australian corporate boards: effectiveness & performance (slides)

8/8/2019 Australian Corporate Boards: Effectiveness & Performance (Slides)

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Wednesday 27 October 2010, ASX Sydney

Professor Thomas ClarkeAlice Klettner

UTS Centre for Corporate Governance

Board Effec tiveness & Performanc e


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Boards of Directors

Out of the Darkness


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Boards of Directors

Into the Light


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Research Project

This research is primarily motivated by the call for further vigilance andeffort to strengthen corporate governance. While it is uncertain if theworst of the global financial crisis has passed, the expectation remainsthat boards should not just monitor management, they should also takefull responsibility for their own performance to ensure business

longevity at the optimal level that shareholders also seek.

The regulatory changes occurring overseas also suggest that interestin board evaluation is likely to increase over the next few years. Takinginto account that corporate Australia is part of the international

financial landscape, it is prudent to understand how our directorsconduct board evaluations and if improvements could be made.

Ann Byrne, CEO ACSI


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Board Effectiveness and Performance

Aims and objectives of the research.

Methodology and its limitations.

Board evaluation in context.

Key findings.

Significance and impact.

Where to next?


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Aims of the Research

To examine current practice in boardevaluation, both on paper and in practice,here and overseas.

To explore its value in terms of improvingboard performance and effectiveness.

To understand how best this value can becommunicated to investors.


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Research Questions

How should Australian Boards assessperformance at both individual and grouplevels?

What does effective board evaluationcomprise?

How can shareholders recognise highperforming boards?

How can information on board evaluationand performance be communicated bycompanies or extracted by investors?


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Methodology

Stage One

What are companies disclosing in their annual reports regarding theirboard evaluation processes both here and overseas?

We reviewed 70 annual reports

Top 30 ASX

Top 10 LSE

Top 10 NYSE

Top 10 Europe Top 10 TSE


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Methodology

Stage Two

What do directors and investors think about board evaluation?

The process

The outcomes Improving board performance and effectiveness

Indicators of good board performance

We interviewed 12 directors and 3 fund managers representing:

26 companies in the ASX 100; and 3 significant institutional investors


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Limitations

Stage One

We chose the largest companies on the basis they are usually atthe forefront of corporate governance. Our findings may not applyto smaller companies

Stage Two

Director interviews - our sample was not random which couldlead to bias. There are many reasons why directors might agreeto be interviewed which have to be balanced against the

difficulties of obtaining access Fund manager interviews small sample was designed to

explore the issue of disclosure from both sides and was notintended to comprise a stand-alone data source


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Context

InternalExternal

Roles and responsibilities

of directors

Regulatory requirements

Post-GFC reforms

Board evaluation processes Investor engagement

Board

Internal External


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Post-GFC ReformsNew Focus on Board Performance & Effectiveness

Revised UK Corporate Governance Code published June 2010:

To encourage boards to be well balanced and avoid group think, there arenew principles on the composition and selection of the board, including theneed to appoint members on merit, against objective criteria, and with due

regard for the benefits of diversity, including gender diversity.

To promote proper debate in the boardroom, there are new principles on theleadership of the chairman, the responsibility of the non-executive directorsto provide constructive challenge, and the time commitment expected of alldirectors.

To help enhance the boards performance and awareness of its strengthsand weaknesses, the chairman should hold regular development reviewswith each director and board evaluation reviews in FTSE 350 companiesshould be externally facilitated at least every three years. (FRC, 2010)


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Post-GFC ReformsNew focus on institutional investors

UK Stewardship Code for investors published July 2010:

sets out good practice on engagement with investee companies.

Investors are encouraged to publish on their websites comply or

explain type statements against the Codes seven principles.

Principles deal with overall stewardship, conflicts of interest,monitoring, intervention, collective action, voting policy and reporting.


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Stage One Findings: Disclosure

Regulatory regime strongly influences style and extent of disclosure.

The USAs prescriptive regime appears to lead to more perfunctorystandardised disclosure than the principles-based regulationelsewhere.

Leading companies in the UK, Europe and Australia are voluntarilydisclosing more, including information on the outcomes of boardevaluation.


