AI, climate reporting top issues at Essential Director Update 2024

The first AICD Essential Director Update (EDU) for 2024 which took place in Canberra on 11 September outlined important governance, regulatory and legislative challenges which are impacting boards and directors. Register here to attend this year’s EDU in your area.

The AICD Essential Director Update is an annual, members-only series of events held across Australia. At this year’s opening event in Canberra on 11 September, the first keynote speaker, Christine Holman GAICD, focused on the topics of generative artificial intelligence (AI), cybersecurity and mandatory climate disclosures.

Generative artificial intelligence

While most directors are familiar with AI through platforms such as ChatGPT, they may not be sure of how to use it for the benefit of their organisations.

“Directors need to invest in AI literacy now to ensure companies have a governance framework to guide its use in a responsible and ethical way,” said Holman, who sits on the boards of AGL, Metcash and Collins Foods.

She listed three key risks to consider and manage when navigating AI.

●     Bias — data and algorithms are skewed to provide outcomes that are unfair and discriminatory.

●     Hallucinations — generated content that is inaccurate or nonsensical.

●     Jailbreak — bad actors, usually cybercriminals, manipulate language models so they act in a harmful way.

Holman acknowledged that implementing AI can create challenges for directors such as significant job displacement. “We must confront these difficult issues head-on,” she said.

Cybersecurity

It’s vital that directors balance their trust in management’s cyber protocols and controls with rigorous verification processes, such as an independent black box exercise, which simulates a real-life threat.

“Black box exercises have shown some existing management cyber controls to be materially deficient or, worse still, nonexistent, exposing the company to significant risks,” said Holman.

She stressed that if a company has cyber insurance, it’s critical the disclosure questionnaire is regularly reviewed to ensure everything the organisation is doing to mitigate cyber risks is accurately disclosed. “A future claim could be rejected because of false and misleading disclosures,” she said.

Mandatory climate reporting

Holman believes the incoming changes to the Corporations Act 2001 (Cth) and the new standards due to take effect on 1 January 2025 will shine a light on outdated climate methodologies and strategies that are simply not fit for purpose.

“These standards are designed to provide a clear and consistent structure with explicitly prescriptive obligations,” she said. “While this legislation may appear to have a compliance lens, it goes hand in hand with the strategy formulation, risk, oversight and stewardship responsibilities woven into the fabric of how we do business.”

Corporate culture

The second keynote speaker, Bruce Cowley FAICD, spoke about recent developments in four areas — building culture, CEO performance and succession planning, not-for-profits, and financial resilience.

“Today, just about all directors accept that part of their role is to support the development of a positive culture in their organisation,” he said. “However, the large number of examples of poor culture identified in recent media reports suggests that some boards may not be as vigilant about poor culture as they were a few years ago.”

Cowley, who sits on the boards of Australian Retirement Trust, South Bank Corporation and Sunshine Coast Hospital & Health Service and serves as the Chair of the Queensland Trust for Nature, believes boards face three challenges.

“Firstly, assessing the current state of the organisation’s culture,” he said. “Secondly, understanding the techniques and tools available to help change the culture. And thirdly, articulating the desired culture and devising appropriate oversight, methods and metrics for achieving that.”

CEO performance and succession planning

The year 2023-24 has seen the departure of notable CEOs, including those of Optus, Star Entertainment, Woolworths and Qantas. Cowley suggests that, in part, this could have been a way of shifting the dynamic as media reports threatened the companies’ reputations.

“I’m referencing these cases because they represent a trend of boards having to make quick decisions in circumstances where there are growing public calls for the CEO to go,” he said. “In these circumstances, boards need to remember the fundamentals of good governance and good decision-making, and always make decisions in the best interests of the organization, rather than giving in to pressure.”

The examples also remind us that it’s not uncommon to lose a CEO unexpectedly. “Succession planning shouldn’t be just something you do when CEOs are nearing the end of their term,” said Cowley. “It’s something the board needs to consider at all times.”

The NFP sector

Cowley spoke about areas of focus for the Australian Charities and Not-for-profits Commission (ACNC) in the coming year, issues identified by the AICD annual survey for NFP organisations, the new AICD Governance Principles and the Productivity Commission report into philanthropy. He also commended the third edition of the AICD NFP Governance Principles, revised in response to increased regulatory scrutiny, societal expectations and the impacts of global disruptions such as COVID-19.

Financial resilience

Last year, ASIC reported the highest number of insolvencies ever recorded in Australia in one year.

“Many NFPs in particular have struggled financially in recent years as a result of less access to government grants, less success in fundraising activities, or simply costs exceeding revenues,” said Cowley. “The question for boards is, how can they prepare for periods of financial stress, build their balance sheets and, if the worst-case scenarios come to pass, respond to the challenges that reduced cash flow can bring?”

He added that directors should maintain focus on safeguarding the long-term financial sustainability of the organisation. “Ensure you have appropriate financial disciplines in place and remember that in a crisis, cash is always key,” he said.

Questions for the panel

For the panel Q&A session, Holman and Cowley were joined by Liesel Wett OAM FAICD and moderator Anne-Marie Perry GAICD.

Asked whether it’s time to see data as a risk for the organisation rather than an asset, Holman replied it can be both. “Data is extremely valuable if used and harnessed correctly, but we also need to understand the responsibilities and obligations we have when we are custodians of that data,” she said.

When another member asked whether some directors are stretching themselves too thin over several boards, Cowley stressed the need to allow for the unexpected. “Something could happen in one of your companies that requires a lot more of your time,” he said.

Wett found herself in that situation when COVID-19 hit. As then chair of Goodwin Aged Care Services, she faced the unprecedented challenge of needing to keep residents safe. “There was a real fear that if I didn’t do my job properly, people could die,” she said. “I’m not sure I could have done that if I’d been sitting on more than two boards.”

INFO

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