The Westpac chairman talks to Tony Featherstone about appointing a new chief executive officer and lessons in succession planning.

    Brian Hartzer’s appointment in November 2015 as incoming Westpac Banking Corporation chief executive officer (CEO), to succeed Gail Kelly, was business as usual for a market ready to pounce on any disappointment. It was also a masterclass in CEO succession planning from a board’s perspective.

    Orchestrating the change was Westpac chairman Lindsay Maxsted FAICD, the former KPMG boss who has quickly become one of Australia’s elite directors since leaving the accounting firm in 2007. Maxsted also chairs Transurban Group and is a BHP Billiton non-executive director. 

    Like Westpac, the BHP Billiton board, led by chairman Jac Nasser AO FAICD, engineered a smooth CEO transition when Andrew Mackenzie replaced the retiring Marius Kloppers in 2013. The parallels between two of this market’s most important recent CEO succession events are unmistakable.

    The most obvious is a belief that succession planning starts again the day a CEO is appointed, that it requires significant investment in executive development, and that good boards help to develop and assess a pool of potential internal candidates over several years.

    Most boards think the same, yet too many botch CEO appointments. Poor board alignment on strategy, differing views on CEO requirements, low investment in executive development, poor monitoring, or bad luck, kills their planning. Faced with a weak pool of internal candidates, they must choose a lesser-known external candidate, sometimes stalling organisational momentum.

    Succession planning

    Westpac’s planning for Kelly’s replacement began three years before the event, first with extra development for potential internal successors, then with a narrower focus where training programs sought to identify a candidate’s potential to lead the bank.

    An independent third-party provided another perspective on the candidates’ suitability to lead Westpac and the board held a separate session at each meeting for a year, to discuss succession planning. Separately, Kelly helped drive the succession-planning process, working with the board and ensuring a smooth handover when Hartzer, who joined Westpac in 2012, started as CEO in February this year.

    “If an outsider joins as CEO, the risk is you automatically stop and start again, and the progress stalls,” Maxsted says.

    Of course, the true test of Westpac’s succession planning will not be known until a few years after the handover, when Hartzer has navigated the bank through an increasingly volatile regulatory, political and economic landscape.

    There is no shortage of risk: digital disruptors eating into bank market share; a rapidly changing relationship between banks and consumers; heightened shareholder activism around lending to fossil fuel companies; and market demands for greater information from banks on the risk of climate change to their earnings. The list of challenges Hartzer faces is long and varied.

    Critics say Kelly timed her exit superbly; at the crest of a glorious few years for bank stocks, and before regulatory changes, through the Financial System Inquiry, are implemented. But that simplistic view belies her work with Maxsted on CEO succession-planning and the board’s determination to maintain Westpac’s progress on several fronts – from higher earnings and dividends to its work on corporate social responsibility (CSR) and gender diversity.

    That view also underestimates Maxsted. After a stellar career in accounting, notably as an insolvency expert who worked on some of Australia’s largest corporate collapses, he is no stranger to complex, high-pressure situations. That Westpac had a strong pool of internal candidates to replace Kelly, and needed only to conduct a limited global search for external candidates, is testament to the board’s work.

    Although a passionate recreational thoroughbred horse breeder and racer, Maxsted is not prone to taking wild risks at board level. He talks fondly about his biggest result in racing: his part-owned horse Align running second in the 1999 Golden Slipper Stakes in Sydney. Maxsted named his corporate advisory business Align Capital, an apt metaphor for his skill in bringing boards and executive teams together in the same direction.

    This skill might also be the one that helps the 60-year-old become Australia’s most powerful director later this decade or next.
    Here is an edited extract of Maxsted’s interview with Company Director.

    Company Director: What were the main elements of Westpac’s CEO succession-planning?

    Lindsay Maxsted: It began with a development program for Westpac group executives who reported to Gail Kelly, over a three-year process. The program was about preparing potential internal successors and we narrowed it in its last 12 months to ask: “Is this executive ready to be the CEO of Westpac?” That meant we had another lens on our CEO candidates, in addition to that of the board and incumbent CEO, from an external third-party who analysed the executives’ skills and advised on their suitability for the role.

    At a board level, succession planning was a key issue for all of 2014, and also pre-dating that. Each board meeting included a private session without Gail, where directors could talk about where the CEO succession-planning process was at. In turn, I provided relevant feedback to Gail and Westpac’s group executive of human resources and corporate affairs, Christine Parker.

    Critical to this succession-planning process was absolute alignment with the outgoing CEO. For succession to be seamless, the board and the incumbent CEO must have similar views on CEO tenure. 

    CD: Did the board have a preference for internal over external candidates?

    LM: Every board does. From the board’s perspective, you know the calibre of the individual with an internal candidate. You can do all your formal and informal referee checks, but you don’t know how an external candidate performs, particularly under stress, until they are working for you.

    We undertook a global executive search, using Korn Ferry in Sydney, London and New York, and benchmarked our internal candidates against potential external ones. Having undertaken the very detailed desktop evaluation, and satisfied ourselves on the quality of the reports being presented to the board, we formed the view that the likely external names were no better qualified than our preferred internal candidates. 

    CD: How long should a board look at an internal candidate before being confident to appoint him or her as CEO?

    LM: That will vary from circumstance to circumstance. Clearly the longer the better, but at least sufficient time to see the impacts of their leadership style and qualities. 

    CD: Why do boards sometimes handle CEO succession poorly?

