2021 Essential Director Update Presentation by David Thodey AO FAICD

For his presentation, David Thodey covered the response to COVID, the digital challenge, cyber security, culture, ESG and high-performing boards.

I am pleased to be joining Lisa, in delivering this year’s Essential Directors Update.

As Lisa mentioned, there is a rich set of topics to discuss today - many of which you will be familiar to you.

As you heard, my current responsibilities traverse several areas - from technology companies, healthcare, financial services, innovation, science, and research - with a little bit of public policy!

However, my career has mostly been focused on the technology sector.

I don’t consider myself a professional board director - though I do take my role as a board director very seriously. And I do spend time thinking about what makes a board successful and impactful. How do we create high performing boards that enable companies and organisations to be more successful - in whatever industry or sector in which they operate? This is an important question for us all.

Like Lisa, I have chosen several topics, that I am sure you will all be considering, to briefly discuss:

• Our ongoing response and learnings from COVID.
• Responding to the digital challenge.
• The reality of cyber security threats.
• Work from home - what is your view?
• Good culture starts in the Board Room.
• The rapid rise of ESG - COP 26 in Glasgow - what is required.
• Lastly, a few reflections on high performing boards.

For each area I will attempt to provide a brief overview and discuss some possible responses for boards - it will be a quick run through.

1. The COVID era - and how do we respond?

It is difficult to talk about the role of Boards without discussing the impact of COVID these days.

Let me start with a few reflections from the epidemiologists at CSIRO:

• COVID-19 already has hundreds of variants and it is unclear whether there will be new waves of virulent strains. Since a large percentage of the world’s population are yet to be vaccinated - this is a possibility.
• Vaccination really is the only viable long-term solution and there is no universal vaccine that is guaranteed to provide ongoing immunity. Vaccines are continuing to develop in response to the virus.
• We still have much to learn about this pandemic - so there is no sure pathway to a world without COVID. Co-existence is essential.

Based on this analysis, I think it is very important that boards continue to plan for a world where COVID is still prevalent. So rather than waiting for the world to return to pre-COVID times - it is better to build plans and approaches for a world where we are co-existing with COVID. As Lisa mentioned, there have already been several legislative changes in this area.

Additionally, I think we can also use this virtual world experience to increase our impact across the organisations we are involved in. But it requires new ways of thinking. Unquestionably, face-to-face contact has many advantages. But I think there are some learnings from the COVID experience that we can use to improve the way we operate as Boards going forward:    

1. Adopt the principles of virtual board meetings - We have adopted some of the principles of virtual meetings in our normal board planning: shorter duration, structured discussions, more breaks, times for general discussion, using the technology for better interactions. The AICD has good advice on this.
2. Engage international speakers more often - We have also made a point to reach out to global speakers more regularly and bring them into the board room - only limited by the time zone.
3. Virtual or hybrid AGMs can reach more people - Can be made to work effectively with appropriate planning and engaging with shareholders earlier. Virtual AGMs can engage more shareholders rather than being restricted to geographical locations. It is important to make sure technology allows all shareholders and members to fully participate in virtual meetings. The Chair needs to make every effort to encourage questioning of the board and management.
4. Extend your board visits virtually - Rather than travelling to different locations, it is now possible to engage with employees across the organisation and at different locations more easily. Using virtual break-out sessions you can provide opportunities for side conversations.
5. Improve workplace safety for contagious diseases - It is important to put in place long term plans for staff safety, even after vaccination as staff can still contract the virus and be contagious. Mandatory vaccination is an important consideration for organisations.
6. Keep in better with customers - It is also important to consider long term engagements with customers and how to reduce the risk of infection. Online and hybrid engagement models will remain.
7. Effective travel - Consider long term travel policies. Are all those trips necessary?

These considerations apply in all states and jurisdictions as boarders open as vaccination levels increase. So, look for the opportunities to positively change the business for the long term.

2. The Digital Challenge - has COVID really accelerated digital enablement and how should boards/directors respond?

Through COVID we have seen an acceleration in the adoption of video-conferencing technologies and a significant increase in online sales, the enablement of tele-health and other consultative services…all beneficial.

