard Le Blanc, the Harvard Law School and the Australian Institute of Company Directors.
Looking at these prognostications, what challenges can we expect for Australian Boards in 2015? Most likely in my mind are:
- Cyber security
The 2014 year saw a number of high profile attacks across the globe. The consequences of these attacks were severe, both in their own right and due to the poor response of some of the organisations involved. The attacks will not stop coming in 2015. They will only become more frequent, and it’s only a matter of time for many organisations before Directors’ fears are realised and their company is tackled next. High priority targets would seem to be financial institutions and retailers and any other corporation where large amounts of sensitive consumer data is stored.
More pressure will be placed on companies from stakeholders and investors on the viability of various business models given issues such as climate change, shifting demographics and social inequity. Boards can expect that investors and stakeholders will ask whether the business is sustainable given these factors, and make investments based on the answers to that question. Even sacred cows are no longer safe. For example, the concept that mining and oil companies are sitting on buried wealth is no longer considered to be certain given projected demand and pressure from activist investors.
Regulators will continue to introduce more compliance-based reforms that will either detract from Directors’ attention on strategy or affect the functioning and performance of the Board. For example, any legislated change to the current composition of industry superannuation funds will cause disruption while Boards readjust their memberships. Likewise, continued pressure from APRA will cause Boards of financial institutions large and small to constantly ensure their focus remains on governance rather than management.
- Activists and proxy advisors
There will be increased scrutiny from external parties on Board actions. This will create pressure in some areas for Boards to act in ways that go against what is best for the company under their stewardship. The challenge of balancing long-term growth against short term returns is not new. What is coming to the fore is increasing pressure on Boards to ensure that they are focused on value-adding activities for the strategy and growth.
- Economic setting
The consensus appears to be that markets will be volatile, unemployment will be high, consumer confidence low, global growth low and the dollar down. Foreigners will find investments in Australia less attractive, dividends will come under pressure, some companies will face the threat of takeover (potentially hostile) and there will be more demands on Board time.
None of these challenges will be a surprise to anyone. What will be interesting is how Boards react.
A recent McKinsey article opines, rather provocatively, that “Boards aren’t working” and are missing the boat in four vital areas:
- Electing the right people – Boards are seen as inadequately equipped to meet shareholder interests
- Spending quality time on strategy – Directors need to increase the number, quality and depth of strategic conversations
- Engaging with long-term investors – Boards are not conducting an open, ongoing dialogue with long-term investors to enable a longer-term outlook
- Pay – Directors need to think like investors by having more skin in the game, either via incentives or share holdings.
It’s difficult to fault McKinsey’s logic and it’s unlikely the situation is significantly different in Australia than it is in the US.
If I were able to invoke the traditional genie’s three wishes, it would be nice to look back in December 2015 and say that Boards have enjoyed success in the following:
Rather than reporting that they want to spend more time on strategy, my first wish is that Boards will have actually implemented specific activities to spend more time on strategy.
For example, during 2015 Boards will:
- Move beyond the one-off annual strategy event by creating a timetable that addresses corporate strategy regularly.
- Increase the time they devote to Board work.
- Table a strategy item as the first point on the agenda at each Board meeting when they are freshest. Encourage directors to discuss the high impact items that can add the most value.
- Require executive presentations to demonstrate explicitly where initiatives and projects contribute to the overall strategic plan.
- Invite external speakers/experts to provide industry insights, competitive analyses, and information on consumer demands that reinforce or challenge the corporate strategy.
- Become more active in the field, visit company locations, listen to customer panels, observe company operations – see with their own eyes what competitors are doing, what customers need, how their business could improve.
- Do more broad based scenario planning to consider a range of possible environments within which the organisation could be operating in the near and longer term future.
After implementing these activities, Boards will be more innovative and customer focused. In this data-rich decade, companies are able to know more about the customer than the customer does themselves. Using this information, Boards will drive strategy in the direction of tailored and innovative products and services that are what customers actually want and need, and reflect the changing world in which we all live.
- Board performance, succession and composition
A PWC survey of US Directors noted that 36% of respondents would like to see the exit of another Director on the Board, up from 31% the year before. The needs of Boards change as companies mature, grow, slow down, venture into new markets, withdraw from other markets, face new competitors and increased customer demands. Not surprisingly then Boards face an ongoing challenge in renewing Board capability, ensuring the right people are assembled around the table and are able to contribute where needed.
By the end of the year, my second wish is that many Australian Boards will have gone beyond the requirements of the new ASX corporate governance guidelines to invest significantly in identifying the contribution of individual directors. They will have articulated carefully the capabilities that are required at the Board level and will have assessed the capability of all Directors against the future needs of the organisation.
As a consequence, Boards will have put in place training and development for some Directors, removed others, and recruited new Directors. Boards will focus on leadership succession throughout the organisation based on the organisation’s future strategy.
The focus on independence will shift to independence of thought rather than independence defined as how many years a Director has been on a Board and how many shares they own.
Although we will not see a 30-year old on the BHP or Commonwealth Bank Board, Boards will make use of advisory groups and special committees so that Boards can independently tap into the information they need.
- Board dynamics
My third wish is that Chairmen around the country will become more and more rigorous in bringing matters to agreed resolution and in rooting out dysfunctional behaviour. The leadership of the Chairman will encourage debate, ensure all views are expressed, and prohibit dysfunctional behaviour from disrupting the flow of debate and decision.
Dysfunctional behaviour will be called out in Board rooms with no glossing over problems, so we won’t hear that:
- Debates become bogged down in irrelevant detail
- Directors regularly discuss matters or lobby each other outside the main session
- Directors are hostile to management and interrogate them based on a personal agenda
- Directors are out of touch with the company
- Directors bring items to meetings that are not on the agenda
Such markers of poor Board dynamics will be noted and the problematic behaviour changed, or the Director/s will be asked to leave. There will be more and more awareness on how Board dynamics (the interaction of different Director skill sets and behaviours and the extent to which Boards tolerate poor performance) affects what the Board does.
In the same way that Boards will put a process in to identify capabilities they require and facilitate Board renewal, the management of boardroom dynamics will have become a repeatable process that is conducted regularly.
If all of this can come to pass in 2015, we can all look forward to McKinsey NOT publishing an article leading off with the sentence “Boards aren’t working” at the end of the year.