#GovSummit18: Changing the Conversation

In March, the third annual Australian Governance Summit brought together around 1100 leaders from the director and business community to explore three major themes — trust, innovation and sustainability in a rapidly changing business and societal context. The two-day forum profoundly shifted the conversation on how organisations should adapt, and a director’s responsibilities and competencies. And there was optimism for the future. Here, a round-up of the major themes.

Overview

In the era of renewed focus on the board’s role of stewardship, leaders must start to heed voices they’d rather not hear, advocate clearly and visibly on their organisation’s role in building a prosperous and sustainable Australia and be mindful of the global context. These were central messages during the two-day Australian Governance Summit in Melbourne on March 1 and 2.

Keynotes from Elizabeth Proust AO FAICD, AICD Chairman, Sam Mostyn MAICD, chair of Citi Australia, the Rt Hon Sir John Key, former New Zealand Prime Minister and NAB chair Ken Henry AC set the tone for challenging and inspiring discussions.

Proust opened the summit, acknowledging trust as our most fragile asset amidst changing societal expectations and rapid technological development.

Sam Mostyn MAICD, who is also a non-executive director of Mirvac, Transurban and Sydney Swans, gave a powerful keynote speech, quoting Groucho Marx: “The secret of life is honesty and fair dealing. If you can fake that, you’ve got it made.” Mostyn said it felt like a reflection on the changing times; that many in the community felt business was faking honesty and fair dealing. “There’s a nervousness about the role we play,” she said.

Mostyn said directors and boards have a responsibility to earn their social licence and it necessitates an evolving role for directors. The changes are twofold, she observed: “First, who sits around the board table? Second, the character and quality of the work around that table, and the new conversations required to discharge the expectations of society. We need to have safe spaces for complex and difficult conversations. We need directors who are independent, authentic and prepared to speak up; who bring their whole selves to the boardroom.” She quoted former Indonesian finance minister Marty Natalegawa: “Leaders must be able to disagree without being disagreeable.”

She also challenged boards on how they could speed up the transition. In terms of reflecting the changing circumstances at the board table through greater diversity — both through the participation of more women and more cultural diversity.

“We are simply not moving fast enough. This poses both a great risk, and more importantly, leads to missed opportunities,” she said. “Directorship is not a lifestyle choice and directors need to act as stewards of their organisations to rebuild community trust. It involves a fundamental commitment to contemporary stewardship expectations... undertaking that role must involve clear-sightedness about those responsibilities and accountabilities — and an understanding of what it is not.”

The themes were taken up in panel discussions and break out sessions on topics including the evolving role and responsibility of business, culture, trust and reputation, stakeholder engagement and the changing landscape of director liability.

It’s the “drip, drip, drip” that will cause a disaster in your company around trust, not the overnight issues, said Craig Dunn, the chair of Stone & Chalk Chair and former CEO of AMP. The Rt Hon Sir John Key, opened day two of the summit on the topic of governance of a nation — insights from abroad, with an assessment of issues confronting governments and business as a result of globalisation, changing social expectations and technology.

He also reminded Australia that it still had to do the hard work on reducing its cost base and bureaucracy to ensure continued prosperity. He said boards needed to reflect the community they operate in and look more like their customers.

There were panel discussions on innovation through better collaboration between business, start ups and the education sector. Former Facebook Australia and New Zealand chief Stephen Scheeler outlined his eight lessons for leading a digital transformation from the boardroom while Tim Trumper MAICD and chair of the NRMA and Aki Ohashi, Palo Alto Research Centre discussed ways of bringing the best of Silicon Valley thinking to Australia with Holly Ransom MAICD.

In a widely aired speech on the issues Australia needed to tackle on the tax reform and economic government policy front, Ken Henry AC closed the conference with a thoughtful reference to the “need to make Adam Smith’s invisible hand visible”.

“A narrow pursuit of profit might lead a business to negatively impact its employees, thus denying workers a source of income formerly available to them. And in pursuit of profit our businesses might generate negative externalities, including greenhouse gas emissions and other forms of pollution. And when we are challenged to explain why we are doing these things we often say that we are simply going about our business.

