Feature: Team Governance

In 2010, Australia’s largest not-for-profit health fund HCF embarked on an extraordinary process to overhaul its constitution and board structure.

In 2010, Australia’s largest not-for-profit health fund HCF embarked on an extraordinary process to overhaul its constitution and board structure. In a first for AICD, Alexandra Cain sat down with HCF’s board to talk about their transformation.  

HCF’s commitment to its not-for-profit (NFP), mutual status is part of its DNA. It exists for its members, rather than shareholders. Maintaining this commitment has been an important point of focus for HCF’s board during a period of industry-wide turbulence.

Against a backdrop of multiple regulatory reviews and ongoing industry consolidation, HCF has returned to members more than 90 cents in benefits for every contribution dollar received. Its management expense ratio is significantly less than the industry average.

These results were delivered within the context of a significant governance transformation. A new constitution was implemented in 2010, reducing the number of directors from 12 to eight non-executive directors and introducing a board renewal policy, limiting directors’ terms to a maximum of 12 years.

With significant change to the board, HCF employed a skills matrix to assist with selecting new board members. This focus on governance as a team activity is an important part of the HCF story.

In a first for this magazine, Company Director sat down with the entire HCF board to find out more.

CD: What did the change in constitution mean for the business?

Stuart Coppock: Four things had to be addressed. There was a governance document, of course, that had to be modernised within corporations law context. The role of the directors and their appointment also changed. Hospital members had to be engaged. Having successfully achieved that, we now have a director cohort who are demonstrably accountable. We had to make sure the process didn’t adversely impact how the business ran. It was quite a difficult task. What we have achieved is novel and unique in the fact we’re making it work. We have also made sure governance of the whole organisation through the constitution matches contemporary practice.

CD: How has the skill set of the board changed?

Robert Goaley: The board that was instrumental in the new constitution was an extremely effective board; they all had a lot of experience within health insurance. Through their persistence, the constitution was changed, putting in place a new mechanism that would see them out of a role. So the first thing we looked at were the skills we had on the board. Then we looked at the skills that would be required to run our organisation. Our first new directors were Lisa McIntyre, who has strong strategic skills, and Claire Jackson, who has a clinical background, followed by Chris Wright, who comes from a funds management perspective.

We were also looking for someone with strong auditing and accounting skills and Mark Johnson came to the board. John Barrington brought another set of skills; he was CEO of a large health fund and he has been a commissioner of the Private Health Insurance Administration Council. You can sit down and come up with 40 or 50 skills you need on a board, but for a board of our size I’m confident we have the relevant skills.

Along with these changes we, as a board and a company, have been very fortunate to have a strong leader in our managing director Shaun Larkin, especially as our governance changes coincided with some of the most turbulent and fast-changing times in the history of the industry.

John Barrington: Following on from Rob, our skills as a board are well complemented by the refreshed management team. The skill base has been uplifted in the disciplines of running a business in every area from marketing to IT. We have more than kept pace with developments going on in the general industry so we are well served as a board, particularly in our governance responsibilities, by having people who really can give us factual, clear advice. That’s been very helpful.

Stuart Coppock: Rob has been extraordinary. I have experienced three chairs on this board, each reflecting a different need or requirement of the corporation as a mutual. Rob, working with our managing director, has done an extraordinary job in dealing with the enormous degree of change happening in our industry. Leadership has been a big issue and that has brought us to where we are today.

CD: What do you consider your main challenges?

John Barrington: We really have two regulators, which potentially can be difficult for a company like ours. We’re fairly unique because the rest of the insurance industry doesn’t have that dual control. We have pricing control coming from the government and we have capital adequacy controls coming from the Australian Prudential Regulation Authority (APRA). It’s important that those two don’t get into conflict because long term that could do significant damage to our business. The government has some issues around pricing and we’re conscious of that. But we’re also very conscious as a board about solvency and capital adequacy, relying on actuarial assistance to determine proper pricing.

Claire Jackson: The health environment is extraordinarily volatile. Nationally, we have the privatisation of Medibank Private; Medicare billing is under review; there are reviews of primary health care and how we’re going to cope with our ageing population and the burgeoning chronic disease problem. We have a review around eHealth and how we’re going to use technology much more artfully to deliver high-quality healthcare. Not to mention the review into private health insurance, with 40,000 consumers feeding into it. We’re very aware technology has had an explosive effect in many businesses such as ours, and we’re very keen to monitor that and leverage it for our members.

CD: How does the board work effectively as a team?

Chris Wright: It’s a real partnership. Our managing director has put in place a dynamic new team and has brought a significant amount of new expertise into the organisation. The board and the executive together determine the strategic direction of the organisation. It’s not one or the other; we do that in partnership to ensure we’re all on the same page when it comes to the future of the organisation.

We work as a full team to ensure we achieve our vision, which we may have to adjust as we move forward. We don’t try to set everything in concrete. If there are changes or improvements we need to make, we do that together. The board will monitor progress to ensure we keep on track. But we also expect management will challenge the board and the board will challenge management and we work collegiately to ensure we agree our future. We don’t have a them and us approach. It’s a partnership and a team working towards the same goals. Management also attends board meetings, in some cases for the skills they bring and their reports. In other cases, in particular for strategy, all management and directors attend meetings.

