Agenda

A round-up of recent governance news.

A better approach to CEO performance appraisals

A global movement to do away with annual performance reviews in favour of more regular, constructive appraisals has reached the CEO level.

Now, experts are starting to explore fresh ways for boards to assess the performance of chief executives.

Rohan Connors, a partner with professional services firm EY, says there’s no one-size-fits-all approach when it comes to assessing CEO performance. For some businesses, it’s appropriate to have a formal appraisal process. For others, the review is less formal.

“Then the chair can talk to the board about these discussions. The chair will also interact with external stakeholders to understand how the CEO is perceived externally,” he says.

According to Connors, businesses are moving away from a ratings system to measure CEO performance in favour of an ongoing review mechanism. He says there are natural points during the corporate calendar when it makes sense for the business to check in with the CEO. He also notes that often it’s impossible to separate an assessment of the performance of the business from the CEO’s performance.

The points in the corporate calendar when it makes sense to assess performance include the end of the reporting period, during the budgeting process and when strategy is updated.

“Active chairs are interacting with CEOs frequently to get an ongoing sense about performance,” says Connors. He says better businesses also provide opportunities for career development for the CEO, by encouraging them to sit on a board external to the business, for instance.

Graham Kenny, who runs performance metrics and appraisal consultancy Strategic Factors, says measuring performance based on how well a CEO has completed a series of activities, or by reviewing performance against job description, is sub-optimal.

“Don’t go back to the job description to work out performance; it’s the outcomes that really matter. I want people to think about outcomes, not activities, at every level. It’s also not dignified to ask whether someone has ticked a task box, it’s more about what they have achieved,” he says.

Moreover, Kenny suggests the balanced scorecard method of assessing company performance is flawed because it is inconsistent. In its place he has developed what he calls the focused scorecard.

“What it comes back to is how relevant the organisation is to its stakeholders, and this comes back to revenue,” he says.

For instance, when assessing an organisation’s relationship to its employee stakeholders, the evaluation should be based on the benefits the business provides and the working environment.

More focus on crisis prep needed: Deloitte

More than half of the businesses surveyed (52 per cent) as part of Deloitte’s biannual crisis survey, A crisis of confidence, experienced a crisis in the past five years.

But only 11 per cent of non-executive directors in Australia rated their organisation’s ability to respond to a crisis as ‘very effective’.

Additionally, only 17 per cent believe they have ‘extensively’ identified the potential risks that could create a crisis.

This is despite the fact that, for the majority (60 per cent) of Australian businesses that were surveyed for the research that had experienced a crisis, it took between two and three years for the business to recover from the event. For 10 per cent of businesses recovery took more than four years.

Graeme Newton, the Deloitte lead partner for crisis management and crisis leadership said it is essential that boards and management work together to prepare a co-ordinated approach to potential crises, which includes developing a shared understanding of the risks facing a business.

“Deepening that understanding will strengthen the systems used to detect and possibly even prevent some of those adverse events from occurring in the first place,” Newton said.

Crisis expert Sonia Zavesky, director, Zavesky Consulting, says in an era of social media there’s no time to plan once a crisis occurs. “That work needs to have already been done and tested. If an organisation can’t instigate a clear and well-tested crisis response plan, including a communication plan within 20 minutes of something going wrong, they’re in trouble,” says Zavesky.

“Boards need to have a risk register and they need to understand the court of public perception – fuelled by the media – is critical in times when things go wrong.”

Navigating political issues in an election year

One of the trickiest aspects of good company governance is getting perspective on the potential for live political issues to impact the business’s operations. This is especially the case in the run up to a federal election.

Former South Australian MP Iain Evans, a consultant on political risk, stresses that directors of government boards, in particular, need to consider the impact of both the election itself and the campaign period on their board and their reputation.

“The election may change the government or the minister responsible for the board on which they serve. This may create uncertainty,” he says.

His advice to directors in this position is to consider the approach of the alternative government to the board and to the directors’ positions on the board. Thought also needs to go into the potential for the board to be abolished or reformed, or for its ambit to be widened or restricted, should a change of government occur.

“Directors who have had little engagement with the alternative government or potential ministers are exposed,” he warns.

Evans says the election period can be difficult for directors of government boards. The board’s performance could potentially become an election issue. Additionally, issues the board is administrating may become political targets in a campaign.

