Has the position of non-executive director reached its use-by-date? Are company boards so stuck in the mire of boardroom minutia that they can't see the strategic performance forest for the compliance trees? Non-executive company director, Diane Grady* believes it is time to take stock and if necessary break the boardroom mould.
The image of non-executive directors (NEDs) in the investing world is not good. In a recent Ross Carmichael Survey on Corporate Governance one interviewee captured the mood of many when he said: "My view is that two out of three Australian Boards are dead weight." Even NEDs themselves are increasingly frustrated with their roles. Many would agree with the sentiment expressed by Gary Pemberton when he resigned from several boards that "There are better opportunities to have fun and make money than being a non-executive director". What's driving these negative perceptions? We all know that keeping companies out of trouble is not enough in today's dog-eat-dog world. However many boards are struggling and failing to make the transition from a reactive, compliance-oriented model to a new strategic, performance focused approach. Too many companies are stuck in a time warp - wedded to their routines. While management has changed in response to the increasingly global and dynamic competitive environment, boards haven't. Board structure, processes, composition, and communication have stayed largely the same. No wonder the reputation of boards is so poor!
If we want strategic boards, companies must "Break The Mould" in three areas: Instead of rigid board structures and processes
… We need boards that are more transparent about who the directors are, how they add value and the decisions the board makes.
The dynamic board
What is a dynamic board? A couple of examples will illustrate the idea. At Lend Lease we have used board structure to help drive strategy. In the mid-nineties we decided that becoming an international company was a major strategic imperative. We sent senior executives to Europe, Asia and the US to establish a beachhead in each region. We recruited NEDs in each of those continents.
In 1995, David Higgins was appointed CEO because the board believed he had the passion and the skills to lead this international effort. Lend Lease made rapid progress. In order to drive our international strategy deeper, we decided to create six business boards underneath the main Lend Lease board - one in Europe, the US and Asia, and 3 in Australia - one for MLC, one for property services, and one for capital services. Each board was chaired by a non-executive director and had a mix of executives and non-executives. I chaired the property services board where our focus was on developing a strategy for Civil and Civic. We knew the business had no future in Lend Lease if we couldn't find a way to lower its cost base and to create an international business with good margins. With the support of the property services business board, the CEO, Ross Taylor, and his team initiated a change process that transformed the local business. This involved shifting Civil and Civic's focus from the project to the client.
At the same time we were taking out costs and changing behaviours within Civil and Civic. We developed an international strategy that rapidly led to the acquisition of one of the world's leading builders of semi-conductor fabrication plants. We acquired the UK based Bovis - one of the worlds largest project management companies which gave us a truly global presence. The developing and implementing of this property services strategy would have been an all-consuming agenda in many companies. But in Lend Lease, this level of strategic initiative was happening simultaneously in each of the business boards around the world. For example, MLC in Australia was negotiating with AXA for National Mutual. In Europe, the development of Bluewater-the UK's largest retail centre - spawned numerous development opportunities in the region. In the US, we sold Compass (which had come with the ERE business) and were negotiating to acquire several other real estate investment businesses. The business board substructure we had created, did in fact, enable us to generate strategic momentum more quickly, on more fronts, than would have been possible with a single board.
By 1999 Lend Lease had succeeded in creating three global property-related businesses - project management; development; and real estate investment management. Meanwhile, a comprehensive change program was happening at MLC that transformed it into one of, if not the best firm in its industry. Having established a serious international presence in our three property-related businesses, our next challenge was to integrate them to capture synergies between them. To facilitate this integration process, we once again changed our board structure. We disbanded the six business boards forming just one global real estate board, and one financial services board. Most recently, with the sale of MLC we have again restructured and now the main Lend Lease board oversees all the property businesses globally. All of these changes to board structure occurred in just six years. This illustrates what I mean by a dynamic board and how it can assist in stimulating corporate strategy. In my experience, the dynamic nature of the Lend Lease board is unusual. It's more work for NEDs, but it's a lot more rewarding too.
