Having spent the past 34 years around the boardroom table, Kevin McCann ranks among Australia’s most experienced directors. He recently sat down with Zilla Efrat to discuss some of the issues faced by Australian directors.
Kevin McCann FAICD started his life as director much earlier than most – when at the age of 36 he was invited to join the board of his client, Pioneer Concrete, a top 20 listed company.
“When I told my senior partner in my law firm, Allen Allen & Hemsley, his reaction was that I was far too young and an older partner, who did work for the company, should be appointed,” McCann observes. “I doubt this would happen today because the role of the director is now a lot more complex and boards look for greater experience than I had then.”
McCann has spent the ensuing 34 years sitting on various boards. Today, he is chairman of Origin Energy, the lead independent director of Macquarie Group and a director of Macquarie Bank and BlueScope Steel. He is also chairman of the Sydney Harbour Federation Trust, a council member of the National Library of Australia and a Fellow of the Senate of University of Sydney. In addition to that, he is a director of the Australian Institute of Company Directors and chairman of its corporate governance committee.
Previous directorships include being chairman of Healthscope and a director of Pioneer International, Ampol and the State Rail Authority of New South Wales. He also served as a director on the Defence Procurement Advisory Board and as a member of the Takeovers Panel.
And, he held many of these positions while practising as a commercial lawyer specialising in mergers and acquisitions, mineral and resources law and capital market transactions as a partner of Allens Arthur Robinson (and its predecessor Allen Allen & Hemsley from 1970 to 2004) and as chairman of its partners from 1995 to 2004. Holding multiple directorships as a busy partner in a large law firm is also something that would probably not happen much today.
“I was very fortunate because the firm was very generous to me. Nowadays, a partner in a large law firm would probably have to retire to take up multiple board positions, partly because of the potential liability of the firm for the acts of the directors and the need for related-party disclosures. If your firm is doing legal work for the company of which you are a director, the fees paid have to be disclosed in the annual accounts. That often works as a negative because the corporation prefers to avoid related-party relationships which require disclosure, so a partner on a board may actually cost the firm work. I am encouraged that some of the firms have altered their policies and are now allowing some talented lawyers to take up board positions.”
McCann recently sat down with Company Director to discuss the shifting landscape for Australian directors. An edited extract of this interview follows.
Company Director (CD): What do you believe are the biggest challenges for Australian directors?
Kevin McCann (KM): One is that we are becoming swamped with compliance and regulatory obligations. That is particularly the case if you are the director of a financial institution regulated by the Australian Prudential Regulation Authority, but even in industrial companies in heavily regulated industries such as energy, we do seem to spend more and more time on audit committees, tackling accounting issues and on remuneration committees dealing with regulation and corporate governance attitudes to remuneration. On one board, we actually have a corporate governance committee. We also have occupational health and safety and environmental committees, which again tend to deal with regulatory issues. So we don’t spend as much time as I would like on strategy, considering innovation or how we might improve the operational performance and on issues such as talent development and risk management.
The area where I have faced the greatest challenge is continuous disclosure obligations, which are very strict in Australia. It is very hard to get clear interpretation of the operation of Australian Securities Exchange listing rule 3A(1). The ability of the Australian Securities and Investments Commission (ASIC) to issue on-the-spot fines makes directors very risk adverse and it has a chilling effect on the ability to conduct confidential negotiations. An approach about a possible takeover or a major transaction may be very much in shareholders’ interests, but if we have to put these in the public domain it may result in that transaction not occurring. The growth in class actions and ASIC’s enforcement provisions leave directors quite uncertain of their obligations to disclose in many cases.
CD: What do you find most challenging personally as a director in the current climate?
KM: In the last two years, it has been the global financial crisis (GFC) and the concerns about liquidity. On most boards, liquidity was our major concern because in many markets, traditional forms of finance closed. For financial institutions, the Government action in providing a guarantee of borrowing in 2008 was very important. For non-financial institutions, liquidity was also a big issue. Fortunately, Australian equity markets responded very well through the crisis and companies were able to raise funds through equity issues in 2009 to repay debt. The other challenge was the extraordinary fall off in sales. Customers stopped buying products and ran down their inventories.
CD: Are you still finding it hard to raise capital?
KM: Liquidity has returned to the market and financial institutions were able to raise funds domestically and offshore because of the Government guarantee. Now that has terminated, the markets are available but the uncertainty in Europe and to a lesser extent, in the US, has meant margins have remained high and liquidity is slightly less available than it was six to nine months ago.
CD: Were there big lessons for you as a director going through these changes?
KM: Absolutely. Liquidity management was something that did not feature on directors’ key issues lists because we assumed markets were deep and liquid in the short and long term. But once fear and panic occurred, liquidity dried up. Although there were deep pools of liquidity, institutions just kept it on deposit and weren’t prepared to lend to financial institutions and were also nervous about lending to non-financial institutions. Liquidity management was a top issue during the GFC and remains under constant consideration by directors. We also realised gearing levels needed to reduce in times of slower economic activity.
The other lesson was the extraordinary volatility of the markets. A few months ago, we thought we were on the way to a V-shaped recovery. Now I’m not so sure. We’ve learnt in the past six months that it doesn’t take very much for financial markets to take fright. A number of factors have contributed to this. We have had the sovereign debt risk syndrome in Europe and concerns about the financial stability of some European banks. When this uncertainty happens, liquidity becomes more expensive and less available. We have also seen very large movements in share, currency and commodity prices over very short periods. All of this is extremely hard to manage and affects planning and confidence.
