Kathleen Conlon talks to Tony Featherstone about boardroom diversity, the risks of policy-on-the-run, strategy formation and how emerging directors can find their first board position.

    A constant danger for boards is the potential for "groupthink" if directors agree too easily with the consensus view. Kathleen Conlon FAICD seems unlikely to ever fall into this trap. The former management consultant has refreshing independence of thought on issues ranging from gender diversity to emerging directors, and how boards should assess strategy.

    That trait has helped Conlon’s rise from strategic consultant to the boards of ASX-listed companies and the Australian Institute of Company Directors. After a stellar 20-year career in consulting, culminating as a Boston Consulting Group partner for seven years, Conlon joined the CSR board in 2004 in her first governance role and remains on its board.

    Conlon became a non-executive director of the fast-growing online property advertising company, REA Group, in 2007, and joined the board of emerging rare earths producer, Lynas Corporation, in 2011. She was appointed to the Australian Institute of Company Directors board in November last year and is president of its New South Wales division. This year, she joined the Benevolent Society board.

    Her move from management consulting partner to board director seemed an obvious career path. Conlon is known as a global thought leader in operational and change management, and has consulted to dozens of corporations and their boards in Australia and overseas.

    But compared with other professional services, such as law or accounting, the consulting industry provides far fewer board directors – a puzzling trend, given the need for boards to assess and test complex organisation strategies in quick time, often without all the facts.

    Conlon believes too many boards have a narrow specification for directors. They seek those with operational experience rather than focus on key board attributes: the ability to think independently, be curious, work well in a team setting and be a leader. In turn, the requirement for senior management experience disqualifies too many potential female candidates.

    Conlon has strong views on the gender diversity debate. She believes the threat of quotas for women on boards is needed to maintain pressure on companies that lag on this issue and argues that all the good recent work on this issue could be undone if pressure to appoint more female directors is lifted.

    Conlon also commented publicly last year on the need for the Federal Government to harmonise work health and safety rules. Most directors rarely comment publicly on government-related issues, but Conlon believes the mark of a good director is forming a well-researched position on issues and not being afraid to be a constructive thought leader.

    On emerging directors, Conlon argues that those who seek their first or second board position need to star in their previous career before making the transition to a governance career. Finishing an executive or professional career on a high gives emerging directors a much stronger chance of gaining a seat on a leading organisation’s board, rather than working their way through the ranks.

    The 49-year-old chairs human resources and remuneration committees on boards and seems an obvious candidate to chair boards of ASX 200 companies in coming years. The ability to pull apart organisation strategy and provide high-level strategic input is a precious skill.

    Here is an edited extract of Conlon’s interview with Company Director:

    Company Director (CD): You have strong views on the need for boards to have more female directors. Are ASX-listed companies doing enough to improve the representation of women on boards?

    Kathleen Conlon (KC): No. I find there are three tiers of boards when it comes to lifting female representation. There are those that absolutely get the importance of having a critical mass of female directors and improving board diversity, to make better-quality decisions. Then there are boards that have taken small steps and added a female director and now they feel they have done enough to meet the criteria. And, there are a group of boards that keep making excuses about why they don’t need to change their board composition and add more women.

    CD: Many directors are against the idea of introducing quotas for the number of female directors on boards. Are quotas needed?

    KC: I am a huge fan of the threat of quotas. I hope we never need them, but the threat of quotas makes change-resistant boards take more notice of this issue. All the recent progress from the latest push to lift the number of female directors will stall if we take off the pressure, because the second and third tiers of boards on this issue will continue to lag in appointing women to their boards.

    CD: A recurring explanation for the lack of female directors is the lower representation of women in senior executive ranks. Do you accept that argument?

    KC: No. At least 30 to 40 per cent of all directors come from a functional background, such as law or accounting, and there are lots of very qualified women in the finance sector. Yet too many boards and headhunters, in my experience, still insist on seeking candidates with specific managerial experience.

