Looking through the hourglass: Interview with Nick Greiner Cover Story

Friday, 01 August 2003


    The relationship between boards and companies could be compared to an hourglass with information trickling down to the board filtered through the bottleneck of the CEO or company secretary. 

    As Nick Greiner tells John Arbouw, time has run out in this archaic relationship and boards must be far more proactive in seeking information both from management and in managing shareholder relations

    Looking through the hourglass

    The relationship between boards and companies could be compared to an hourglass with information trickling down to the board filtered through the bottleneck of the CEO or company secretary.

    As Nick Greiner tells John Arbouw, time has run out in this archaic relationship and boards must be far more proactive in seeking information both from management and in managing shareholder relations

    When Nick Greiner was a professional politician and NSW Premier the skill he needed over all others was the ability to communicate to a broad cross section of the community. It is this communication skill that now serves him well in his career as a professional company director.

    In a corporate environment where continuous disclosure rules are being broadened, where non-institutional shareholders demand increased access and information, and where directors, for their own fiduciary safety, need to seek information from sources other than the CEO or company secretary, communication skills are becoming paramount.

    Also, a degree in law or accounting is no longer a guaranteed passport to success as a company director. The boardroom has become a far more dynamic forum where knowledge without the ability to effectively argue and communicate is worthless.

    And the definition of a non-executive independent director is rated not merely on status, education or relationship, but on the ability to think independently and to communicate this to fellow board members.

    It is why Greiner believes that the first flush of reform inherent in the ASX Corporate Governance guidelines released last March will be tempered by a far more realistic assessment of what is meant by independent directors.

    "No one is going to sell their QBE shares because [CEO] John Cloney is not independent," Greiner says. "The institutions are being a bit two-faced about this. When Coles Myer (Greiner was on the board) was doing well nobody complained about the governance. It was only when its performance was down that they were focussing on governance.

    "It is impossible to come up with a broadly-based set of corporate governance guidelines that will work across the board. However, I don't think they are an intrinsically bad set of principles.

    "I think corporate Australia needs to say that it's a fine platform and that they will probably adhere to 80 percent of that, but they also need to say that where it makes sense they will make changes. For instance Macquarie Bank has already done that.

    "In the end a company has to do what is in the best interest of shareholders. It is not worth fighting over what the ASX Corporate Governance guidelines say but rather in the way you treat them. If you treat them as the Ten Commandments which have to be honoured at all times in fear of committing a mortal sin, then this can be damaging to companies.

    "What this requires is some intestinal fortitude from the director community to just do what is in the interest of shareholders."

    Greiner may be right but the risk management paranoia permeating Australian companies and boardrooms has made everybody nervous. The current hard-nosed legalistic attitude being taken by the Australian Securities and Investment Commission to a number of issues including options (see story page 19) give directors little comfort as to how the ASX will view deviation from the corporate governance guidelines.

    ASX chief Richard Humphry has said the ASX will be taking a sensible view to the issue but that hasn't stopped cries from the director community to alter some of the corporate governance guidelines before they come into force next year.

    "Look, I know Richard Humphry well. I brought him to Sydney to be head of the Premier's Department and I believe him when he says that they will be light handed.

    "I don't think the ASX is the problem. It is more of a broader issue of the institutions, the Australian Shareholders Association, the media commentators and frankly the corporate governance consultants that have proliferated. If they try and apply a sort of literal test then directors have to have the courage to say no."

    But if this is a case of managing shareholders and the various stakeholders then this hasn't always been a boardroom strong point. The fact that the ASX has strengthened the continuous disclosure rules following the practice of some companies such as AMP to selectively brief analysts, brokers and institutions is a case in point.

    The problem for boards is that the management of all, rather than some shareholders and stakeholders, has become the major issue.

    "A Harvard Business Review article a few months ago said that the missing link in the corporate governance debate is the shareholder," says Greiner. "All this stuff is being done nominally in the name of the shareholders but traditionally shareholders haven't worried all that much about it.