But has the adoption of these technologies fundamentally changed the way organisations really operate? Are they really innovating?

Remember that digital transformation refers to the transformation of business processes and business models through the adoption of new technologies such as cloud computing, AI/ML, block-chain, robotics, enhanced communications, and big data.

We have seen the growth of new entrepreneurial companies that adopt new technologies to disrupt industries and organisations - enabling lower costs, better customer service and different ways to create value. McKinsey estimates that this digital transformation is at best 30% through its impact across global industries.

It is important that organisations do not become complacent in adopting new technologies to transform their organisations - both to create opportunities but also to remain competitive.

So, how can a board better understand and use technology to achieve your objectives? A few thoughts:

1. Allocate time to understand technology directions - All the boards I am on make time on the agenda to discuss technology. Some have set up specific working groups and bring in external speakers to talk about crypto currencies, Ai/ML etc. You cannot abdicate the understanding of technology to the few.
2. Set business targets - Sounds simple but we have learnt that you must define digital projects in the context of driving business outcomes - not just the implementation of the technology. A new release of software means nothing unless it delivers business value.
3. Build a strategy - Strategy is not static but is a process. So, you need to embed technology disruption in your business strategy. It is an element of the strategy.
4. Assign ownership and regularly review outcomes - You can’t leave this to be owned by the many, you need clear accountabilities from the technology team.

Digital enablement of business is no longer optional and presents significant opportunities for all organisations. And remember, technology can drive innovation, improve ways to access new global markets and build new business models.

An understanding of the potential of new technologies is as important as understanding your financial statements and cannot be delegated to one director on the board. The 2019 AICD study on innovation provides some good recommendations on this topic.   

3. The reality of cyber security threats - and how can boards/directors be better prepared to handle the inevitable?

Thirdly, this new digitally enabled world has seen an enormous growth in cybercrime.

The 2021 Australian Cyber Security Centre report observed over 67,000 cybercrime reports over the last 12 months (that is 185 every day). So cyber security is a critical risk for every organisation and an essential part of a director’s responsibility.

Cyber security must be on the board agenda irrespective of the size or type of your organisation. You will need to take a risk-based approach to this topic, as the extent of the threat is extremely large - and any response needs to be commensurate with the potential impact on the organisation.

As many of you will know, there are many considerations when discussing cybercrime - from simple phishing to ransomware attacks. And many of us have experienced them all.

It is important that boards understand this evolving area of risk and work with management to develop the appropriate plans to mitigate these risks as much as possible.

Some actions that we have taken are:

1. Consistency - What work practices are consistent with our purpose and values?
2. Job Categories - What are the requirements of the different types of work performed in our organisation?
3. Flexibility - What degree of flexibility can the organisation support?
4. Individual preference - Every individual has unique requirements, and the organisation must determine the ability of the group to accommodate these needs.

The opportunity to create a more customised and flexible workplace has been enabled by technology, for all categories of workers. This opportunity for greater flexibility can enable higher productivity, better work/life balance and more engaged staff. But this will require new people management techniques.

The benefits are not a given and need to be considered carefully - every organisation is different, and you need to build the right solution for your company.

5. Good culture starts in the boardroom - and how do you really know what the culture in a company is?

It has often been stated that the board is ultimately responsible for the culture of a company. That is true. The way a board behaves, the decisions they make, and the topics they concentrate on - impact the culture and values of an organisation.

The 2020 AICD culture study with ACSI provides some good insights on this topic.

How board directors behave in the board room sets the tone for the whole organisation. So, I would encourage us all to reflect on our behaviours and determine if they are consistent with the values of the company.

As directors, we need to assure ourselves that the culture and values of the organisation are being lived and practiced throughout the organisation - consistent with the aspirations. So, in terms of understanding the culture of an organisation, we try to use a few approaches:

1. Surveys – Surveys are important and provide a unique insight into the organisation. But understand that they are limited, and they require analysis.
2. Engagement vs culture - Make sure the surveys ask specific questions about culture and values of the organisation as well as engagement.
3. Annual to more regular - Annual surveys do not provide a sense of the pulse of a company. So, consider moving to more regular surveys that are provided by new online cloud-based survey approaches.
4. Consistency and alignment - Test whether values are used in decision making by the management team, and how they approach complex and ambiguous issues.
5. Direct engagement - It is also important to have direct engagement across the organisation. While difficult in a virtual COVID world, there are still ways to engage with staff virtually.