CD: What are the biggest lessons you’ve learnt as a director?
KM: The importance of an effective and transparent relationship between the board, CEO and management. If you don’t have that foundation as a non-executive director (NED), you are in peril because the CEO and management control the information flows. You need a CEO who gives you the bad news today and the good news at the end of the month. I’ve had some instances where the CEO has not been transparent. In these cases, if you get into financial difficulties, it becomes much more difficult to work your way through the system than if advice of the bad news was not delayed.
The other lesson is effective board dynamics, which is crucial if a board is to work together constructively. Getting the balance right is an art the chairman must master.
CD: Any tips on how directors can pick up red flags from the information management provides?
KM: [Corporate governance consultant] Colin Carter FAICD always said you must be able to smell the smoke and once you have the experience of understanding financial information and operational reports, you can begin to pick up red-flag indicators. I guess cash flow is the most obvious example of when a company may be in financial difficulty. Interaction with management is also very important in understanding key strategic and operational issues affecting the company. I like board workshops that give directors the opportunity to have a deep dive into some strategic, regulatory and operational issues. It gives us a very good opportunity to evaluate the executives and ask penetrating questions about operational or financial issues. Board visits to operations also enable you to get insights into executives and operations that you might not have sitting in a glass tower in Sydney or Melbourne.
CD: How do you create an optimum skills mix for a board?
KM: You need to determine what skills the board requires. You can certainly have generalists – lawyers, accountants, management consultants – but it doesn’t substitute for industry experience. It’s essential to have industry experience on a board. So in a financial institution, if you have a board of nine directors, I would like three or four with financial services experience. In the case of a mining company, you would expect to have experienced mining executives on the board. As Australian companies get larger and more complex, they require people who have experience in different geographies. Then you need other skills, depending on the activities of the company – for instance, IT, marketing, legal and accounting.
CD: Do lawyers make good NEDs?
KM: That’s a tough question to ask a former lawyer, but I do think lawyers are becoming more valued as we get more into a prescriptive, regulatory, compliance and corporate governance era. They can also add real value in M&As, fund raisings, competition law and so on.
CD: You are mentoring two board-ready women as part of the Australian Institute of Company Directors’ ASX 200 Chairmen’s mentoring program, and a third informally. What do you believe is holding back gender diversity on Australia’s boards?
KM: Many women lack a profile that exposes them to large listed companies. When I was appointed to Pioneer Concrete, I had as a commercial lawyer worked with chairmen of boards and CEOs. I was intimately involved in acquisitions, takeovers and corporate advice, so I was seen as a trusted adviser.
It is very difficult for qualified women who don’t understand corporations law, stock exchange requirements or haven’t worked with chairmen and CEOs to have a profile or the experience that boards seek. There are very talented women who have those specialised skills in finance, marketing or IT and who wish to be appointed as directors. Boards also seek assurance about reputation and business and interpersonal skills. The program is trying to help emerging directors become visible to those who are going to make decisions about appointments.
CD: What tips would you give aspiring women directors to help them get noticed by decision-makers?
KM: Try to find a mentor or advocate in the business community who would be prepared to advise you on how to develop your directorial skills and raise your profile with those making decisions on board appointments. There’s no lack of appetite to appoint women to ASX 200 boards. Australian boards accept the need for gender diversity and I don’t think we should stop with one appointment. I think two women on a board would be a minimum and I hope companies see three women as an aspirational goal.
CD: As part of your career highlights, you have enjoyed participating in the global development of Australian companies. You have just come back from China. What tips would you give companies looking to expand into that market?
KM: Australia is very much linked to China’s economic, commercial and social progress and development. In the short term, China is placing restraints on its GDP growth, but in the medium term, I am extremely optimistic about the growth in our trade in goods and services with China. Australian companies are doing a very good job in developing their markets in China, not only in commodities but also services, including education. China is highly regulated in the financial services sector. There are many regulatory barriers for a foreign investor that you have to work your way through. In the non-financial sector, Australian companies need to understand the Chinese marketplace and the requirements of Chinese customers. You can’t simply provide those customers with products and services that are successful in other markets. You need deep market surveys to establish what the Chinese customer wants and then to adapt your product or service offering to those requirements. When you do that, experience shows you can be very successful in China.
CD: Any tips for companies looking at the US market?
KM: I have always found the US attractive because of the scale of its markets. If you believe the US economy is going to recover, there are interesting prospects for Australian companies that identify a niche not being serviced. There are also great opportunities for roll ups and consolidation in a market close to the bottom of the economic cycle. The US recovery may be a slower process than most people think so it’s going to require patience.
CD: What do you do to relax in your spare time?
KM: I am a golfer. I collect antique books – books on the great Italian architect Palladio, Jane Austen, English literature of the 19th and 20th centuries, gardening as well as antique law books. I go walking and cycling annually in Australia, New Zealand and with friends in Europe. I attend many classical music concerts. I am also a serial attendee of lectures by people such as Niall Ferguson and Joseph Stiglitz. I enjoy the intellectual stimulation they provide. Then there is my family and grandchild, whose company I greatly enjoy.
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