    "The truth is that most boards have at best paid lip-service to actively managing the relationship with the owners. It is something that has been left to the CEOs and this is going to change. By and large CEOs don't like it because they have seen it as their prerogative to manage the board and the shareholders.

    "The reality is that both large and small shareholders are going to take a far more active role in what happens on the board and in the company. The shareholder relationship has been something like item 20 at the back of the board papers and basically tells you who has bought and who has sold. Typically it hasn't been qualitative and it hasn't been actively managed.

    "The better companies now are actively managing those relationships so that shareholders and stakeholders don't have to wait until you put out your annual report and you put out your corporate governance statement."

    One of the problems in this brave new world of trying to relate to the owners of the company in a far more substantial and proactive manner is that business schools or other educational institutes have not prepared directors or CEOs to deal with this.

    Traditional organisational charts incorporate either a pyramid or flat structure but nowhere within this paradigm are the owners of the company listed as a key element requiring active management and relationship building.

    "The organisational charts that I see do not have the shareholders in pride of place. Occasionally, they have an investor relation or public relations person who is normally at the edges of the management structure.

    "You can see this changing and it will continue to change. There are certainly a number of disclosure issues but it is very much a management cultural issue where understanding of and relating to the owners becomes part of the organisation as a whole.

    "Driving a strong shareholder culture is going to become a prime responsibility of the CEO, some of whom are already doing this, but also it will also directly affect the chairman of the company.

    "This is a real change because that hasn't been the case. In the 10 or 11 years that I have been on company boards the times when we had occasion to meet with our shareholders have been very limited.

    "By and large CEOs have been very comfortable that it has been limited because they see that as their task and is part of the creative tension between management and boards. There is now increasing sensitivity on board level that this can't be left exclusively to the CEO and have the CEO as the conduit between the shareholder and their representative.

    "The owners ought to have a direct link to their representatives on the board."

    For a former politician such as Greiner the situation is ironic. Even the poor voters in whose name all manner of deeds are done by politicians have the opportunity to provide direct feedback and have access to their elected representatives.

    But just as politicians meet big business groups or individuals more often than the suburban voter, companies and boards particularly chairmen and CEOs meet far more constantly with large shareholders.

    And even though boards and directors constantly proclaim that their duty is to shareholders and to increasing shareholder wealth, the reality is that the CEO manages the relationship between the board and the shareholder. It isn't only the CEO/shareholder dynamic that is at issue. Recent corporate failures have conclusively shown that boards need to have far greater access to information other than that coming through the CEO or company secretary.

    "I call this the CEO sieve or the narrow bit of the hourglass where the CEO and the company secretary are. On company boards on which I sit we now go out of our way to see that directors get information directly.

    "On the QBE board we go out of our way to ensure that directors have information from a variety of sources and encourage directors to meet managers in whatever part of the world. I will be going to France soon and I have just written asking to see the manager in Paris.

    "He may be well down the management pecking order but I don't want to know which risks he will or won't write. I simply want to get a feel for the market. This is perhaps unusual for some companies.

    "I can remember when I was on the Coles Myer board and I was somewhere in the Riverland of South Australia on other business and I saw a Fosseys store. I wandered into the store being a diligent director and introduced myself and asked for the manager.

    "We chatted for around 10 minutes and I then went back to my other business. By the time I got back to Sydney that evening, I already had a message from the then CEO Dennis Eck. Apparently, the South Australian manager had told his state manager who told Eck that it was outrageous for a Coles Myer director to come into a store without prior notice.

    "CEOs who are confidant about what is going on do not have problem. Ten years ago people got stuck into Sir Eric Neal because he allegedly wasn't letting Stuart Fowler run Westpac. Then there was this swing back and people would sit around the board table saying we can't intervene in management issues.

    "That's fine but it is a question of common sense. If a company is well run and the corporate culture is positive there is no reason a manager would not be happy to see someone from the board. From my experience interaction between directors and management has always been a positive thing on both sides.