Boards that seek to be strategic need to assess whether rigid structures and processes are holding them back. Directors should examine their routines and take steps to align themselves with business requirements. Nothing should be sacrosanct - board papers, board agendas, meeting schedules, sub-committees, fee structures, board composition - all should be challenged, and changed if necessary. Dynamic boards almost by definition will not fit into a cookie cutter governance model. But I am not advocating a return to the "bad old days" of no real governance. The strategic board cannot shirk its compliance responsibilities but it can find ways to become more efficient and creative in managing the tasks. For example, our risk and compliance committee at Lend Lease was concerned that completing "the forms" was becoming the driver of our risk management process. So we asked the CEOs "tell us what keeps you awake at night? What really concerns you about the business and put that into a one-to-two page memo".
We all felt this was far more effective in driving good risk management into the business. And it was far more efficient than reviewing pages of ticks and crosses. Becoming dynamic and strategic is not an excuse for poor governance. Boards need to do both efficiently. Boardroom diversity The second area where boards should "break the mould" is diversity - diversity in board composition and diversity in the roles NEDs play. Some chairmen think diversity means simply appointing a woman non-executive director. But diversity needs to go much deeper. For boards to really add value in today's complex and converging world, they must have diverse perspectives. Where once a company's competitors were predictable, now they come from any number of industries or countries. Where once there was little crossover between functions within a business, now companies must rely on an integrated team. Where once customers were reasonably homogeneous and relatively easily satisfied, now they are fragmented and demanding. This complexity means that management can really benefit by listening to and engaging in the business a strategic mix of non-executive directors from different countries, disciplines and backgrounds.
Woolworths is a good example of where the diversity of the board enabled us to tackle industry convergence and complexity more effectively. Grocery retailing used to be grocery retailing. But now, it's banking or petrol, or e-tailing as well. Fortunately, when we were considering how to handle the in-store banking opportunity we had several NEDs who had extensive experience in financial services and no conflict of interest-one of whom had been the deputy chair of the Reserve Bank. These NEDs provided vital assistance to the executive team. NEDs at Woolworths also helped the executives design the major change program now under way, known as Project Refresh. Project Refresh is changing Woolworths on a number of dimensions, one of which involves centralising the buying function. Because several of us had previous experience as executives or consultants in the consumer goods industry, we understood cost structures and strengths and weaknesses of Woolworths' competitors - at least from the suppliers viewpoint.
We knew the advantages that would come to Woolworths from changing its traditional state-based buying structure to a more centralised organisation. Similarly, some of our non-executive directors' have used their considerable experience in managing major change programs to advise Woolworths' management on how to create a process that involves changing the way many people work, while still keeping the business running and delivering excellent results. In the logistics area, the expertise of several non-executive directors made us aware of issues with our distribution strategy and opportunities to beat our arch rival retailers. This led to the creation of a national logistics function reporting directly to the CEO. In Woolworths there are many on-going areas of convergence where expertise of non-executive directors contributes to the decision-making. For example,
• one NED has a deep understanding of genetic engineering and the food labelling debate;
• expertise in telecommunications and managing large service businesses will come from two new directors.
These examples illustrate how the diversity of the Woolworths board has helped the company address important strategic issues. At the same time, there is substantial retailing expertise on the board-but it comes in diverse forms-not the easily identified and classified "former CEO of a retailer" package. While none of us have been the CEO of a retailer, we know the economics of the business, we know the language, and we know the challenges. But far more importantly, we provide what management (which has grown up almost exclusively in the retail industry) really needs - diversity! Our tendency to stereotype directors inhibits real diversity. In many instances, companies have a rather superficial selection process for NEDs, even when they've used executive recruiters. Too often the search starts with a superficial brief - we "want a CEO", or "someone with finance experience". When a list of is provided by the headhunter, the board scans through it with comments like "he's a good guy", "he's difficult" - often based on no more than hearsay. Unfamiliar names (if per chance they appear) are skipped over easily.
From this "roll call" a preferred candidate is chosen, meets with the chairman and maybe a few directors over lunch - and the deal is done - a new director joins the board. The process at Lend Lease was quite different. The brief to headhunters is the company wants NEDs who:
• Challenges conventional wisdom
• Has a track record of innovation
• Has an egalitarian view of the world
• Is passionate about people and helping them realise their potential, and
• Will get involved in Lend Lease"
We don't want someone who:
• Is a big name
• Will see this as just another notch on his belt
• Is a consultant
If boards want respect, shouldn't the selection process for NEDs be as professional as it is for company executives? Without more in-depth search processes, it's unlikely that boards will be able to achieve the diversity necessary for effective strategic debate. And the image of boards will remain staid. The diversity on the Lend Lease board gives the company a tremendous strategic advantage. We were able to recruit talented and diverse directors from around the world because they were attracted to Lend Lease's unique partnership model of governance where non-executive directors play diverse roles in the business.
