At the Table with Michael Chaney

After more than three decades at the top of corporate Australia, Michael Chaney AO FAICD reflects on what makes an effective director, why boards fail and the importance of staying focused on shareholder value.  

The now former chair of Wesfarmers, Michael Chaney, sat down with Company Director last month, bringing to the conversation more than three decades of experience at the highest levels of corporate Australia. 

From overseeing decades of growth at Wesfarmers to chairing the boards of NAB, Woodside and Northern Star Resources – where he is due to step down at the end of November – Chaney has seen what makes boards succeed and what causes them to fail. Earlier in his career, he served as managing director of Wesfarmers (1992-2005) and sat on the board of BHP until 2005. 

He shares his insights on the qualities of an effective director, why asking “silly questions” is crucial, the difference between a good board and a great one, and the challenge of balancing the competing interests of shareholders, customers, stakeholders and the broader environment in which a company operates. 

At Wesfarmers, his philosophy has always been clear – delivering shareholder value, in financial terms, comes first. As he was preparing to hand over the chair to Ken MacKenzie on 29 October, Chaney expressed full confidence in his successor, predicting a transition that would be evolutionary rather than revolutionary. 

You’ve spent decades in the boardroom, both as an executive and a non-executive director. What has experience taught you about the qualities that matter most around the table? 

The directors I’ve found to be most effective are those who’ve held a senior role in management, in a reasonably large organisation. Particularly ex-CEOs, because CEOs, by their nature and their duties, have to be across a whole lot of issues and crises. That experience allows them not to jump at shadows, not to get overly concerned about a particular issue, and understand there are ways through challenges. So having held a very senior role or a CEO role, I found, is probably the best experience you could have.  

The second thing is the willingness to speak out when they have something constructive to say, but not feeling the need to speak out on every issue, in particular where somebody else has already made the point. I’ve worked with some very good directors who don’t say a lot, but when they do say something, it’s considered and makes a contribution.  

The third thing is people who are willing to challenge management, but not in a way that management feels it is being attacked. Some people by their nature come across as being quite aggressive, and management feels under the pump and threatened. You want directors who are considered, appreciate the challenges facing management, and ask questions to provide colour to an issue, to explain an issue, but without any implication that you’re doubtful management’s doing the job properly.  

A fourth thing is that good directors are well prepared. They’ve read all the papers, thought about them, and they recall what’s been said in previous meetings. I always say to the directors, we might have 1000 pages of board papers and committee papers this month, but you’ve got to read every word, because one day you might be up in the witness box, and the judge says, ‘Well, why do you say that when on page 672, it was pretty clear…’ That's quite a challenge, because some meetings, particularly at annual results time, can be pretty lengthy and the board papers can be pretty extensive. But it’s really important you spend the time reading and absorbing them.  

Finally, I’d say a good director has to understand the difference between governing and managing. Management runs the company, directors are there to oversee management, to review management’s recommendations, whether it’s on strategy or an investment or operational issues, not to try to run the company themselves. That, I think, goes back to the first point I made, that if they’d been CEO in a previous life and dealt with boards, they would fully understand that issue.  

Can you recall a moment in your career when you got something wrong or had to rethink your approach – and what it taught you about leadership?

The example that I could cite was Bunnings entry into the UK market. This occurred, I think, in my first board meeting coming back. I’d been out for 10 years after retiring as CEO and I came back as chair. And the Bunnings people, who certainly would’ve been ranked among the world’s best retailers, put a proposal to the board to take over a hardware company in the UK and convert it to a Bunnings lookalike on the basis that ‘We know what we’re doing. We’ve been highly successful here and those guys over there don’t really know what they’re doing. We’ll go and show them’.  

It broke a golden rule I’ve always tried to stress. That is, don’t suffer from hubris. As soon as you start suffering from hubris, you relax, you stop innovating, you stop challenging yourself and somebody else comes in and eats your lunch. The lesson there was that if the basis of what you’re doing has the flavour of hubris about it, be very careful about it and question it more than you otherwise might. 

You spent 13 years as managing director of Wesfarmers before returning as chair a decade later. How challenging is it to move from running a business to overseeing it? 

