The 2024 AGS explored the dynamics of directorship and governance in a complex regulatory landscape. Insights from leading figures highlighted the need for board adaptability, strategic foresight and diversity to navigate AI, cybersecurity and climate change.
Changing role of the director
The role of the director is no longer limited to diligently reading board papers and attending board meetings, because they also need to immerse themselves in their organisation’s strategic and operational landscape, says Catherine Livingstone AC FAICDLife, Pacific National chair and chancellor of University of Technology Sydney.
“With apologies to Paul Krugman, governance isn’t everything, but it’s almost everything,” she began, issuing a clarion call for reordering our priorities around over simplified ESG metrics and checklists. “I despair every time I see the ESG acronym, which effectively consigns governance to being a compliance subtext to the E and the S. This de-featuring ignores the fact that true governance is anchored in strategy and purpose.”
Livingstone questioned the value of processes and policies without direction, advocating for the ESG acronym to be reversed to GSE. She also critiqued the inclination towards quick fixes, advocating instead for the merits of design thinking as a strategic capability that propels businesses beyond superficial aesthetics to tackle core challenges and unlock innovative solutions.
“Design thinking is hard, but pays enormous dividends and with the increasing velocity of change, as a capability, will be a critical success factor. It drives simplicity from complexity, providing a rigour, which enables more resilient strategic thinking.”
Highlighting examples from Tesla to Apple, and her own executive career at Cochlear, she stressed the transformative power of design thinking in strategic disruption, challenging the notion that its application is limited to product or fashion design. However, for the philosophy to work it requires a communicable strategy and a linked business plan.
“This line of sight must be clear, and the plan must be executable, with whatever degree of challenge is agreed between the board and management,” said Livingstone, emphasising that a disconnect of expectations will lead to a break in governance. “The strategy will be adrift and management demotivated, compromising the delivery of the plan.”
Livingstone, who was honoured with an AICD life fellowship at AGS 2024, advocated that boards hold strategy discussions with the CEO and the next two layers of direct reports. “The discussion among this wider group is much more broadly informed and enables better questions to be asked, with a focus on whether the right questions are being asked, and avoiding the process moving too quickly to the first right answer,” she said. “There is always a second right answer.”
Diversity on a board is crucial to achieving this, but Livingstone said this means more than just gender diversity, because there is an important distinction between difference and diversity. She added that by supporting the three streams of governance, rewards can be huge both through “value creation and enabling an organisation that can contribute to economic and social wellbeing”.
Livingstone also questioned whether longer tenure limits are appropriate, saying six years might be a better midpoint to help organisations balance corporate memory with meeting the changing needs of the organisation’s strategic context. The rapidly changing landscape requires directors to develop strategic situational awareness.
“They need to be looking for patterns and those soft signals in the ether, to avoid falling into the trap of path-dependence thinking — that is believing that doing more of the same is the best strategy, especially when all is going well.”
Scott Perkins
Choosing the chief executive is 95 per cent of the board’s job. The next part is helping the CEO and their team make better decisions by establishing trust, said Woolworths Group Ltd and Origin Energy Ltd chair Scott Perkins.
Boards can support executives with “diligence to put in the discretionary effort, aspiration to continue to search for the full potential of the organisation” and empathy that understands this is hard, he told the AGS.
First and foremost, directors need to overtly invest in creating a trusted environment — with trust between the board and CEO, and trust among board members themselves. “Trust that enables the CEO to go, ‘I’m not sure about this’ — trust that encourages diversity of opinion,” he said.
When Perkins took over as chair of Origin, he abolished the practice of board meetings starting with a private session without executives being present. His experience had been that even though directors had read the board papers and discussed an issue among themselves, it was later recalibrated when the executives contributed to the discussion.
He asked why private sessions were even needed, except to discuss CEO performance and pay. “Why can’t we say everything in front of the chief executive? He or she is sitting outside thinking, ‘What are we talking about?’ for the hour,” said Perkins. “It’s actually not trusting. We should back ourselves to say everything in front of the CEO, including the hard discussions.”
He also commented on director tenure, dismissing expectation that a director is appointed for 10 years. “There should be an expectation that the director is appointed for [only] as long as she or he is performing,” said Perkins.
Joe Longo and Mark Rigotti
Being a director is “a tough gig”, said Australian Securities and Investments Commission (ASIC) chair Joseph Longo.
“If you’re acting in good faith and want to run a profitable business and not fall foul of what’s expected of you in terms of the law, that’s hard work.”
The increasingly complex business environment ramped up existing governance
pressures, he noted. “If we also add changes to regulatory settings, mandatory climate disclosure, cybersecurity and AI, to name a few, it may seem to some that being a director is like Sisyphus in the ancient Greek myth, forever pushing a boulder up the hill, only for it to roll back down again.”