There is no simple way to validate the culture in a company. It is important to try not to rely on one input source - rather seek many different points of reference to test the culture of a company. The board sets the tone of a company.

6. The rapid rise of ESG - and is it different to what good companies and boards/directors have always done?

Lisa has already touched on several areas around ESG and AICD have published a stakeholder’s guide that is well-worth reading.

Institutional investors, regulators and governments are setting out their ESG expectations for organisations around transparency, setting targets and for delivering continuous improvement. These non-financial measures are being used in the assessment of companies, debt raising and in the evaluation of senior leaders and the board.

The current big topic is carbon emissions: our commitment to Net Zero, the importance of moving to Net Zero before 2050 (or earlier), and addressing scopes 1,2 and 3 emissions, as defined by the Paris Agreement. As you know, governments will be meeting in Glasgow for the major global climate change summit this month, called COP 26. Companies and non-government organisations will be encouraged to act on commitments to reduce carbon emissions.

Boards must be thinking through how they credibly tackle climate change within their organisations. I think this is essential for every board. The recently released AICD Minter Ellison Climate Risk Guide is a good place to start.

A few actions that we have taken to make ESG more credible and relevant are:

1. Culture - We work hard to make ESG a part of the culture and values of our organisation. If they are not connected, they will have less impact.
2. Regular engagement - It is important that boards engage on these topics on a regular basis and not only when the annual report is required. So, on one board we have a separate ESG working group, on other boards we have ESG as a regular review item on the rolling 12-month planning schedule.
3. Operational targets - It is very important that the metrics and targets are operationalised - lead and post. This includes the outcome measures and the costs associated with the achievement of these goals.
4. Reporting - Set your targets and regularly review. Carbon emissions, diversity and social engagement are easier to measure.

ESG needs to be made personal to your organisation. And it needs to be consistent with what your organisation stands for: your purpose, culture and values.      

7. The high-performance board and director - what does it look like?

Lastly, what are the elements that make an effective and high-performance board? We have all sat on boards where it is just hard work, difficult to gain alignment, frustrating and unproductive.

High performance boards have good working relationships, create challenging but supportive environments, bring strategic clarity, and represent stakeholder interests.

Most importantly, I think HPBs have a high level of trust and respect between all board members - and provide an open and transparent environment. However, this does not happen quickly or easily for boards. I think boards can benefit from investing more time to better understand how they interact and make decisions. Some actions that we focus on are:

1. Hygiene factors - Make sure that all the hygiene factors are in place - the more planning you do for meetings the better the outcome. More planning gives you more time to discuss topics.
2. Etiquette - Take time to define how you want to operate as a board - the way you interact, the way you interact with management. Every board is different.
3. Accountability - Reflect regularly on how you are performing as a board and the impact you are having. Self-reflection is important. We regularly take time at the end of every board meeting to both reflect on the meeting and about how we performed.
4. Environment - Invest time and energy in understanding whether you are creating an environment of trust and respect - a supportive but challenging environment.

Many reports indicate that these elements of trust and respect are the critical elements for a high-performance board - but often boards do not make time to address these areas overtly.

Conclusion

So in conclusion, the challenges that I set myself are as follows:

1. Are we making the most of this COVID disruption to re-define how we operate and increase the impact of the board?
2. Do we really have a digital adoption plan that will improve business results?
3. How prepared are we for a cybersecurity incident?
4. Have we used the WFH experience to redefine how our organisation operates and set new principles for how work is done?
5. Is the board setting the standard for the culture in your organisation and how do we assess what the culture really is in our organisation?
6. Is ESG a matter of compliance or an integral part of the culture of our organisation, and what is your plan to move to Net Zero?
7. How would we rate the performance of our board - are we investing enough time to improve the performance of the board and is their trust and respect?

It has been a pleasure to discuss some of these points with you today.