I think it can be. In my case, it really wasn’t. Wesfarmers is a conglomerate and when I was CEO of the conglomerate, I chaired all the divisional boards. We set up divisional boards that had the executive members of that business, Bunnings or Kmart, on the board, and chaired by the group CEO. The group CFO was also on that board. So even in the course of my daily job as CEO, I was acting as chair half the time. It gave me an appreciation of the fact that as a director, you don’t really understand the business. Management is there 24/7, 365 days, and the directors come along eight or nine times a year for a couple of days. You can’t hope to be abreast of the business, the operations, as you are when you’re in management. 

In my case, that involvement as chair of these subsidiaries helped reinforce that point so that when I became chair, it wasn’t all that different. I didn’t have day-to-day responsibility for all those divisional leaders reporting to me, but I knew what it was like to chair a board and I knew the difference between governing and managing.  

You’ve chaired boards across very different industries. What have those experiences taught you about the difference between a good board and a great one?

I’d say it’s very important to have a real mix, a diversity of skills and experience on a board. It’s also important to have some directors who have a sound knowledge of the business the company’s involved in. They’re able to make a judgement about recommendations management is making to the board based on their own experience, whether it’s in retail or resources and so on.  

But it doesn’t mean all the directors should have a background in that business, because it’s often the left-field questions that elicit the best discussions and outcomes – and it goes back to good directors. One of the characteristics is that they’re not afraid to ask what they might think is a silly question. Because silly questions often lead to much better discussion – and maybe even different outcomes. 

Wesfarmers has a distinctive culture and a reputation for developing leaders from within. What does it take for a board to protect a company’s culture without allowing it to become resistant to change? 

It’s a very good question because it goes back to the hubris point as well. If you’re doing very well, you think you know what you’re doing and that you shouldn’t change. You just keep doing what you’re doing. That’s the recipe for failure, really. 

The key to it at Wesfarmers has been something unusual. Unlike operational companies, when we went public in 1984, we adopted a corporate purpose of providing a satisfactory return to shareholders – a financial purpose. A lot of companies won’t do that because they say, ‘It will be demotivating for our employees if they think it’s all about dollars’.  

We started off by saying, ‘Why do people invest in Wesfarmers?’ They buy shares in Wesfarmers because they think it’ll do better than if they buy shares in Westpac or BHP. It’s all about the returns they’re hoping to get. So the culture of return on capital has been the culture of Wesfarmers for the past 40-plus years. It’s been preserved because the successive managers and directors have been supportive of it. 

This is not an easy thing to do, frankly, because people change and you run the risk of appointing somebody who’s more of an empire builder. That’s never been what we’re about. We’re about return on capital. It’s not surprising, frankly, that if your corporate objective is return on investment, and providing good returns to shareholders, that you end up providing better returns to shareholders.  

In Wesfarmers’ case, when we went public, if you had put $1000 into the company [...] and reinvested the dividends, you’d now have $1.5 million compared to about $60,000 in the ASX 100 average. That’s because we’ve had this sole focus, but we’ve been careful from the outset – because of that concern about, ‘Gee, are you really only there for the money?’ – to say we'll only achieve that if we look after the interests of all the stakeholders – customers, employees, suppliers – the environment [and] the communities in which we operate. 

Being a good corporate citizen goes hand in hand with high shareholder returns. People complain about ESG and the burden of ESG, well for us, it’s not a burden. It’s always been part of our make-up to do all of those things and that’s why we’ve achieved better returns. 

What will be the hardest thing for your successor to preserve about the company and what might need to change?

It’s a very sharp focus on shareholder returns and return on capital for investments. That’s why we were hoping to attract Ken MacKenzie to succeed me – and were delighted to be successful in doing that. Because Ken is known for his capital allocation focus. He runs courses on it at the Melbourne Business School, CEO courses, and so on. When Ken and I were talking on a number of occasions about the possibility of him coming on board, we found we were finishing each other’s sentences. We think very much alike on that really fundamental issue about listed company management. 

I don’t think much needs to change, not in the philosophical sense. I’ve heard Ken when we were talking to shareholders saying, ‘It’ll be evolutionary, not revolutionary’. The company itself has changed dramatically every 10 years – from being an agriculture company to a coal miner, to a supermarket company, to a general merchandise and hardware company. But it has always been a conglomerate. That’s been key to success and Ken appreciates that. The changes will be more, ‘What businesses are we in? Shall we buy or sell them?’