The introduction of climate reporting requirements would impose new obligations upon directors, but also bring benefits. For example, access to climate reporting data from other entities in a company’s value chain would “support in better managing climate change- related risks and opportunities, and potentially
enhance shareholder value”.
AICD managing director and CEO Mark Rigotti raised the issue of superannuation fund boards, given that the industry is now worth an estimated $3.6 trillion. For instance, late last year, Australian Prudential Regulation Authority (APRA) deputy chair Margaret Cole said superannuation trustees needed to “step up and be accountable” to deliver better outcomes for their members.
Then, in February, former Prime Minister Paul Keating said union-backed industry super funds would likely start seeking board representation on major Australian companies.
“Having a role on companies where they have a majority interest... it seems to me that it is actually tied up with governance,” said Rigotti.
Longo indicated that ASIC’s Financial Accountability Regime — the forerunner of which was brought in to deal with bank behaviour — would ultimately be extended to superannuation trustees (from 15 March 2025) and be jointly administered by ASIC and APRA.
“[The trustees] have to figure out ways of acting in the interests of members who are now drawing on those savings,” added Longo.
Cybersecurity
Boards need to have a baseline understanding of cybersecurity concepts and principles, but should stop short of having a specialist cybersecurity director, said Dr Derek Bopping GAICD, head of the Australian Signals Directorate Melbourne office.
Bopping added he was concerned that cybersecurity is “almost like a bottomless well of technical detail that requires an inordinate amount of time and expertise to maintain”.
Boards should instead work to overcome their three biggest blind spots: understanding their data — what they are holding and how it’s managed; the idea that data is the only thing boards need to worry about, rather than the operational and business interruption consequences of a cybersecurity incident; and that there is a merging of cyber risk and political and geopolitical risk, and they should be briefed accordingly.
While boards might not need a cybersecurity expert, they still have an important role to play in cybersecurity, said Catherine Brenner FAICD, chair of Australian Payments Plus and a non-executive director of Scentre Group. Boards can look at the broader landscape, she added.
“The individuals within the organisation will probably be looking at their technical bits — the bits that are affecting the operations are their particular area of focus. The board can step back, look at the whole picture and see the forest for the trees and think about things such as the second and the third-order effect of what’s happening.”
Dr Pamela Hanrahan
“The number of these is growing — governments like them and they are a direct instruction to boards that you cannot delegate this,” said Hanrahan, who is also the author of Directors’ Legal Responsibilities: A Handbook for Australian Boards.
These duties include financial reporting, workplace health and safety, including sexual discrimination and harassment, and for financial services companies, the Financial Accountability Regime.
The second area covers conflicted transactions. “If there’s a transaction between a director or a controlling shareholder in the company, then you must be very vigilant,” said Hanrahan, adding that boards should seek independent advice.
Third is “red flags”. If directors know there is a problem and management keeps putting the board off, that is very high risk, she said.
Finally, boards need to keep a close eye on mission-critical risks, such as the worst thing that could happen to a company, she told this year’s Australian Governance Summit.
AI: Challenges and opportunities
Artificial intelligence (AI) demands a seat at the boardroom table, as a tool for growth and a crucial component of risk management, said Dr Ayesha Khanna, co-founder and CEO of Addo.
Opening the second day of the AGS, Khanna said that incorporating AI governance into existing governance frameworks was paramount to safeguarding an organisation’s long-term success. “Board members need to be ready to thrive in this new world,” she told delegates.
They needed to understand two fundamental questions: What can AI do? What risks does AI bring? Developing a comprehensive AI strategy and a sound knowledge of data architecture was crucial. Communication was also key, for although mandatory AI reporting was yet to emerge, voluntary reporting was recommended “otherwise people will start pulling out”.
Khanna pointed to the example of Disney, one of the largest entertainment companies in the world. “One of the reasons activist investors are going after it is because they say its AI response is anaemic,” she said.
She noted that the lack of comprehensive AI governance strategies has led to notable failures and controversies in recent years. For example, one investigation found that the use of the Compas algorithm by US judges to make decisions on granting bail led to disproportionate “false positives” for black people and “false negatives” for white people, resulting in the former being more likely to be detained in custody.
Other AI risks included “hallucinations” (incorrect predictions based on data gaps), AI hacking and other examples of bias and prejudice that may give rise to litigation. An audience member identified the additional risks of copyright or IP infringement, given that large language models (LLM) were “trained” on publicly available data. However, Khanna suggested that area was of lesser concern — at least for now.