“We are going to have to demonstrate that our social purpose drives the way we operate. We are going to have to demonstrate that we are more than profit, much more. It’s a challenge that I’m hoping all of us want to embrace.”

The issues Australian directors are facing — culture, trust, sustainability, equality, transparency — are also being faced globally, a panel discussion on the global context noted.

“You could have this panel in New York; we are having this exact conversation,” said Tom Daemen, Microsoft Australia director of corporate, external and legal.

“All over the world, people are looking for new solutions,” said Marcello Palazzi, entrepreneur, philanthropist and global ambassador for Benefit Corporations. He outlined the increasing momentum behind the B Corp movement, saying Australia has become the fastest-growing community of Benefit Corporations in the world. “Building trust, having a positive impact — all these things are a plus.”

“For the past 20 years, we’ve really defined our success in a fiscal way. I am now seeing this change — investors say they will back a very sustainable business,” said Monica Bradley GAICD, Brisbane-based investor, director and startup collaborator. Bradley issued a challenge to boards to revisit board processes such as reports and meetings, and see how much of the audit and risk committee could be machine-learned.

Macquarie Group non-executive director and AICD National board member Nicola Wakefield Evans FAICD said board composition needs to evolve. “We are in a period where the role of a director is being redefined. Boards are always the last group in a company to transform and restructure themselves. We still operate through precedents we’ve been [using] for 100 years.”

Optimism afoot

Directors were upbeat about the future, though it was agreed that Australia should beat the drum more on its successes. For example, Macquarie Group has innovated over its 50 years and continues to do so year-on-year in global infrastructure and asset management. “Yet most people in Australia think we’re a bank,” Wakefield Evans said.

The summit has helped profoundly shift the conversation directors noted. Sally Evans FAICD, a director of Opal Aged Care said, “The summit framed the issues in a way that I felt confident is the right discussion to have in the boardroom.”

Technology challenge

In her keynote speech Elizabeth Proust said technology was neither the cause nor the solution to the trust problem. “But how we approach the governance of it — what questions are asked, what steps are taken and what regulation is put in place — may well impact people’s trust in organisations in the future.”

She quoted a February Bain & Company report, which estimated by the end of the 2020s automation may eliminate 20–25 per cent of current jobs. Similar research by McKinsey & Company estimated a range of 15–30 per cent. Even at the lower range estimate, as many as 800 million workers worldwide and 3.2 million workers in Australia would be impacted.

“That would truly alter the society we live in and our expectations of the availability of work, fundamentally. Technology is giving us the opportunity to redefine what we mean by work and workplaces. We also need the confidence and willingness to use technology for mutual good.”

AICD has established a Technology Governance and Innovation Panel to help develop thought leadership on the issue. It has also engaged Deloitte to help bring together key trends likely to impact Australian organisations, and provide a resource to support directors in incorporating the changing landscape in their governance questions and strategies. The partnership project will develop a ‘playbook’ for directors to help them navigate the future of work from a governance perspective.

Four Ways to Innovate

CSIRO chair David Thodey AO FAICD gave a call to action to business in his keynote address. “Innovation is not optional. There are those that suffer ‘woe is me life has changed’ or the victors ‘we can do something with this’. Our role as board directors is to be victors.” Thodey emphasised that innovation was usually the product of “hard, disciplined work”. He outlined four practical ways board directors can improve their organisation’s innovative capacity:

1. Turn up to the boardroom with a learning attitude: searching, questioning and moving forward.


2. Put time on the agenda to think about what is possible. “Get external speakers into the boardroom, get staff to come in. You have more innovation inside your organisation than outside.”


3. Recognise culture is not motherhood; it’s about a willingness to question the status quo and find new ways of doing things. “We brought Dr Gary Hamel down to spend time with the Telstra — two days with him and you change the way you think about things. We also did other things like set up incubators and accelerators to break the mould.”


4. Build process and organisational structure around getting those innovations outside of the business.

   “Are you willing to reinvent yourself?”

Steering a steady course through the rocky shoals of risk

Professor Pamela Hanrahan, UNSW School of Taxation & Business Law, outlined recent changes and issues in the landscape.