At Lend Lease, most non-executive directors spend between 50-70 days a year on the company matters. Formal main board commitments take about 25 days. For the remainder of the time, each year we sit down with management to determine where we should focus attention, and our respective time commitments. Sometimes we chair business boards, sometimes we participate on PCGs (project teams), sometimes we are mentors to a key executive, sometimes we play representation roles. Our roles are as diverse as the businesses and the directors themselves. The transparent board Lastly, boards should become more transparent. From my perspective, the "tell 'em nothing" sort of arrogance exhibited by too many boards is counterproductive. Without trying to take a pot-shot at a well-meaning group that is striving to deliver a highly complex task, the SOCOG ticketing fiasco is an example of how lack of transparency has led to a profound lack of trust. In companies, if boards aren't trusted, shareholders suffer. Interestingly, despite expressed desire from the investment community for more strategic, value adding boards, I've observed that companies are often penalised for "pre-emptive strikes" not anticipated by the market. Yet good strategy often requires taking action early - before any sign of deterioration in performance appears in the results.
The problem appears (at least in part) to be lack of trust. Boards in general have done a poor job in building confidence in their decision-making. The investment community seems to assume that boards don't know what they are doing. Maybe the investment community would be less sceptical if companies were more up front about who the directors are, how they add value and how decision-making processes work. Possibly the one sentence biography in the typical annual report is not enough information to build confidence in directors. This will certainly be true if boards seek to become more diverse and include less well-known names as non-executive directors. Boards may also need to be more transparent about the rationale for sensitive decisions like personnel changes. For example, Woolworths has been castigated for the way we handled the transition from Reg Clairs to Roger Corbett. In the face of malicious media articles and market furore when the respected Reg Clairs was asked to retire at age 61, we kept a stiff upper lip and essentially said nothing.
Maybe we would have been wiser to explain the reasons - which were good ones. Non-executive directors on the board knew that Woolworths needed to make a number of changes, particularly in the supermarket business. We knew our state-based cost structure was too high - particularly with international competitors on the prowl. We also knew our state-based structure put us at a disadvantage with suppliers. And we knew that our state-based organisation prevented us from getting the most out of our distribution and information technology. In short, we knew the traditional formula that had worked so well for Paul Simons, Harry Watts and Reg Clairs needed to change to meet the new competitive environment. It was simply unwise to ask a CEO on the verge of retirement to stay longer to lead a massive change effort that will eventually affect all parts of the organisation. We selected Roger Corbett to be CEO because of his particular commitment to the change - and recently the benefits from his Project Refresh are beginning to be recognised by the market.
But it's been a long time coming. After we made the announcement, our share price plummeted from $5.90 to the $4.60s as the market reacted to the loss of a favourite son. In retrospect I think we should have communicated the real story instead of letting rumours circulate unchallenged. We were too tradition-bound and too attached to the board code of silence. Only recently - 18 months later - has our share price recovered and gone over $6. But it should be higher and shareholders have suffered from a good strategic decision by the board, but poor acceptance by the market. We weren't transparent. We didn't speak up. Many in the investment community are still critical of the Woolworths board for its decision - even as they acknowledge that the improvements from Project Refresh will have a major positive effect on the bottom line. This experience highlights the deep scepticism about boards and their competence. And it illustrates why strategic boards need to get better at communicating with the market. If boards become more transparent, I believe it will lead to better understanding and trust-which will benefit all stakeholders.
I know the cynics will doubt that a "fair go" is possible - at least in the media. I hope they are wrong. But one thing is certain, the silent treatment certainly hasn't produced a positive image of boards so far. Boards will need to change if they are to successfully move from a reactive, compliance focus to a strategic, and performance focused model. Making these changes will require challenging conventional beliefs about corporate governance. McKinsey's research shows the best companies tend to have strong boards and strong management. But becoming strong is like getting fit - it will take work. We need active debate within boards and within the community to create a new era of governance. Stan Wallis was correct when he said recently, that we need boards that deliver performance not conformance (Company Director, July). In short, we need to 'break the mould'.
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