    Boards should say: "We want a director who has significant strategic insight, curiosity and experience across a range of industries, excellent communication skills and high personal ethics and values." Yet their board spec to a headhunter is often to find a director who has deep management or operational experience, which in turn narrows the field of candidates and can rule out potential female directors who do not have a line management background.

    CD: A debate is building about the need for greater cultural diversity on boards. Given your long experience in Asia, do you believe boards need more directors with significant Asian knowledge, experience and connections?

    KC: I strongly prefer the idea of having directors who can consider multiple issues, including the organisation’s growth in Asia, rather than boards recruiting directors with specific expertise. All the directors on the Lynas board have experience working in Asia or overseas, and the same is true of the CSR board. Boards need to ask if they have sufficient understanding of cultural diversity across all directors. There may be situations where it is important for a board to add a Chinese director, for example, but in my view, a genuine knowledge of Asia, and appreciation for how its culture differs to ours, is an issue for all directors.

    CD: You commented publicly last year that the Federal Government needs to harmonise work health and safety rules to remove red tape and help business. What are some other key issues that both sides of politics could address to help business?

    KC: The underlying issue is what I call a "stroke of a pen" risk or policy-on-the-run. Making abrupt policy changes without sufficient consultation with business creates significant uncertainty. There has not been enough dialogue between government and business, and lack of bipartisan support results in business deferring key investment decisions due to the uncertainty. I would love to see the Coalition come out with a positive view on what it hopes to do, supported by policies, and give enough time for a sensible debate. Until we have more genuine dialogue and debate, we will continue to get policy-on-the-run that is very unsettling for business. The carbon tax is a classic example. The idea that a Coalition government would repeal it, without sufficient debate on what works and what doesn’t, is nonsensical.

    CD: Do directors need to have a strong say in the public debate, not only through the Australian Institute of Company Directors, but as individuals rather than always as company representatives?

    KC: It’s a difficult issue. If you are going to comment, you need to do your homework and have a well-considered argument based on fact. You need organisations, such as Company Directors and the Business Council of Australia, which have the resources to help consolidate a policy position for the business community. Also, a lot of directors, myself included, do not have long-standing experience in engaging government at all levels.

    CD: Moving to strategy, some directors say the board is the custodian of strategy; others say that strategy formation ultimately rests with management. Where do you stand on the issue, given you have advised companies and boards on strategy for two decades?

    KC: Both answers are right to some degree. On transformative strategy, the board must be intimately involved with every aspect of that strategy. It can be very hard for incumbent managers to make transformation decisions on a portfolio of businesses with the same arms-length view a board can take.

    When the company is not embarking on a significant transformation, the board will focus more on the delivery of the strategy, and rely on management to keep evolving that strategy. Ultimately, it is management that deals with customers every day and operates in the market, so it is far better placed than boards to drive the strategy on an ongoing basis.

    In my experience, good CEOs come to the board early and say ‘‘this is what I am thinking about strategy", rather than delivering the strategy to the board as a finished product. They know the board often has hundreds of years of collective business experience and is a valuable resource for the CEO to tap into. CEOs that engage the board early on with strategy ideas, and leverage off its skills, usually deliver a much better result.

    CD: How can boards test the formation and delivery of strategy by management?

    KC: Good directors are deeply engaged in the world around them. They are avid readers of newspapers and industry publications. They attend events, talk to people, listen and are always assessing the current and future operating environment. They use this knowledge to test whether strategy makes sense and is being executed well.

    One test I use when assessing management initiatives is: "How well has the company thought through the customer?" Many companies fall down in their understanding of what truly drives customer value. Those who grew up in marketing companies learn from a very early age that your success ultimately depends on understanding what customers want and giving it to them. Too many executives tend to let capital expenditure drive strategy. They ask: "How much money can I get and what can I do with it?"

    It’s vital that directors get out and spend time with customers. Talk to them, find out what is going on and whether they like the product, and visit the company’s site – without getting in management’s way. Spend more time in the field and less time in the boardroom. In reality, a lot of information that gets to boards is filtered because it needs to be brief and digestible, so you need to get out and see and hear it for yourself.

