Q&A with Peter Hay

Peter Hay has his work cut out for him as he takes on one of corporate Australia’s toughest board challenges this month: becoming chairman of Newcrest. While he may not have specialist mining experience, Tony Featherstone discovers he may just have that Midas touch Australia’s largest gold miner needs after a troubled year. 

It is easy to praise boards of high-performing organisations and judge those who govern weak ones. In the middle are directors who excel at governing organisations in difficult circumstances, of their own making or because of market forces, and who help turn them around.

Peter Hay FAICD is such a director. The new chairman of Newcrest Mining has one of corporate Australia’s toughest board challenges. A slumping share price, claims of selective analyst briefings and a battered reputation capped a horrid year for Australia’s largest gold producer.

Hay has his work cut out for him. Newcrest faces a possible shareholder class action for potential breaches of continuous disclosure rules and needs to restore market confidence. It will also have a new CEO, with Sandeep Biswas, its current chief operating officer, likely to be appointed in the second half of 2014.

Taking the reins from Don Mercer FAICD, the former non-executive chairman of Newcrest and one of Australia’s most distinguished directors, is a challenge in itself. The combination of significant board renewal and executive change can test even the best chairmen.

Then there is the ongoing challenge of governing a multi-billion-dollar company in the volatile global gold sector where the returns of precious metals producers arguably depend as much on the actions of the US Federal Reserve, and its effect on the gold price, as the companies themselves.

Hay does not have specialist mining experience, a point not lost on critics of his appointment, but many leading chairmen come from a different industry. In Newcrest’s case, having an ex-lawyer and investment banker who can lead a board that has plenty of mining experience, and can always get more, might be just what the organisation needs.

One senses these and other challenges made the Newcrest role even more attractive for Hay. The former CEO of law firm Freehills and former director of corporate adviser Lazard clearly thrives in a battle.

During our interview, Hay talks about his great love for business. As other directors extol the virtues of modern-day governance and risk management, Hay, refreshingly, talks about helping companies “make more money” and “clobber their competitors”.

He talks about listening to people in organisations – really listening – and trying to figure out what keeps the CEO up at night. He thinks deeper than most about executive leadership and culture, and how directors can spot signs that the company is not being managed as well as it ought to be, before waning performance shows up in the financials.

Although he plays down talk about director intuition, Hay has a feel for directorship that comes from years of experience and being at the epicentre of deals.

Hay is no stranger to challenging board roles. As a non-executive director of Myer Holdings, he has watched sluggish retail sales and the threat of online sales batter industry incumbents. His directorship of GUD Holdings has provided a front-row seat to the vast challenges facing manufacturers. Hay is also a non-executive director of Alumina, the bauxite and alumina refinery/aluminium producer that has underperformed the sharemarket in the past decade. For good measure, he was also a director of the controversial NBN Co from 2009 to 2012.

His role as a non-executive director of ANZ Bank since 2008 is a different challenge again. As other organisations struggle to maintain growth, Australia’s seemingly unstoppable banking sector has to find new ways to preserve high growth rates in a slow credit-growth environment.

Hay’s not-for-profit roles include a directorship of the national board of the Australian Institute of Company Directors and Landcare Australia. He is also a member of the Australian Government Takeovers Panel.

It is hard to think of a director with as many diverse roles in a full governance portfolio. Hay says he will reduce the number of directorships now he is Newcrest chairman, but adds he is no fan of formulas about director workloads. “They might apply to cream-puffs who don’t like to work hard, but I actually love this stuff and find work is also my recreation,” he quips.

The mild-mannered Hay seems a good choice as Newcrest’s chairman. He is someone who can bring people together in difficult circumstances, hold his nerve in challenging corporate situations, oversee CEO succession and quickly win the trust of the broader investment community.

Nevertheless, it is a big step up from being a non-executive director of mostly ASX 200 companies to chairing a top-50 ASX company and a globally significant gold producer. And, Newcrest’s recent problems will take time to fix.

