Agenda

Latest news for Australian directors.

Sharp rise in family companies implementing boards

More family businesses are forming boards and the adoption of formal governance structures is improving their performance, the KPMG/Family Business Australia Family Business Survey 2015 survey shows.

The report found 52 per cent of respondents had a formal board, up from 39 per cent in 2011. Use of other governance mechanisms, such as shareholders’ agreements and family constitutions, is also rising.

Produced in conjunction with the University of Adelaide’s Family Business Education and Research Group, the report found high-performing family businesses had:

• A formal board of directors with a non-family, non-executive director.
• Adopted mechanisms that facilitated agreement and communication of expectations between the business, family and owners. These included a family constitution, shareholder meetings/forums, shareholder agreements, policies for family and non-family employees, and succession planning.
• Used management practices that focus on what is happening outside the business. These included benchmarking, competitor analysis, documented strategic plans and progress reports.

The survey identified clear benefits in appointing non-family members as non-executive directors (NEDs). But more family businesses were appointing NEDs from within the family. About 72 per cent of NEDs were family members in 2015, up from 54 per cent in 2011.

Reasons for the increase include family members wanting to move from management to board roles, family members showing an increased interest in governance, and family businesses possibly struggling to find suitable non-family NEDs.

“Having a non-family, non-executive director on the board was significantly associated with superior family business performance,” the survey said.

“Those that chose to appoint non-family NEDs may be signalling they need outside help because of the new circumstances they face, and/or the need to improve the effectiveness of the board, and also a willingness and maturity to consider perspectives other than their own.”

Anti-discrimination and harassment policies vital

One-quarter of Australian workers have experienced gender discrimination, one-fifth racial discrimination and 16 per cent religious discrimination, according to a new survey by human resources and recruitment firm Randstad.

More than two-thirds of respondents said sexual orientation was not an issue in Australian workplaces – well above the global average. But about 16 per cent of respondents said they had experienced sexual-orientation discrimination at work.

The findings of the Randstad Workmonitor report will interest boards that need to know that their organisation’s values and ethics are being upheld at all levels of its workforce. Persistent discrimination can be a sign of an unhealthy culture, increase organisational risk, and limit the ability to attract and retain top talent.

Steve Shepherd, employment market analyst at Randstad, says the survey findings show work is needed to instil a true, accepting company culture, even though diversity is widely acknowledged as being good for business because it improves decision-making.

“There is currently an untapped opportunity for Australian employers to embrace the wide range of cultures, experiences and skill sets in our society for the benefit of their workforce,” says Shepherd.

“By educating employees to embrace the differences they have with colleagues – be it gender, race, culture or religion – teams will be able to identify each person’s strengths and motivations and utilise them to boost efficiencies.”

For boards, the issue is about ensuring the organisation has clear anti-discrimination and harassment policies that are well-known to staff and upheld. And that staff who breach them are dealt with appropriately by the executive team.

In a social media-informed world, the reputational risk from incidences of blatant discrimination, and the associated legal risks, has never been greater.

Pros and cons of “skin in the game”

The debate about directors’ lack of equity in companies they govern has resurfaced in the latest Australian Council of Superannuation Investors (ACSI) report on board pay.

Nearly 11 per cent of non-executive directors of S&P/ASX 100 companies do not own shares in their organisation, according to ACSI’s 14th annual survey, Board Composition and Non-Executive Director Pay in ASX200 companies.

“This is a poor result and we hope the number begins to improve,” said ACSI CEO, Louise Davidson.

“While ACSI doesn’t mandate how many shares an individual director should own, we do believe that having skin in the game aligns directors more closely with the investors they represent, and that well-governed boards require their directors to hold equity in the company,” she added.

Released in November, the survey found 18 per cent of non-executive directors of ASX-listed companies ranked 101 – 200 by market capitalisation did not own shares in their organisation.

Although some were new to their board, the majority had served for more than a year.

ACSI says there is a general view among investors that all directors should be required to own shares in organisations they govern, to provide better alignment between director and shareholder interests.

Although the preferred quantum of shareholding varies across industries, there is a view that directors would govern more effectively if they had more to win or lose.

Little consideration has been given to opposing arguments for enforced director share ownership. First, directors of large listed organisations already have significant financial, legal and reputational risk by virtue of their role and duties. It is not clear how a small allocation of shares would incentivise non-executive directors to lift their performance.

Second, requiring directors to build their shareholding over time could jeopardise their independence. A large shareholding could cloud directors’ judgement if it induces them to make short-term decisions based on personal financial interests, rather than in the long-term interest of all shareholders.

Moreover, a significant shareholding, or the potential for more shares through incentive plans, could make it harder for directors to challenge the board if they are unhappy with the organisation’s governance, or resign from their role. It could also encourage directors to remain longer on the board than they should and reduce healthy turnover.

Finally, many directors of ASX 200 companies argue that board roles are modestly paid relative to their workload and risk.

Providing shares or share incentives to directors, in lieu of some fees, could make board roles less attractive for those who rely on the income.

Banking on technology expertise

A new report from global consulting firm Accenture has identified a worrying lack of technology experience in the boardrooms of the world’s largest banks, and highlighted broader concerns about board composition and the need for directors with deep technology skills.

Only 6 per cent of board directors and 3 per cent of CEOs of leading banks have professional technology experience, according to Accenture’s report, Bridging the Technology Gap in Financial Services Boardrooms.

Remarkably, more than two-fifths of banks have no board members with professional technology experience. About one-third had one board member with tech experience – an important finding given the rise of financial technology (fintech) disruptor companies.

