Rising regulation is putting pressure on directors to ensure they are effective in the boardroom, but the expectations of stakeholders will continue to expand, says Macquarie Bank non-executive director Michael Coleman FAICD.
Macquarie Bank non-executive director Michael Coleman FAICD believes that non-financial risk and an expanding group of stakeholders are taking up an increasing amount of a director’s time and it can be challenging for directors to know if they’re carrying out their role effectively. He says that as governance standards develop, the expectations of stakeholders will continue to expand, adding to the existing pressure on directors and boards to act appropriately and in the best interests of the company.
The scope of reporting will broaden with the introduction of standards by the International Sustainability Standards Board (ISSB) including integrated reporting, says Coleman, a long-time partner at KPMG and an authority on financial reporting. “These things are all expecting you to think more about who the stakeholders might be, whereas 30 years ago, it was more a case of, ‘You are required to look after the interests of shareholders’,” he says.
Companies will be required to report more on their impact on climate, on nature and on their approach to diversity. Reporting scope 3 carbon emissions — those emitted by suppliers and customers — will likely soon be required of Australian companies. Treasury is running a consultation on the climate-related financial disclosure it should require of companies and has suggested the reporting regime, including scope 3, could start in the 2024–25 financial year.
“How do you properly gather that information?” asks Coleman. “How do you satisfy yourself that all of this detail is correct and is being properly reported? That's just one example of all these issues that are coming down the pike.”
Smaller entities outside the ASX 200 group of companies will probably struggle to find the talent to help them meet the requirements, he says.
Along with his role as a non-executive director of Macquarie Bank — the authorised deposit-taking institution (ADI) within Macquarie Group — Coleman was, until August 2022, also a non-executive director and chair of the audit committee at Macquarie Group. He has a long involvement with the AICD and is a former NSW and National AICD board member.
A partner at KPMG for 30 years, he has significant experience in financial reporting, including as chair of the federal government’s Financial Reporting Council and as a member of the Reserve Bank of Australia’s audit committee.
Coleman came onto the Macquarie Group board in 2012, after Catherine Livingstone AO FAICD announced she would resign because of her commitment to chair Telstra. Macquarie wanted to replace Livingstone with someone who had risk management and reporting expertise. Coleman was interviewed by chair Kevin McCann AO FAICDLife, CEO Nicholas Moore and the other directors.
This extensive interview process remains in place at Macquarie and Coleman says it gives all directors the opportunity to ensure they’re comfortable that new people coming onto the board have the appropriate skills for a global financial services company.
Three terms of three years has become the standard director tenure in Australia. This is generally considered necessary to comply with the ASX guidelines, although Coleman believes boards would not be disadvantaged by having some directors on the board for a longer period of time. “You have to have a well-structured renewal program and you need to be continuously on the lookout for new talent for the board,” he says.
An atypical culture
Coleman notes that Macquarie doesn’t have the “typical big company culture”, where the board determines the direction for the company and the strategy is delivered from on high. “The whole focus of Macquarie — and one of the reasons why Macquarie has been so successful — is that it encourages people at all levels to think about new ideas and to bring those ideas to the top. This is a culture that goes all the way back to people like [former Macquarie directors] David Clarke AO, Tony Berg AM FAICD and Allan Moss,” says Coleman. “Macquarie has a bottom-up strategy determination process, but the proposals are still subject to a very intense risk analysis on the way through. Small investments into adjacent areas of activity are made with the overall objective of making certain there’s nothing that comes through that could damage the organisation as a whole.”
Macquarie’s strategy has been to make a lot of small investments to ensure an idea has veracity and the company has the capacity to execute them. An example is investing in energy transition. Macquarie first became involved when several European countries started to encourage the development of renewable energy and governments began to provide guarantees to green energy companies about their future revenue streams. “There was a government-based revenue stream that could be monetised and that’s when Macquarie first became involved,” says Coleman. “Then they gradually became better and better and understood the industry more.”
The company is now a leader in the wind and solar industries, and is making early-stage investments in utility scale storage, zero emissions transport and hydrogen. He expects the Macquarie Group to continue its green energy investing in the US following the introduction of the Inflation Reduction Act, which provides US$394b in programs and funding to accelerate the transition to net zero.
He says the expanding regulatory regime for directors is quite onerous. “Anybody thinking of becoming a director should go into it with their eyes wide open and realise exactly how much liability people are trying to sheet home to you,” he says. “People must be aware of what that responsibility is, and prepared for their judgement to be challenged quite often — often in the public domain.”
This can be difficult for some directors who have recently joined boards from an executive career. Then there’s what Coleman calls the “nose in, fingers out” role of directors that can also be a difficult adjustment. “If you’re a non-executive director, you should be very aware of the fact that you don't have the same sort of capacity to run the business day-to-day as you do when you're an executive,” he says.
Directors must also be good networkers, to meet those experiencing similar issues, to get a better sense of how to deal with problems. He suggests anyone involved in the AICD Chair’s Mentoring Program treats it like a job, talking and listening to colleagues in the program to get the most benefit from it.
Coleman believes non-financial risk should be the focus for risk committees. For banks, this means appropriate lending and the impact that has on the community and environment. “You see quite a bit of this emerging from questions raised at bank AGMs,” he says. A broader range of risks means that risk committees require a broader range of skills than in the past. Coleman says how companies deal with the emergence of AI and the increasing volume of data has become a big issue for boards, in particular of financial institutions. Regulators are also asking for more data to be delivered quickly and directors must be confident the data that companies provide to regulators is accurate. This means a greater focus on issues such as conduct risk, culture and product creation, as well as the company’s actions on climate change, waste and the circular economy.
“All these issues are receiving considerable coverage in the media and by the regulators,” says Coleman. “The expectation level of what directors can do and are expected to do is changing constantly. Legislators seem to be continuously expanding director obligations.” A challenge for boards is attracting younger directors, who can be the voice of the younger customer/community member. But Coleman says directors also need significant executive experience to provide advice and guidance, which younger directors may not yet possess.
This article first appeared under the headline 'Feeling The Pressure’ in the September 2023 issue of Company Director magazine.
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