As the ground rules for what constitutes an effective director shift, it’s becoming apparent that awareness and vision outweigh track record every time.

    It has long been said that diversity, experience and a track record are key attributes of an effective board of directors.

    Diversity, of course, is non-negotiable — it is vital. Experience, however, is now in question. We’ve seen plenty of examples where a formerly successful CEO or chair falls short in their next company. Even within the same industry, new circumstances can render experience counterproductive.

    In this regard, we don’t suggest acuity and analytical ability are questionable. It is habits, practices and traditions that are at risk of expiring their use-by dates.

    Historical experience is being rendered obsolete within industries by profound changes in customer profiles, products, systems and technologies, geography and ownership (including foreign). To this we can add the digital disruption of fast broadband, AI software, analytics, and robots emerging at a breathtaking pace. Newspapers, magazines, free-to-air TV, music and video stores, and financial payment systems are among the more visible casualties.

    This won’t trouble the millennials, now 37 per cent of the workforce, although few of them are yet at CEO or board level. They are tech-savvy, info-savvy and global-savvy. They adapt well to change and may turn out to be our best leaders and directors for more than a century.

    Experience less valuable than knowledge and vision

    For board members, experience is now far less valuable as an attribute than knowledge and vision. Or better still, wisdom, rare as that is. Knowledge of the external environments of a business as well as the company itself, as shown in the diagram opposite, is key. Only then can a director properly assess direction and profitability, or mentor the CEO.

    It’s a big call for any one person to have in-depth knowledge of all these environments, hence the even greater need for diversity and collegiality among directors. However, the total board must have a holistic understanding of the entire external environment and fully comprehend the relevance of the business to the outside world, especially its own industry, marketplace, economy and society.

    Meanwhile, directors need to focus on helping their organisation achieve good growth. World’s best practice (WBP) proftability is 20+ per cent Return on Shareholder Funds (ROSF) after tax.

    A good ROSF should not be an option apart from property trusts and not-for-profit (NFP) enterprises. Sadly, only a minority of Australian companies achieve world’s best practice because the vast majority don’t aim to achieve it and have insufficient awareness of what is happening globally, as recent surveys have revealed.

    That said, Australia does have some outstanding companies as shown in the table above, where the Best 100 in various categories and other comparative data is provided. Around one in fve companies in the largest 2000 enterprises achieve profitability of more than 20 per cent ROSF over five-year periods.

    Around the same number run at a loss over a five-year period, incredible as that seems.

    The rest range from the commendable to the “why bother?” level (returns below the bond rate). However, in noting the many businesses that lose money, it’s important to recognise that a significant number are young or taking a long-term investment decision. This was true of Mount Isa Mines in the 1930s and McDonald’s in the 1970s. Not all loss-making and low-profit companies are poorly run. Indeed, a large number could quite possibly be tomorrow’s corporate heroes and successful giants.

    Let’s return to the importance of knowledge. In FY18, the nation’s two million-plus businesses — dominated by the largest 2000 enterprises with 47 per cent of all revenue of around $5 trillion in 2018 — will spend around 6.25 per cent of revenue on information. That’s double the outlay of the Industrial Age. Almost a third of that total will be spent on externally sourced information. Compare that with less than five per cent at the end of the Industrial Age in the mid-1960s, when we still had a fortress mentality and planned from the inside out — as opposed to today’s more effective outside-in approach.

    Protectionism allowed us to get away with that controlled environment stance, but Australia paid a high price over time with a lack of international competitiveness.

    Today, we spend more time and money on knowing the external forces impacting our business as well as expanding our knowledge of internal matters via workplace culture and health and safety programs, governance audits of more and more functions, and the management accounting of profit-and-loss and balance-sheet data.

    We still lag well behind the US, which spends nearly double the average percentage of revenue on external information as the rest of the developed world. We’re also behind the US in profitability when it comes to the big end of town.

    The board must have a holistic understanding of the entire external environment — and the relevance of the business to the outside world.

    Awareness of changing markets and tapping available capability is vital here. In a recent survey (Match Fit: Shaping Asia-capable Leaders), the Asialink think tank found an alarming gap in Australia’s ASX 200. Less than 40 per cent of boards had knowledge of Asian markets; barely 30 per cent had any business relationships with Asia. The ability to relate to Asian cultures was less than 20 per cent.

    This should be of concern to all directors.

    After all, Asia now accounts for over 41 per cent of world GDP — bigger than the whole of the EU and North America — and this mega-region’s GDP is growing at twice the rate of the rest of the world.

    It now accounts for two thirds of our inbound tourism, nearly 68 per cent of our immigrants and over 80 per cent of our exports.

    This is only one aspect of one of the external forces shown in the diagram (“How We Stack Up”, below) that directors need to be across. It demonstrates the importance of understanding these forces and shows how far behind the rest of the world many Australian enterprises are.

    We need to keep learning, but do we have the will and wisdom to do so? The appropriate structures, cultures and management of a modern business are very diferent to that of the pre-digital and premillennial employee eras. While ethics, fairness, non-discrimination and incentivisation are constant values, much else has changed. We frequently hear that millennials are difcult to manage and border on the insolent. But are we using behavioural templates that are no longer relevant? If we cannot understand, motivate and lead millennials then we have a problem.

    Experience alone does not cut it any more. We live, work — and have to direct and manage — in a rapidly changing world. Today and tomorrow are far more relevant than yesteryear — and crucial to a successful board as we travel through this challenging century. However, acuity and wisdom, or the getting of those valuable attributes, will never be out of date.

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