    "Basically directors need to get out more. They need to talk informally to management and to people below the CEO. The answer is not to get people in to make more presentations because that doesn't really achieve anything.

    "If the HIH non-executive directors had spent more time going to company functions with brokers and analysts from the insurance industry they would have been told more than two years ago that HIH was writing the bottom business. And they would have probably been told by the industry that they were under-provided.

    "Nothing happened at HIH that the insurance industry as whole hadn't known about for years. One assumes that the board didn't have occasion to get this vibe from the industry otherwise they would have done something about it and challenged Ray Williams more often."

    But directors getting out more often also has its problem, as Greiner found out when he accepted a role at the University of Sydney's business management school only to be knocked back following student and the health faculty protests because of his chairman's role with British American Tobacco.

    The protest was on the basis that the tobacco industry could have an undue influence on Sydney University research. The Russell Crowe movie The Insider which was based on real incidents, detailed how tobacco interests in the US have influenced research in order to bolster their case.

    It certainly gives shareholder relations a whole new meaning and it is one of the reasons, BAT privatised its Australian interests.

    "Tobacco companies have been driven to a new approach in their stakeholder relations. We know we start with low credibility in the sense that a number of pundits do not believe whatever we say.

    "We know that we face these problems and a lot of that is historical. The way we have faced that problem is to become a pure tobacco company. By that I mean is that we have a company whose only business is tobacco. BAT used to be in financial services. Other tobacco companies have taken the same path.

    "This means that when shareholders buy or keep their shares they know they are doing that in a so-called sin industry. We also engage in a large social reporting exercise around the world. It is fair to say that we get limited response because of the anti-smoking zealots who can't conceive that we could do anything worthwhile.

    "There isn't much we can do about that short of the government banning the product. We are at the far, far end of what we call the darkness of the market because basically we have no opportunity to market the product including at point of sale.

    "Contrary to what people may believe we do not spend time trying to turn that tide. There is no easy answer. I think you get a distorted view of tobacco companies particularly in Australia. In Europe or Asia people have the same information about the serious health risks of tobacco but there is a more balanced approach between the smoking and non-smoking groups.

    "BAT is a large legal company that employs lots of people and 20 percent of Australians use our product. The government is the largest stakeholder and takes more than 70 percent of our revenues. If the community as represented by their government were to decide that tobacco is unacceptable as an industry, then fine.

    "To condemn anyone simply because he is on the board of a company whose product you don't like is pretty stupid."

    It isn't only the tobacco connection that has created some controversy for Greiner in his career as a director. Whenever the subject of how many boards any one director should sit on, the Greiner name comes up as someone who sits on too many boards.

    The argument is that board work is or can be fairly involved depending on the company and that if your time is spread across too many companies then this is not in the best interests of shareholders.

    "Initially I did sit on too may boards. Of course it is not a question of treating all companies equally.

    "About seven or eight years ago a Sydney newspaper purported to have searched ASIC records and concluded that I sat on 37 boards. The truth was that 12 of them were subsidiaries of QBE, five of them were subsidiaries of McGuigan wines and some were my father's companies or my family companies. I was on seven public company boards and the chairman of two of them and I think arguably that was too many.

    "I am now on only three company boards and I am not chairman of any of them. I am involved with six or seven other companies which by and large have a single shareholder either here or overseas. But that's a very different role.

    "These are small companies involving owner/shareholders and I have to say that I find these type of roles satisfying because we spend a lot less time worrying about regulation and more time on furthering the business. We have far fewer formal meetings and if we do have formal or informal meetings they are about the business.

    "I find this more satisfying than sitting on the board of a public company where by necessity you have to worry what you are going to say in the corporate governance section of the annual report.

    "The power of the media to brand you a serial director is pervasive. The real test is to ask the shareholders whether I am active or do a good job. I am a professional director and that is what I do."


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