It’s common for a government to want to appoint directors supportive of their agenda, but there is no guarantee that a board won’t be disbanded mid-term in order for a government to appoint directors who will fulfil their objectives. Evans urges directors to review their election preparation and to have clear board rules around the processes to be used in the campaign period.

Public boards, like government boards, must also be prepared in the lead-up to an election and ready to deal with the consequences of the outcome. No organisation is exempt from short-termism and effective short-, medium and long-term strategies and objectives need to be in place.

The AICD’s latest Director Sentiment Index identified the following issues that Australian directors believe the Federal Government’s main priorities should be:

• Infrastructure.
• Transport reform.
• Tax.
• Innovation.
• Growth.
• Australia’s transitioning economy.

A further example of the impact of political issues can be seen by those not-for-profit board members impacted by the National Disability Insurance Scheme. These directors have had to closely monitor legislative and policy changes, which have significantly changed organisations’ business strategies and resulted in high degree of uncertainty about the impact of the long-term changes in the sector.

The big question

Question

What are the key points of governance for staff members or board directors of the parent company who are appointed to the board of a subsidiary company?

Answer

The main point to remember is that a director’s responsibility is to the company of which he or she is a director, not to the organisation – in this case, a parent company – that appointed the director to the board. In the vast majority of cases there will be no conflict between the interests of the parent and the subsidiary, but in the rare situation where a director feels a tension between the two, first remember the rule stated above. If the difficulty cannot readily be resolved it should be brought into the open. The director should bring it to the notice of the chair, of either the parent or subsidiary board as appropriate, and if necessary seek to have it discussed at a board meeting.

This Q&A is taken from Director Assist, a complimentary member service operated in partnership with IFX. Answers are provided by a network of specialist practitioners. 

Big data is a governance issue

New research by management consultancy McKinsey & Company has found most businesses it surveyed have made significant investments in big data and advanced analytics. But questions are emerging about the return on investment attached to these expenses, effectively elevating the big data issue to board level.

The research, based on a random sample of 714 global businesses, found significant productivity and operating profit benefits from investing in big data assets such as data warehouses. But to achieve these benefits the business must have access to data analytics talent and big data IT capabilities.

According to Richard McLaren, digital vice president at McKinsey, big data is a board issue. “The world is changing rapidly. Many boards use their intuition to make decisions, but this is no longer enough,” he says.

“It’s the board’s role to ensure the company and its executives make decisions on outwardly focused evidence. This is not just about big data. The idea that what worked last year will work in the future is a fallacy. External data must play a key role in decision-making,” he explains.

One of the conundrums with which businesses grapple when putting systems to manage and analyse data in place is how to extract the right information to make better decisions, which comes down to the availability and volume of data.

McLaren says this means businesses must be aware of the information flows that matter to customers, as well as information about operations, safety information and data about how the business is meeting its compliance requirements.

“Does the organisation have a plan to obtain the best available information? Does it have the right capabilities to handle this information?” he queries.

Directors must also have a handle on information that can prove the business is complying with the relevant laws and regulations that determine how it carries out its activities.

In terms of proper governance of business data, McLaren says the board must be able to satisfy itself that information is safely stored. “They need to know how information is held and how sensitive it is. They must also know whether there are sufficient plans to protect data and how the business will respond in the event of a cyber breach.”

McLaren also notes big data can lead to substantial opportunities for businesses, especially consumer ones. “The key is in understanding information flows because not all data is created equal.”

All organisations have growing obligations to protect their customer data, especially in light of upcoming changes to privacy laws that are likely to make it mandatory for businesses of a certain size to disclose when customer information has been inadvertently accessed, for instance by hackers.

This means it’s essential for companies to be able to know where and how their customer data is held. They must also have plans in place to respond if there is a data breach.

When it comes to measuring return on investment, McLaren says the starting point is to apply specific value to decisions made using big data. An example is measurement of sales through digital channels after marketing campaigns.

The baseline is sales made as a result of digital marketing when there is no segmentation of the customer base. Compare and contrast this with a marketing campaign where messages are targeted to consumers based on the information the company has about their preferences and demographics – information that could be classified as big data.

The business will be able to measure the sales made in the campaign in which messages were sent to customers on a segmented basis, and attribute this to the data used in the campaign. In this way it is able to determine a return on its investment in the business’s ability to store and segment data.

Says McLaren: “In a board context, directors must appreciate the way information creates value in the business. It’s essential for the directors to understand information flows and the underlying strategy to take advantage of opportunities that arise from being able to analyse this data.”