    CD: What metrics do you use to assess the effectiveness of strategy formation and delivery?

    KC: A risk is focusing too much on outcome-based key performance indicators (KPIs) and overlooking metrics that tell you the process is working. Boards can miss the point if they only look at outcomes. In large projects, it is often too late if the outcomes are bad.

    For example, if the company has a heavy capital investment requirement, the board needs to know the process of allocating capital is sufficiently robust. Directors need to know how projects are identified, how one is chosen over another, how the project is delivered, and so on. In my experience, when big capital projects go wrong it is usually because of a bunch of issues around weak processes that were not sufficiently tested and measured or considered by the board.

    CD: What do you see as the big game-changers for Australian business that will require boards to reassess strategy in coming years?

    KC: Obviously the main ones – technology, the rise of Asia and the global economy – will play out for years to come. For me, the defining issue is how Australian companies become more productive and how the country addresses its slow productivity growth.

    The core issue is our education systems. We must put more value on engineering, science and other technical skills that drive greater productivity. I was amazed at the number of high-quality PhD students in Asia when I visited there last year on behalf of Lynas. It’s not even a matter of relative cost: the Asian PhD students have tremendous skills and enthusiasm.

    In Australia, many companies in industries such as manufacturing, which are under pressure, have been forced to cut discretionary costs. They have invested less in training and education and have often had to hollow out their next tier of knowledge workers to cut costs.

    Boards need to ask whether the organisation is sufficiently developing its knowledge base so that it remains competitive for years to come. Companies that are not productive only have one real option: to be cheap. With wage rates in the US coming down, and energy costs there falling due to the shale oil and gas boom, it’s going to become much harder for Australian companies to compete on price. The answer has to be higher productivity.

    CD: Why do far fewer senior management consultants become directors compared with other professions, such as law and accounting, even though assessing and testing organisational strategy is a crucial board task?

    KC: Management consultants do not have the operational experience a lot of boards look for when seeking a director, although many spend considerable time advising companies on operations issues. I would have visited more than 100 manufacturing plants, across multiple companies and countries as a consultant.

    I’m always surprised that more senior consultants do not join boards. The skills one gains as a senior consultant are easily transferable in a governance setting. Management consultants are used to working across multiple strategic issues at quick pace, and often have to read between the lines to make decisions. Senior consultants are also used to dealing with boards and know what they need to assess strategy.

    At a recent Company Directors mentoring program for emerging directors, I noticed some line managers wanted more information in board packs to analyse and make better-informed decisions. But this is not always possible at board level. Good directors are able to join the dots and think laterally across issues, rather than always wanting to drill down for more information. As a consultant, you learn how to make decisions when it’s not possible to have all the facts.

    CD: What advice would you give emerging directors seeking their first board position?

    KC: Be a star in your executive career first before seeking to join a board. Don’t look at boards as an employment option if your executive job is not going well. Stay in your role, build it up and leave at the height of your executive career, so you will be noticed by boards. The reality is, if you have a mid-ranking role in a mid-ranking company, or your executive career has stagnated, it is unlikely you will be in demand from leading boards. As a headhunter once told me, you start your next career where you finish your last one.

    CD: What about those who seek a second or third board position, or a directorship of a large ASX-listed company?

    KC: Understand your personal brand and know what you can contribute to a board. Do plenty of research on key governance issues and let people know your position, so you are seen to be a thought leader. Join Company Directors, attend its events, participate in debates and panel discussions and make sure you stand out. Keep networking so that you build your profile in board circles.

    CD: Can we expect to see you on more boards in coming years and do you have aspirations to chair boards?

    KC: Yes. I enjoy being on boards and would like to chair them in coming years. I have been a non-executive for almost a decade and chaired board committees, so chairing a board seems a natural progression when or if it happens.

    CD: How do you relax away from work?

    KC: With three children aged 12 and under, and a full-time governance career, I am always very busy. Our family loves to kayak, sail or ski, or basically do any sport that has something to do with water.

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