Kerry McDonald’s chats to Zilla Efrat about the experiences and lessons that have helped hone his risk management skills, whether in the boardroom, on the open road or on the ski slopes.
Hard won lessons and experience
Kerry McDonald can often be found moving at high speed, perhaps in the fast lane on his Kawasaki ZX10R or skiing down Whistler or Ruapehu, just above the family ski house in Ohakune, New Zealand. But whether out in the fresh air or in an air-conditioned boardroom, he is highly likely to be closely focused on risk.
For him, it’s all about exercising judgment about risk and uncertainty and in doing so, relying on plenty of experience and some hard won lessons in life.
That experience was built up during his time as an economist at the New Zealand Institute of Economic Research and in the UK and Australia, his 20 plus years as a senior executive at Comalco, and more recently as a director on numerous boards in both New Zealand and Australia. It was also honed by what he calls “the rich tapestry of life” which included a lot of rugby, surf lifesaving, skiing and climbing, shooting and motorcycles.
Among other posts, McDonald is chairman of Bank of New Zealand, vice chairman of Oceana Gold and Opus International Consultants, and a director of National Australia Bank and Leighton Contractors.
He says: “On a company board, as in life, things can move quite steadily and predictably but inevitably, something happens that creates a real challenge and then all of my background experiences, including in sport, influence the way I respond. It is successfully responding to a challenge, in the context of risk and uncertainty, that I find most rewarding. That really concentrates the mind and brings out the best in a good board team.
“It’s in the nature of business and a director’s role that challenges emerge on a regular basis. Competitors do something. There may be an acquisition. Something unexpected happens in a market, like the US subprime problems, or in an operation or with people. Government policy changes can also happen quickly and unexpectedly and have a big impact.”
But he believes that the better the board, the better it works together, the better equipped it will be to deal with these challenges. So what makes a good board?
McDonald observes: “People are not all the same. They can bring very different skills, experiences and attitudes together, as well as very different capacities for risk and tough decisions. The worst situation is where a board continually avoids a tough decision, but such decisions also typically need full discussion and testing. This process will benefit from a range of perspectives around the board table.
“A good board is one that contains a diverse range of capabilities and attitudes, but that works well as a team. A good board needs directors who are challenging and probing, a bit of grit in the oyster. You can’t have a board that is so congenial and friendly that no one tests each others’ views or those of management or the chairman. But the challenging and testing must be within the context of sound team processes.
“The role of the chairman is very important. A good chairman is an effective leader and is fully alert to the way a board is working. He or she will give guidance, as appropriate, to the board as a whole and to individual directors and will have considerable influence on the style and culture of the board. Personally I favour a quiet, self-effacing style of leadership, Kantian leadership really, working through the success of all of the team rather than the dominance of an individual.
“If a board isn’t working well, it is critical to address the problem and the chairman needs to take a lead on this, although any director with a significant concern should make their concern known. Private meetings of directors only and non-executive directors (NEDs) only are also important and should be reasonably frequent and allow enough time for issues to be fully discussed. They are a good opportunities for exchanging views on key areas like management performance and succession and addressing areas that are not going well.”
McDonald notes: “A board has a number of important roles, including setting strategy and culture, but its most important role is to ensure the performance of the CEO and through the CEO, the management team. If there are problems with performance then it’s essential that the board acts decisively including, if necessary, removing the CEO.
“One of the most important things is for the directors to have a frank and open relationship with management and particularly the CEO. I am in favour of a board having senior management attending board meetings several times a year, not just to present specific papers, but with the chance to engage with directors on business issues in an open and frank way, with the flavour of a discussion amongst equals.
“Too often the executives at a board meeting aren’t given the opportunity to freely and frankly debate issues. Without open debate, there’s a risk that directors will not be fully informed and will not make good decisions. It’s also vital to create a culture of respect based on ability. If there is respect, it makes it much easier when there are difficult and challenging issues to deal with.”
McDonald also recommends that the board spends time with senior management outside the boardroom – for example, at site visits or informal or formal dinners. “There should also be the opportunity to have contact with people at all levels. It’s the best way to get a feel for the culture of the organisation, including on safety, and whether the business leadership and training, development and delegation policies and processes are effective or are handicapping employees’ abilities to work to their full potential.”
McDonald sits on boards in New Zealand and Australia and says: “In many respects, viewed from a particular board table, the environment can look remarkably similar for directors in both countries. But there are substantial differences. While good performance looks the same in both, Australia is clearly a bigger economy which has been growing much faster for many years, particularly in terms of GDP per capita. It has many more larger companies and directors, and managers are drawn from a larger pool. There are also differences between the states and cities in Australia, but a key factor now is the difference in the attitude to business in the community. This attitude is much more positive in Australia, and there is a much greater sense in Australia, across the whole community, of a shared vision for the country. This is aided by the generally much more positive and constructive relationships between governments and business. It is notable how often New Zealand business people comment on this.”
Having lived and worked in both countries, the differences haven’t been a big issue for McDonald. He also emphasises the benefit of many years of meeting and working with people like Mark Rayner, Sir Roderick Carnegie, John Ralph, Ian Borrie, and many others. “They had a major impact on my thinking and there were many learning experiences along the way – successes and some notable failures.”