But great governance reputations are not forged by chairing already high-flying organisations. It is the directors who take on the toughest roles and govern expertly through the best and worst times in the interests of all shareholders who deserve the real plaudits.

Here is an edited extract of Peter Hay’s interview with Company Director.

Company Director (CD): Getting straight to your appointment to chair Newcrest from December 2013. There has been criticism from some investors that the Newcrest board lacks mining experience. How do you respond to the broader issue of whether Australian boards need more industry specialists and fewer generalists and lawyers?

Peter Hay (PH): Newcrest’s board has terrific mining experience with some of the most knowledgeable, experienced mining people you could find. That was one of the attractions of joining the board. However, it has a succession issue.

We will need to ensure we replace some individuals when they retire with equally skilled people, because the board does need domain expertise. I don’t think it would be smart to fill an entire mining board with only mining people. The diversity and cross-learning from having different people in different industries is an important factor in board discussions. Frankly, the most vital quality on boards is the ability of directors to think critically, use their knowledge and experience on key issues and think clearly, especially under pressure.

CD: Newcrest has had a tough year. I know you can’t comment on specific company matters, but in general terms, what advice could you give other directors who take on a chairmanship during a very difficult time for a company and have to rebuild market confidence and trust?

PH: The essential ingredient of leadership is trust, so you have to engender trust in all your stakeholders. When that has been damaged in some way, whether there is a good cause or not, you have to work harder on rebuilding trust. The ingredients of trust are pretty obvious: to be reliable and open, avoid surprises, avoid excuses and tell people the truth.

CD: When you take on the governance of an organisation that has had a terrible year, do you have to operate differently as chairman?

PH: [As the incoming Newcrest chairman] I will be more conscious of building relationships with investors, but this is something chairmen of listed companies have to do anyway, so I’m not breaking new ground. I will have a greater sense of urgency in dealing with investors to ensure we go through that process. It has already started; the Newcrest board was out and about talking to investors in the lead-up to the annual general meeting, trying to get across the message that we are working to a paradigm of trying to earn trust.

CD: Do ASX Listing Rules on disclosure strike an appropriate balance between keeping the market informed at all times and the sheer complexities and practicalities for boards that have responsibility for what should be disclosed and when? Do we expect too much on disclosure?

PH: It’s hard to criticise the principle of keeping the market informed. The problem boards have is what information has to be released, and when. You can become aware of an issue and not know enough about it to make an announcement, then in retrospect it looks like you should have announced it. There is nothing wrong with the continuous disclosure rules. We will just have to continue to grapple with this problem of getting information in a sensible form out to the market as quickly as possible. You will see very sensible developments – for example, the ASX making more prominence of companies using trading halts. Trading halts are a useful refuge for boards who think there is something that needs to be announced, but don’t yet know the full dimensions of it and need time to avoid misleading the market.

CD: The Newcrest board arranged an independent review of the company’s continuous disclosure practices, led by former ASX and Australian Broadcasting Corporation chairman Maurice Newman, and publicly released the findings in September in what seemed a fairly unusual step. Do you think we will see more listed companies publicly disclose internal reviews?

PH: The review idea was part of trying to ensure you have done everything you can to find out whether something did go wrong, and it is a piece of due diligence. Publishing the results was about trust building. Had Newcrest said “we have done this enquiry and we are not going to tell you the answer”, it would have been very poor.

CD: Newcrest has appointed a new chief operating officer, Sandeep Biswas. He is expected to succeed current CEO Greg Robinson in the second half of 2014. How do chairmen help manage these critical succession events?

PH: It is a bit unusual for the chairman and the CEO to change all at once. In Newcrest’s case, there is an experienced and stable board that can help the CEO succession. I believe CEO succession is the most important thing boards do. You have got to come to the position of chairman expecting to focus a lot of energy on succession. I am fortunate in that the biggest succession issue at Newcrest has been settled in my first month (on the board). On the other hand, the job of making sure the succession actually works, and the right expectations are created and met, is ongoing.