Russell Schneider: Since the changes to the constitution, and particularly under Rob and Shaun, the board devotes far more time to strategic considerations. This is important because we have a complex, constantly changing industry. So we must be looking for the long term but also be very agile because in this business things can change very quickly and our financial position can change quickly too. So it’s quite important the board and management work together to develop a strategic direction that is our platform for growth in the future.

CD: As a board, how do you approach innovation and risk?

Mark Johnson: We look at innovation on a number of levels. First, we look at it at the strategic level. Management is very focused on challenging everything we do, including processes, systems and products. Then we’re challenging their thinking all the time.

We’re also working with start-ups, initially through our partnership with Kaiser Permanente Ventures and more recently through HCF Catalyst, because we want to contribute to the health sector but also we hope we can invest in some of those good ideas and that will give us a competitive advantage in due course. Our research foundation is also doing a lot to help innovate around health services across the nation. Lisa McIntyre chairs the foundation.

Lisa McIntyre: It’s amazing what you can do with health services; there are so many opportunities for improvement. We run a competitive grant system and the ideas and evidence that come out of it are fed back into our business as well.

CD: Can you describe how you evaluate and benchmark your board?

Chris Wright: We are being benchmarked against the best, including Australian Securities Exchange-listed companies. We’re prepared to put ourselves up against any of those top companies in the way we run the organisation. We benchmark ourselves against ASX corporate governance standards.

Robert Goaley: We’ve just completed our second year using AICD’s Governance Analysis Tool. The structure of the questions that were asked gave us the opportunity to really examine how the board as a whole is operating and how directors as individuals are performing. Last year, being our first time, we used a consultant from the AICD to walk us through the report. The AICD was impressed with the extent of written comments from our directors. We didn’t just tick the box and we really take the comments on board because we are committed to performing to the best of our abilities.

CD: What are you focused on as a board at the moment?

Mark Johnson: There are aspects to running an organisation with a mutual ethos that are very different to running a for-profit organisation. We are here to service members. It’s a beacon in the middle of the room and it is the light we work towards. I think this does something to this board and how we work together.

Chris Wright: It’s a culture that has permeated the organisation since it started. There is a culture of teamwork and you’re expected to contribute and everybody will hear your views. But after the matter has been discussed we adhere to what the board and management have decided. You may have different views and you’re given the opportunity to express those, but we are a team and we’re all working towards the objectives that have been agreed. No individuals.

John Barrington: We’re probably one of the most talked-about players in the industry. To some extent that bonds us because we do feel a responsibility as a group to protect members and to make sure we can give them the services we believe are important. We’re focused on continuing to deliver exceptional services.

The chairman’s perspective

HCF chair Robert Goaley has had a challenging job shepherding the organisation through a fundamental review of its governance processes. Aside from a new constitution and refreshed board, the business has also made a commitment to the AICD’s 30 per cent initiative, which encourages organisations to commit to a target of 30 per cent female representation on their boards.

“At the moment 25 per cent of our board and 40 per cent of our leadership team are women. We are committed to ‘walking the talk’ with regards to diversity,” says Goaley.

Commenting on the opportunities facing HCF, Goaley says the business’s number one focus is to keep designing and delivering products and services to make members healthier.

“We are putting in place a real uplift in technology; including user-friendly apps for the benefit of our members. We really want to get ahead of the field,” he notes.

The business also has a plan to expand the number of dental clinics throughout New South Wales and other states of Australia. “That will be a benefit for our members in those areas. Along with that we’ll be expanding our branch offices. They’re the major initiatives that we’re looking at.”

Of course, HCF is simultaneously confronting many challenges, not least of which are potential changes to rebates, especially for ancillary services. This is a critical issue.

“Around 80 per cent of our members who take out private health insurance also take out ancillary cover. Changing the rebate would drive the better members out of health funds. People leaving the private health insurance system would have to rely totally on the public system, and we all know what a burden that is under at the moment,” says Goaley.

He’s also expecting some action on prostheses prices. Additionally, a sluggish economy poses continual threats to HCF and the private heath sector in general. It’s Goaley’s role to navigate the business through ongoing volatility.

Key to doing this is continual innovation, he says. “I ensure the board is focused on strategic planning, risk and compliance. Our directors play an important and hands-on role in determining and monitoring our strategic planning. This is undertaken with management and corporate advisers.”

Goaley notes a vital part of strategy is how the business optimises benefits for members. “We aim to be leaders in the sector, so we’re very conscious of what our peers are doing. We monitor control structures and ensure major risks are identified and managed. We scrutinise our business and its performance and we challenge management. Reports are not just taken as read, they’re thoroughly discussed. But, at the end of the day, we’re as focused on our member-centric culture as we are on strategy because, while ‘culture eats strategy for lunch’, a balanced approach to both culture and strategy is the key to success.”