Only 8 per cent of board members of Australian banks had professional technology experience, according to Accenture. That was well behind the US and UK, but ahead of other banks in other countries.

Released in late October, the study analysed nearly 2,000 executives and non-executive directors at more than 100 of the world’s largest banks. Accenture defined “professional technology experience” as having held senior tech positions at a company or tech firm.

“Many of the biggest challenges now confronting banking are intimately connected with technology, so directors need a robust understanding of technology if they are to make informed decisions,” said Richard Lumb, group chief executive of financial services at Accenture.

“Fintech, cyber security, IT resilience and technology implications of regulatory changes have all become critical board-level issues, but many bank boards simply don’t have adequate expertise to assess these issues and make decisions about strategy, investment and how best to allocate technology resources.”

Lumb said many boards were struggling to recruit technology experts and close the technology gap.

“Simply having one or two technology experts on the board is not a panacea. Banks need to change boardroom culture through a combination of deep technology expertise and also much-improved understanding of the impact of technology among other board members.”

Accenture recommends that banks set up board-level technology committees, similar to those in audit or remuneration. Only 11 per cent of the top banks have such committees.

It says financial services boards should provide regular programs of personalised coaching to help improve the technology acumen of their directors.

The big question

Question

What must directors know if they are appointed to the board of a subsidiary company?

Answer

The key point to remember is that a director’s responsibility is to the company of which he or she is a director, not to the parent company, which appointed him or her 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, he or she should first remember the rule stated above; and 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

Going the NFP merger route?

The recently released 2015 NFP Governance and Performance Study has important advice for boards considering mergers, an increasingly prominent strategy in the sector. The Australian Institute of Company Directors study offered 13 tips for directors to consider before embarking down the merger route. They are:

1. Recognise that the not-for-profit (NFP) board’s role is to service its beneficiaries.
2. Understand the needs of beneficiaries before starting merger discussions.
3. Know that an NFP merger is a multi-party negotiation where beneficiaries, for whom the NFP exists to service, are not at the table.
4. Know that an NFP merger is a multi-party negotiation where beneficiaries, for whom the NFP exists to service, are not at the table.
5. Take stock of your negotiating “assets”. What is the best outcome from a merger? What are the deal breakers?
6. Identify and assess several merger candidates. Understand their goal and the best and worst outcomes.
7. Do a detailed cost/benefit analysis on any merger and challenge assumptions behind financial projections.
8. Complete rigorous due diligence on the NFP and understand the alignment of culture fit between the organisations, for it is often the cause of merger failure.
9. Define early in the process each role in the post-merger executive leadership team and board.
10. Develop an integration and change-management timetable and keep it as short as possible. Benefits will only be fully realised when the merger is complete.
11. Sell the benefits of the NFP merger constantly to stakeholders.
12. Accept the merger will involve emotional “labour”, as some staff or volunteers experience feelings of guilt, regret, loss or betrayal about the NFP merger.

Automation set to affect highly skilled occupations

Artificial intelligence and advanced robotics will have a more profound effect on the global workforce than is widely realised, a new McKinsey study suggests.

The findings have implications for boards that need to consider how their organisation’s human resources strategy is addressing the opportunities and threats of workforce automation over the next 10 years.

McKinsey’s preliminary research suggests 45 per cent of work activities could be automated using existing technologies and another 13 per cent could be replaced by computers if technologies that understand language reach the median level of human performance.

“It’s no longer the case that only routine, codifiable activities are candidates for automation and that activities requiring ‘tacit’ knowledge or experience that is difficult to translate into task specifications are immune to automation,” wrote Michael Chui, James Manyika and Mehdi Miremadi in the latest McKinsey Quarterly.

The authors said about 60 per cent of jobs could have 30 per cent or more of their activities automated. Although these jobs cannot be fully automated by existing technology, a large proportion of the job could be done by computer, in turn vastly changing work tasks and flows.

The McKinsey study found automation will affect even the highest-paid occupations. There is a perception that automation is mostly an issue for low-paid workers who do more manual or routine tasks, but that is not the case. The authors wrote: “Our work to date suggests that a significant percentage of the activities performed by even those in the highest-paid occupations (such as physicians and senior executives) can be automated by adapting current technology.”

The study argued that automation could also help workers spend more time on creativity and sensing emotions – two functions that are hard to automate. Only 4 per cent of work activities across the US required creativity at a median level of human performance, the authors found. And only 29 per cent of work activities required a median human level of performance in sensing emotion.

“While these findings might be lamented as reflecting the impoverished nature of our work lives, they also suggest the potential to generate a greater amount of meaningful work,” the authors wrote.

Resources hindering disability employment

Limited resources are the main obstacle for businesses wishing to implement employment initiatives for people with disability, according to new figures from the Business Council of Australia.

The Recognising Ability: Business and the Employment of People with Disability report found that 75 per cent of Australian companies have a plan or strategy for employing people with disability. However, it cited limited resources as the main issue standing in the way of companies implementing employment initiatives for people with disability.

Additional barriers cited by the survey respondents were a diversity focus on another area; a complex employment services sector not matched to the needs of large businesses; and fear of seeming discriminatory when asking applicants or recruits to disclose a disability. Despite these barriers, the survey also found that one-third of companies actively sought to employ people with a disability and that 93 per cent of companies had a strategy to recognise and support mental health issues in the workplace.

With one in five Australians having a disability, and many more living with or caring for someone with a disability, the report highlighted the need for corporate diversity policies to include disability as a priority. “For many companies, a focus on disability is competing with other diversity focus areas – gender balance, Indigenous engagement – for resources. Knowing what to do and where to start are also challenges,” the report said.