CD: You have a strong background in law and corporate advisory. How hard is it for directors who come from the professions or industrial companies to govern resource companies, given the technicalities of the industry? What advice could you give those seeking a mining directorship who come from outside the industry?

PH: There are two dimensions to that. First, in terms of my own background, I have been interested in businesses and how they succeed or fail, and how they strategise, since I was a young boy. I was always more interested in that than law, to be honest. Second, mining companies are peculiarly technical beasts and directors cannot ignore the challenge of finding out how they work in some detail, and understanding the technical aspects. One of the most important things boards do is look after the balance sheet, and the question of capital expenditure in mining companies is always critical. You need to be able to evaluate those capital proposals and that requires a level of technical knowledge.

CD: Turning to another of your directorships, Myer, you obviously have a good insight into the state of retail sales and the consumer. We have seen a bit of a pick-up in consumer confidence. Will it translate into stronger retail sales next year and what is your expectation for the economy in 2014?

PH: I wish I knew. Confidence is an important indicator of potential growth in the economy, but it is a tough world in retail land and it would be glib to suggest there is going to be a sudden uptick in sales revenue. Every sales dollar is hard-won and I expect that to continue for some time.

CD: We have also seen a sharp increase in business confidence after the federal election. Is it just a short-term bounce or a more sustainable trend? When does that confidence boost translate into higher capital investment?

PH: That is a key question. Business confidence has to be good and we have not yet seen it translate into a bout of capital investment, at least outside the resource industry. We have not seen a surge in new business. Hopefully, if the government can stabilise the mood among business, we will see more companies investing again.

CD: From a business perspective, what should the government’s policy priorities be in its first term?

PH: It has a huge job on its hands to try to stabilise the budget. An important ingredient in confidence is showing it can manage the economy. As to reforms, it has to do what it said it would do: embark on taxation reform and concentrate on areas that are anti-investment. Labour market reform is an obvious example. We have gone backwards a long way in the past six or seven years [in terms of industrial relations] and it is time to go forward again. The government cannot ignore the industrial relations challenge.

CD: What should the government do to help the manufacturing sector, which is obviously important for GUD Holdings, which you govern, and others like it?

PH: Much of the difficulty for manufacturing in Australia is due to non-government things: the currency, high living standards and high operating costs. Governments have limited ability to change these, but they can lower the cost of doing business by lowering taxation. Unfortunately, we won’t see that in the first term while the new government has this huge deficit to deal with. Streamlining process and getting rid of red tape and green tape is another way to help manufacturing. But there is not an enormous amount the government can do to reverse a long-term trend. In a global market, manufacturing will go to where it is most efficient.

CD: As a member of the Takeovers Panel and a top corporate adviser you have had a lot to do with takeovers. Mergers and acquisitions (M&A) activity is starting to pick up off a low base. Can we expect sharply higher M&A activity in 2014?

PH: We have had a lull in activity. Normally when you start seeing an upturn in the economy, you do see an upturn in M&A. It may sound whimsical, but I always think CEOs get bored after a period of flatness, and a dam wall breaks at some point where they want to buy something to regenerate growth. In this climate, we may not see a big pick-up in M&A activity. There’s not that much scope for big industrial mergers. There’s plenty of scope for M&A in mining, where the big guys pick off smaller companies, and there will be continuing foreign investment in Australia and private equity activity. So there will be an underlying level of activity and the boredom factor might drive it higher. One driver of M&A is industry rationalisation. But at the top end, not much rationalisation can occur in industries where there are already two dominant players.

CD: What do you see as some key general governance issues for 2014?