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Stage One Findings: International Comparison

UK company GlaxoSmithKline stated:

The Board agreed the following actions to generate more inclusiveengagement with the executive management team and furtherimprove its collective decision making process:

Identify how to utilise the time spent in Board and Committeemeetings more effectively and facilitate further contribution byNon-Executive Directors on a broader range of issues

Seek to enhance further the Non-Executive Directors continuing

education process beyond their initial induction Provide greater visibility to the Board of GSKs executive talent

and the management succession planning process.


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Stage Two Findings: State of Play in Australia

Large companies have been conducting formal board evaluations forat least 10 years.

Over this time processes have been refined but, more importantly,the exercise has become accepted as valuable practice.

Details of the process (questionnaires, consultants etc) less importantthan its content and purpose.

Board improvements should occur continuously, not just as a result of

formal evaluation.


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Process

Purpose

Subject

Content

Lead by

Process

Cycle

Board maturity

Industry changes

Individuals

Whole board

Retrospective

prospective

External

ChairBoth

Include management

Informal mechanisms

Implement actions

Review processes


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Individual v Team

Directors were divided on the value of individual director evaluations

Advantages Disadvantages

Everyone likes to get constructive

feedback

Implies an ideal director rather than

embracing differences

Discussion around individualstrengths and weaknesses canimprove team function

A good board is a good team, Itdoesnt matter if all the individualsare excellent if they cant work as ateam

Links to director re-election andtraining requirements

Rating colleagues can interfere withthe collegiality necessary for a goodboard


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Positive Outcomes

Prioritising board roles e.g. less time on compliance and more onstrategy

Increasing efficiency meeting protocol, papers, delegation tocommittees

Improving information flow bolstering communication lines, moresite visits

Refining composition/skill set clear link to director education and

succession planning

Team-building exercise in itself


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Skills Matrix

Complex with room for improvement in succession planning

Different companies have different [requirements]. At onecompany [the matrix] includes the work experience of all thedirectors, overlaid with knowledge. Its really tricky as you want tothrow other things in that make people valuable.

There can be some skills that you dont foresee that can beextraordinarily useful.


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The Dysfunctional Board

CULTUREAn adversarial atmosphere in the boardroomor an unmotivated board with a tendency to

group-think

COMPOSITIONSkill deficits or lack of genuine independence

on the board

CHARACTERISTICS

Conflicts of interest or factional interests onthe board, perhaps due to a dominant

shareholder

PROCESS

Poor chairmanship a chair who is too weak,too autocratic or too close to the CEO

Poor processes leading to inefficient use oftime

Chair

CEO


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The Effective Board

CULTURE

Honest, RespectfulTransparent

Constructive challenge

COMPOSITION

DiversityExperience

CHARACTERISTICSEngaged

Non-adversarialIndependent

PROCESS

Secretarial supportInformationCommittees

Chair

CEO


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Disclosure

ASX Principles recommend disclosure of whether board evaluationdone and the process

Leads to rather dry and meaningless information a statement onobjectives and whether they achieved might be more valuable

Direct, informal communication valued much more highly by investors


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Indicators of Board Performance

Director history/profile

Director personal characteristics assessed face-to-face

CEO appointments

Company performance within industry

Board performance during a crisis

Proactive communication with shareholders


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Key Findings

International variance

Flexible processes

Continuous improvement

Individual performance

Senior management


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Key Findings

Informal discussion

External facilitation

Outcomes of board evaluation

Implementation

Links to other processes


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Significance and Impact

Access insights from highly experienced directors of some ofAustralias largest companies rich empirical evidence to add to thepolicy debate

Timely post-GFC there has been renewed focus on board

performance and effectiveness and the role of regulation inencouraging board evaluation and improvement.


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Where from here?

Voluntary disclosure on objectives and outcomes of board evaluationand how it links to other processes, particularly succession planning

Measures to reduce boilerplate chairman statements

More externally led performance evaluations

Potential for Australian Stewardship code for investors depending onhow the UK fares


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Board Effec tiveness & Performanc e

australian corporate boards: effectiveness & performance (slides)

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