Director liability is a complicated matrix of statutory and general law, filtering community expectations, political factors and consequences including criminal and civil liability, civil penalties and administrative actions. Questions of liability are usually at the end of a long chain of concerns and considerations. Directors have many other things to think about, but it is legitimate to make sure you’re comfortable regarding risk exposure. A proper and effective working relationship with management is vital. Among the prominent issues are:

ASIC Enforcement Review Taskforce

Reported to Assistant Treasurer in December 2017, but not yet released. Discussion around increased monetary penalties and imprisonment and changing enforcement pathways. We’ve seen with the ACCC that the government is very keen to see penalties are significant, and enough to be a deterrent and reflect community expectations of what’s appropriate.

New whistleblower laws

Report is due March 16. Proposed criminal or civil penalty or civil liability for individuals who release information on the identity of the whistleblower or engage or are involved in victimisation of the whistleblower. A direct risk to be aware of if you’re part of it. Keep an eye on this.

Cyber security

This is a classic “secretly out of my depth and paddling furiously” problem for many directors, especially in not-for-profits and consumer-facing businesses. ASIC, APRA and the ASX have been hammering the point that you can’t leave it to the CIO, you must be on top of it. Not a huge area of risk, but directors have a duty of care to monitor the business.

BEAR (Banking Executive Accountability Regime)

This matters, even for directors of organisations that are not Authorised Deposit-taking Institutions (ADIs). Signals that politicians are heeding the shifting winds, wanting heads on sticks, sheeting compliance failures home to individuals and reaching into the organisation below the board to name and shame. This may extend to other sectors.

Enforcement trends

We talk about liability as if people are pinged all the time, but it’s pretty hard to find an enforcement strategy over the past five years. Australia has 2.5 million companies and four million company directors, but ASIC has suspended the licence of just 51 people (2004–14). There’s not a lot of enforcement activity against directors. We haven’t seen from ASIC any concerted attempt to set minimum standards for non-executive directors.

Insolvency and phoenixing reforms

More relevant to SMEs than large companies, new laws regarding phoenixing will extend director penalty notices to cover unpaid GST, not just PAYE and superannuation. There are new safe harbour laws to protect directors from insolvent trading penalties.

Opinion

It’s a misconception that directors owe a duty of care to shareholders. They owe it to the corporation. From a legal point of view, a corporation is a vehicle that holds obligations.There are always conflicting claims which directors have to balance.

Part of the reason enforcement is so difficult in Australia is we have too much law, it’s incoherent — a rubble of unfocused, overlapping provisions. We need a couple of provisions with real bite.

Key moments

Ex-New Zealand PM and ANZ board recruit, the Rt Hon Sir John Key’s “Governance of a Nation” keynote address had social media running hot. Highlights included:

• “Australia is the lucky country… outside of rugby.”
• “Relations have never been closer. Now if we can only agree that we claim the pavlova and you give us Crowded House.”
• “We did things that were individually unpopular, but we grew in popularity between elections. People didn’t like individual policies, but they liked the overall direction the country was going.”
• “You need to mirror your customers. Do your boards look like your customers?”

On tax cuts

• “People spend a lot less time figuring out how to avoid tax and working harder.”
• “People robbing you through the front door is going to happen a lot less and people robbing you through intellectual property theft or privacy breaches will happen a lot more. Get across it.”
• “If you’re a bank director get used to the BEAR legislation.”

On globalisation

• “When people worry about globalisation, in the US it’s the trade imbalance, in the UK it’s too much migration, in Australia it’s too much foreign investment.”
• “We have to collectively make the case that migration and foreign investment is good for us. We shouldn’t be afraid of the grandma and grandpa who can’t speak English — their kids will be more Australian than you.”

On the Royal Commission into Misconduct in the Banking, Superannuation and the Financial Services Industry

• “One of the reasons why there was a Royal Commission into banking in Australia is because company directors need to think about more than the bottom line.”
• “Banks have to own the issue, not just say, ‘nothing to see here’. They have to rebuild trust and change the behavioural elements of their staff. I know we are an easy target, but we need those banks to do well and they are not all bad people — and they pay a lot of tax.”