PH: Remuneration and succession are two issues that occupy a lot of board time. The time spent on remuneration and managing investors’ expectations is about one hundred-fold of 10 years ago. The integrated reporting movement, and the requirement to be more expansive about what you say about future opportunities and risks, is an interesting development and it will produce a lot more work for boards in coming years. We see investors becoming more critical of boards that are weak in succession planning.

CD: About succession, are you confident we have enough emerging directors coming through to replace those who will retire this decade?

PH: I think so. When you do a search for directors you sometimes get fields of candidates that are a bit uninspiring. Eventually, however, we always find a top candidate, so I believe there is a large pool of talent to choose from. There is a place for people who are fairly new in the field, because that’s how they can gain experience. It is important that new directors are encouraged to ask the hard questions, which is what boards are fundamentally about.

CD: What advice would you give to emerging directors to build their portfolio?

PH: First, make sure your selling proposition is correct in terms of what you think you take to boards, then earnestly apply it. Whatever business experience you have had, you have something to offer. Failure, too, is a good teacher. Diversity is terrific, not just gender, but diversity of perspective is really important, so you should look for boards that don’t have your clones on them already. Following your interests is a pretty good rule.

CD: You always strike me as a very instinctive director – that is, someone who is good at reading the signs before they become obvious in formal reports. As a director, how do you read the tea leaves in an organisation and sense if something is not right?

PH: I’m not sure that is the case with me. But I do watch people carefully and try to ask them questions designed to reveal their inner thoughts and real worries. To that extent, I am very attuned to what is going on around me and try to “pick up the vibe”, as they say.

CD: Do you spend a lot of time talking to people in the field?

PH: I try to talk to people who run the businesses to understand their challenges. I also try hard to understand what is bothering the CEO and keeping him or her up at night. That’s what I really want to know as a director. I always try to unpick that and understand the real challenges for the executive team.

CD: What are some of the biggest things you have learned in your governance career?

PH: It’s a constant learning process. As a matter of philosophy, you need to approach business as constantly looking for opportunities and expanding the opportunity set, and building the business rather than sitting and being complacent. The constancy of change is another key learning. When I was young I never thought the world would change so quickly, but it does and you have to ride with the bumps and embrace constant change as a director.

CD: Is being adaptable another critical skill?

PH: Ultimately, you have to be really interested in directorship. I love learning about industries, working out their challenges, figuring out how you make more money than your competitors and working on making businesses better. I’ve got a real buzz out of that in my working life. The diversity of board life stops you getting bored. I have been very fortunate in my board life to have had, almost without exception, tremendous colleagues. It has been a great experience in terms of learning, on matters of style and substance and about how to ask the right questions about whether management is managing the company properly. I do enjoy the interpersonal side of boards – people who get appointed to boards are usually high achievers and good thinkers.

CD: Do boards have enough time for strategy or do we bog them down in too much compliance?

PH: A lot of box-ticking goes on, but it doesn’t get in the way of the important stuff. It probably means boards work a lot harder than they used to, but all the boards I’m on still get to strategy and prioritise it appropriately. Compliance can be dealt with pretty quickly and if you have a culture where risk is managed well, you don’t have to spend a lot of time on procedural issues.

CD: Are there lighter moments when boards can enjoy each other’s company and have a laugh?

PH: Boards are pretty earnest places, so there is not always a lot of humour. Board meetings are pretty serious affairs, in my experience.

CD: What’s next in your governance career? Will you chair more companies or perhaps rationalise your board portfolio?

PH: I am trying to cut down on my commitments. I am a little over-committed, but I don’t buy the formula used by the Australian Shareholders’ Association about director commitments and workloads. I am in the process of letting a couple of board positions go because the logistics can become impossible.

CD: How do you relax away from board work?

PH: I really enjoy the work. I enjoy the stress of it too. It’s the best of all worlds when work is your recreation as well. I read a lot, I like to take long walks in the countryside, I travel a bit with my wife and I play golf very badly. I support the Geelong Cats, who are a great example of strong leadership and governance.