About serving on a board

Bruce Cowley FAICD was awarded the AICD 2021 Queensland Gold Medal for his services to governance. Below is an edited excerpt from his acceptance speech.

Receiving this award caused me to reflect on my first board role with MinterEllison in 1993. Then, as now, the MinterEllison board operated much like a public company board, with the ultimate authority to make decisions on behalf of the partnership.

I made my way to Sydney as an inexperienced, naïve 35-year-old for my first board meeting. I had voraciously consumed my board pack and comprehensively acquainted myself with my induction pack, preparing myself as thoroughly as I could. I arrived early, poured a coffee and settled in, excitedly waiting for the meeting to start.

About 20 minutes into the meeting, the phone rang. Our CEO answered it, frowning slightly and clearly unused to having board meetings interrupted. Whatever he was hearing, he clearly didn’t like it. Eventually, he returned to tell us that virtually an entire national practice group — 12 or so partners, a bit less than 10 per cent of the national partnership — was leaving to move to a competitor. An event was occurring that, to my mind, could theoretically threaten the future of our entire partnership.

What a terrible start to my board career — destroying the firm at my very first board meeting. However, realising after a moment that it wasn’t actually all about me, I managed to refocus. Fortunately, the older and wiser heads around the table remained relatively unperturbed. I learned a lot that day, especially that no matter how well prepared you are as a director, never assume things will be smooth, because something unexpected is always likely to pop out of left field and bite you.

Who’s responsible?

That is just as true today. Whether the issue is the destruction of a sacred Aboriginal site, distributing five Cartier watches to senior executives in thanks for a job well done, or implementing a computer system designed in such a way as to inadvertently omit reporting 23 million suspect transactions to the anti-money laundering and counter-terrorism authority — in today’s environment, we’re expected to take responsibility for the company’s problems and find a way through them.

One thing that has changed from the 1990s is that today, someone is expected to take the blame for pretty much every problem. More often than not, that “someone” is the board. Whether or not we are blameworthy, we not infrequently find ourselves having to keep steady hands on the tiller while being on the receiving end of censure from the public, media and markets. Who in their right mind would take on such a role? Well, we do, because it’s a wonderful job. Despite everything, we love being directors because we get challenged in new and exciting ways every day.

Liability and governance

I first became a member of the AICD in 1993 and it has been a long and rewarding association. One of the things that always irritated me as a director — and also as someone who advised directors — was the number of laws that made directors personally liable for what were effectively corporate offences. These provisions could be found not only in tax, environmental and workplace laws — where it might not be so surprising for legislators to want to cast the net widely — but in other laws, ranging from those that regulated fisheries and food to wagering and water.

These laws would usually contain a section with an innocuous heading such as “Liability for Offences by Corporations”, but which packed a punch by providing: “If a company has committed an offence under this Act, the directors are deemed to have committed the same offence...” Those directors would then be rendered automatically liable to a term of imprisonment or a fine unless they could establish their innocence by proving that one of a small number of available defences was available to them.

To most, this seems innately unfair, because it is not predicated on the director having done something wrong, but rather on whether the company has. What happened to innocent until proven guilty? The reality is companies commit offences all the time without any wrongdoing by directors, usually through the agency of employees, without any knowledge of or encouragement by directors of what was going on.

Non-executive directors are especially exposed because they are not employees and their role does not require them to have day-to-day oversight of the company’s operational activities.

I decided to undertake research into those laws and found in the order of 770 laws across all states and territories, which reversed the onus of proof. How had this happened without anyone noticing?

It seemed as if the idea of lifting the corporate veil in this novel way originated in Queensland, at the office of what we now call the Parliamentary Counsel. It was genius — or at least the parliamentary drafters in other states and territories thought so — because in no time, there were hundreds of these laws popping up across the nation. It became apparent these provisions weren’t included as a matter of policy because they were not mentioned in ministerial instructions to the drafters, but were included by the drafters simply as a standard “boilerplate” in nearly all new bills. That made lobbying for their removal harder.

It occurred to me that to lobby for change, it would be good to have a headline argument. In 1765, William Blackstone [English jurist, judge and Tory] wrote: “It is a maxim of English law that it is better that 10 guilty men should escape than that one innocent man should suffer.”

In Australia, it seemed it was better that 10 innocent directors be sent to the gallows than have one guilty one escape punishment.

Five crucial issues for directors

1. Take responsibility for everything that goes wrong

No matter how diligent directors may be, bad things can still happen to the companies they govern. Sometimes, those things will be unforeseen, perhaps, unforeseeable. In the current climate, boards are likely to be blamed both for things within their control and things outside it. While energy must still be devoted to managing risks, boards also need to prepare themselves for responding to the unexpected and be prepared to be transparent and forthright, to accept responsibility (if not blame) and to apologise to those who have suffered from an adverse corporate event.

2. Stakeholder management

While much has been said about the need for boards to take into account the interests of stakeholders, it is important for boards to remember there is no duty owed by directors.

The purpose of taking stakeholders’ interests into account is to help board members make decisions in the best interests of the corporation. Without taking the interests of stakeholders into account, boards will have an incomplete picture and not be best placed to decide on the right decision for the company. [Royal] Commissioner Kenneth Hayne AC QC says that in the longer term, the interests of shareholders and other stakeholders are likely to converge, which might make it easier for directors to evaluate competing priorities between shareholders and different groups of stakeholders. Nevertheless, balancing the interests of shareholders against pressures from stakeholders is likely to remain a concern for boards in shorter time frames.

3. Community expectations

Directors are expected to pay regard to “community expectations”. First mentioned by Justice Austin in ASIC v Rich in assessing the duties of a chair of the board, the concept has grown with the letters patent for the establishment of the Hayne Royal Commission, among other things, requiring that the commissioner should inquire into whether any conduct fell below community standards and expectations. There is risk that the greater the emphasis on community expectations, the more power shifts towards the court of public opinion. Challenges arise for directors in understanding what those expectations are, especially with conflicting community views.

4. Ethical decision-making

Board decisions will be analysed by others in a temporal context and what may have been regarded as ethical behaviour in the past may not be so regarded by contemporary commentators. Decisions and processes need to be continuously reviewed to see if they meet current ethical standards. Processes that ensure the greatest diversity of views are considered before a decision is made can help minimise board decisions that might be regarded as unethical.

5. Corporate culture

Another challenge for boards is to understand the company culture, especially in large, diverse organisations where there may be different cultures in different departments, geographic locations and disciplines. Recent examples of poor corporate culture have been exposed as arising from things such as fear of failure, competitive tension, strong leaders who create a culture of obedience and leave no opportunity for challenge, a culture of secrecy, a leadership group that discourages complaints or challenging of decisions, or a desire to cover up failure. Sometimes, boards act indecisively, permitting subcultures to exist where members of a small group have greater loyalty to one another than to the organisation. Boards must develop tools to dive more deeply into company culture.

Directorship in Contextby Bruce Cowley FAICD will be published by the AICD.