So what have been the biggest lessons learnt?
One, says McDonald, is not to prevaricate on people issues, especially if you think the CEO, or another key executive, is not up to it. “First, confirm exactly what the problem is and then find a solution, and there may be good alternatives to removal from the role,” he says.
Another is to keep a clear perspective on where you are, what is happening and the implications of your behaviour and decisions. “Don’t be seduced or comforted by the immediate circumstances, when you are failing to deal with issues or making decisions that will have serious longer term consequences. Stay alert, reflect, visualise, use the helicopter and don’t be complacent because future outcomes will undoubtedly reflect current decisions. Imagine what you will feel like if it has all turned to custard! Make sure that when grappling with the details of a particular issue, you don’t lose sight of the fundamentals, the underlying first principles,” he says.
“If in doubt, unconvinced or unhappy, then make your position clear and question the points of concern. If it’s a big issue thoroughly test your concerns, but finally be willing to go with a board decision, unless it is a ‘show stopper’.”
McDonald has also learnt not to ignore his instincts. “For example, as a relatively inexperienced director I don’t think that I would have contemplated resigning from a board. But a NED doesn’t have many levers available. Where the board isn’t unified or if you are in a situation where you believe you cannot add value, perhaps because the rest of the board has a different view and you feel strongly that your view is right, then contemplating resigning is important,” he observes.
“Again, you need to visualise what the position might be at some future time if your view is not accepted and things do go off the rails. That doesn’t mean that you should quit if the going gets tough. To the contrary, I’ve been on several boards where the business has been in severe difficulties, where directors were getting daily cash flow balances and were meeting almost daily. You certainly check your insurance cover and indemnity, but if you think that you are doing the best job that can be done for the company and stakeholders, you shouldn’t lightly give up the challenge.”
Perhaps one of the most challenging times as a NED for McDonald was early last year when he was involved in the $3.3 billion takeover battle for forestry giant, Carter Holt Harvey (CHH).
During the four-month saga, McDonald chaired the independent directors committee, assessing the merits of billionaire Graeme Hart’s Rank Group’s takeover bid.
“I was very pleased to be able to work with Helen Nugent – as two of the three NEDs. Rank directly acquired International Paper’s 50.5 per cent shareholding, which gave it control, but the offer was still open for the other shareholders. All the NEDs were asked by Rank to resign. Helen and I discussed this and although the new majority shareholder could dismiss us, we decided that we would not resign until the offer closed. And Rank, to its credit, accepted this.”
As a result, McDonald continued as a CHH director for four more months and particularly challenging months at that. “The committee of independent directors was advising shareholders on the offer, but at the time we were under considerable pressure because we could not get financial forecasts for the business from management that we had confidence in and Rank was already the controlling shareholder,” he says.
He recommends that directors who find themselves in a similar position make sure they fully understand the circumstances, have excellent advisers and leave no stone unturned. “In these circumstances, it is sobering how often commonly held views turn out to be wrong when subjected to detailed scrutiny,” he says.
But looking back, he adds: “Given the circumstances, the outcome was reasonable. The company wasn’t performing to its potential before the takeover and given the ability of the acquirer to buy a major shareholding directly from the vendor, there wasn’t a great deal that the independent directors could do to shift the value in the transaction.”
McDonald was born in Wellington and schooled in Christchurch. “I had a superb upbringing, great parents and a good biff on the backside from time to time to keep me reasonably close to the rails,” he says.
He wasn’t an academically inclined youngster and barely passed the School Certificate by just six marks. Instead, his energies were focused on his social life, winning championships in surf lifesaving and achieving on the rugby field – he played in the front row for Wellington for six seasons and against the 1967 All Blacks in London as part of the Scotland B Team.
Somehow, though, the academic ‘switch’ suddenly went on in the final year of his undergraduate degree and after he changed from accounting to economics. Starting as a junior research officer at the New Zealand Institute of Economic Research, he worked his way up to become its director. This included work across the ditch at the Australian National University under Sir John Crawford and Peter Drysdale on the Australia-Japan Economic Relations Research Project and a number of industry studies for Comalco.
In 1981, he joined Comalco in Melbourne where he encountered Sir Roderick Carnegie, the former head of CRA (now Rio Tinto), and his pioneering work on organisation development.
In the late 1970s, Carnegie became focussed on exploring the idea of a science of management and how it could be used to develop real, sustainable competitive advantage. This work, which has had a strong and lasting influence on McDonald, led to a body of theory and practices that are unique and very powerful. “When properly applied the results are spectacular, creating strong competitive advantages and higher shareholder value, as well as a much better and more rewarding working environment for employees. They obtained more training and development, more delegation, responsibility and discretion, higher rewards and a safer working environment,” he says.
“I haven’t since come across a more powerful and effective approach to creating high performance companies and competitive advantage. It can, however, be difficult to persuade other directors that this is a critical path for the organisation to take. Nonetheless, I have now seen enough businesses develop superiority over their competitors using the processes – and not just in manufacturing and mining, but also in the service sector. It’s not particularly complicated or difficult. It just requires commitment and consistency in approach. It’s something that you have to keep working on.”
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