“Enterprise data is private, unless it’s hacked into... especially if it’s in the cloud, it’s largely protected from the LLM bots that go around trying to scrape the internet,” she said.
Energy transition
Company directors should position their organisations to capture the opportunities from the biggest shift of capital in history as the global economy decarbonises, the summit heard.
Instead of taking a compliance mindset to reducing emissions and reporting on emissions, companies should bake emissions reduction into the way they do business, said John Lydon GAICD, co-chair of Australian Climate Leaders Coalition and chair of Generation Australia.
He noted Australia has a legislated 43 per cent emissions reduction target in six years and a net zero target in 25 years. “That is going to happen,” he said. “What can you as a board do about it?”
Businesses should embed this into their strategies, influencing their choice of product, capital allocation, who they partner with and how they remunerate people.
Karen Moses FAICD picked up the theme, saying the question is how do directors create businesses that are fit for the future and ready to capture the opportunities for the future, as well as to deal with the short-term risks.
“What strategically do I want the business to look like?” asked Moses, a non-executive director of Snowy Hydro and Orica Ltd. “And so, what am I incentivising to ensure we’re going to get there? A lot of change has to come with the businesses and it’s not going to happen on its own.”
The next generation of directors
Building a pipeline of potential directors to plug existing skills gaps and provide diverse perspectives is shaping up as another big challenge facing boardrooms.
Lauren Williams GAICD, a non- executive director of global software company Altium, noted that while enormous progress had been made in terms of getting more women on to boards, a Watermark survey found that 19 per cent of all female directors (prepared to serve on boards) hold 46 per cent of female-occupied board seats.
Age, cultural and other forms of diversity were also needed to “bring a different group of people onto the board to encourage different sorts of thinking and different sorts of outcomes”, she added.
Matthew Everitt GAICD, of First Nations consultancy Dreamtime Art Creative, said that in order for boards to become truly diverse spaces, a lot of work needed to occur on “unbundling boardroom dynamics”.
“We can’t make an assumption that everyone’s going to be able to afford to turn up today or to do a program that would help them get better at governance,” he said. It also meant developing a framework around creating a safe space in which to tackle difficult conversations.
Bianca Goebel GAICD, a director of South East Water, indicated that both individual and collective actions were needed to shift the dial. The next generation of board directors could consider gaining experience by sitting on committees run by universities, professional associations or government panels. “There are lots of different ways you can start to build that governance skill set in real life without actually sitting on a board to help you get there,” she said.
Building more accessible and inclusive workplaces
Weighting candidates with a disability during the recruitment process and delivering disability awareness training to directors were among the tools suggested to tackle the vexed issue of a lack of representation of people with disability on boards.
A three-strong panel also proposed investing in coaching, support and mentorships, as Suzanne Colbert AM GAICD suggested the most compelling case for better representation may be the business one.
“Without the voices of people with disability in the services you’re providing, you’re not really going to ever hit the mark of meeting the quality you’re aspiring to,” said Colbert, who co-founded the Australian Network on Disability.
Lillian Leigh GAICD pointed out that 4.4 million Australians live with a disability, making it likely many boards already had people with disability on them — but other board members weren’t actually aware of it.
Former Disability Royal Commissioner Dr Alastair McEwin AM GAICD said many people didn’t want to disclose their situation “because they just don’t feel safe in the workplace”.
“My personal commitment is to see the board and management have an open culture,” he said. It was vital that organisations didn’t just assume that all people with a disability shared the same experiences.
“Ultimately, what we recommended was culture change through policies and procedures that are flexible, adaptable and not just one-size- fits-all,” added McEwin.
Social issues — how and when should boards take a position?
As boards across Australia grapple with complex cultural, political and social issues, directors are finding that relationships with stakeholders are becoming increasingly complex.
“Stakeholders... are becoming a lot louder, a lot more connected and a lot more mobilised in the way they approach various issues,” said Taleen Shamlian MAICD of Advisory Street Pty Ltd.
But directors needed to ensure that any position the board took was thoroughly thought through. “We need to step back... [and make sure] we’ve done the homework, that we’ve looked at the data and we know we can have an impact,” said Sally Freeman GAICD, the chair of Adica Insurance.
Patrick Langrell GAICD, a director at the Australian Catholic University, cautioned against boards taking a strong “for or against” position, in favour of allowing for more nuanced and moderate views. “The binary approach of taking a stand or remaining silent — both of those options are untenable now and increasingly fraught with risk,” said Langrell. “You’re damned if you do and damned if you don’t.”
This article first appeared under the headline 'Australian Governance Summit 2024’ in the May 2024 issue of Company Director magazine.
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