    LM: I suspect it is because the board is not aligned on the organisation’s strategy and so there are differing opinions on the qualities required in the next CEO. Also, if the board does not do the hard yards on executive development and training, it can quickly realise the pool of potential internal candidates is smaller than it thought. Then you may be restricted to external candidates, which is always harder for many reasons including because you cannot control the timing of when they start. Your preferred external candidate might have to give 12 months’ notice to his/her existing employer.

    CD: You had a strong working relationship with Gail Kelly. What makes for a productive chairman/CEO relationship?

    LM: It’s the same in any relationship –mutual respect. It’s easy for the chairman to respect the CEO’s role, because most of us have been there before. Sometimes it is harder for the CEO to understand the importance of the chairman’s role. Once mutual respect is established, then comes trust, communication, transparency and all the other things needed for successful relationships.

    CD: Westpac has performed strongly in the past two years. But in February 2012 the bank was under pressure after a poorly received trading update, and some institutions were reportedly questioning whether Gail Kelly was the right person to lead Westpac. How does a chairman help a CEO during difficult periods of organisational performance?

    LM: First, you have to be very supportive of the CEO, privately and publicly if needed. It’s like everything in life: someone you respect must know they have your support when needed.

    Secondly, you have to understand the reasons for the negative sentiment and the appropriate response. In that particular instance, we looked at how our messaging could be tweaked to help the market better understand Westpac’s performance.

    CD: Does it create a different chairman/CEO dynamic when the new CEO takes the reins after a strong period of performance?

    LM: No. The Westpac board knows what to expect of Brian Hartzer and he knows what to expect of the board. And we know that in a very formal way, given our succession-planning processes. Brian has been an integral part of Westpac’s strategy development, so it would be unusual if there were large sudden changes. The board is entitled to expect there won’t be huge change in terms of strategic content and direction.

    That said, one of the main reasons we chose Brian as CEO was because of the threat to banks’ business models through digital disruption. That is Brian’s home ground. He understands the threat; he understands how the Westpac brand is perceived by customers and that there will be significantly different customer interactions as technology changes. He has a great opportunity to put his stamp on this issue.

    CD: Banks worldwide are coming under fire from activists who are campaigning against institutions that lend to fossil fuel companies. How does the Westpac board monitor and manage this risk?

    LM: Boards must be aware of the climate change debate and related shareholder activism. The Westpac board very clearly understands why the bank lends to fossil fuel companies, the criteria used to determine whether such a loan is granted, and how that fits within our long-term views on sustainability. I am very proud of Westpac and BHP Billiton’s stance on climate change and how both organisations articulate and deal with that issue.

    CD: Do you expect beneficial owners, such as industry superannuation funds and global pension funds, to make investment decisions based on a company’s environmental, social and corporate governance performance, rather than mostly its financial performance?

    LM: Yes. There is increasing pressure on fund managers to address that issue. That doesn’t, in turn, mean they necessarily need to go to extremes and boycott fossil fuel companies or those who finance them.

    As a lender we are receiving more questions about our approach to climate change, and that is a good, proper thing.
    As I said at the annual general meeting (AGM), Westpac always looks beyond the lens of short-term profitability when lending to customers, so we have no difficulty in engaging with our shareholders on these issues.

    We won’t satisfy the radical elements that will not invest in us if we lend to fossil fuel or other so-called “black-listed” companies. Those investors will need to look elsewhere.  The important elements for us are that we support our existing customers and that we consistently comply with our underlying sustainability criteria.

    CD: Do you favour the global push towards integrated financial reporting?

    LM: I admire the objective, but am not sure it is workable, particularly when a key part of integrated reporting is for financial forecasts and greater disclosure of likely future events.  In terms of the objectives of those promoting integrated financial reporting, I think Westpac is nearly there anyway. Our investor presentations provide immense detail about our strategy, our operations, our views on CSR, and so on. Hence they provide much of the information you would need for integrated reporting.

    CD: How does the Westpac board ensure the organisation’s culture of CSR continues at every level of the organisation?

    LM: It’s a good question. Westpac’s whole sustainability focus is in its DNA. Gail Kelly has taken this focus to another level, but the effort pre-dates Gail. As a board, the best way to influence culture is the tone that directors set, the CEO we appoint, and the way that CEO and his/her direct reports behave. If the tone isn’t right at board and executive level, problems very quickly filter down.

    We also link individual efforts in respect of CSR matters to performance scorecards and remuneration rewards. Our people know that doing the right thing is respected, encouraged and rewarded, and from the board’s perspective we know that always trying to do the right thing is ultimately the best defence for any organisation when problems arise.

    Also crucial is how the organisation reacts when something goes wrong. Depending on the matter, were we supportive of the executive if that was warranted, or conversely what action was taken if the behaviour was inappropriate? If the board and executive team are consistent in these areas there is a really good chance of a positive corporate culture prevailing. 

    By way of example, the Westpac board is obviously very interested in the culture through its financial planning network, given problems elsewhere. So we had several sessions with BT Financial Group CEO, Brad Cooper MAICD. We wanted to know how Westpac was different and, if certain problems could arise elsewhere, why it wouldn’t happen here.

    The board was taken through our processes around the provision of financial planning advice; the qualification and training requirements for advisers; our processes for elevating whistle-blower concerns, and many other aspects of the business. 

    In the end we were satisfied there was a culture of putting the customer first, and if, for whatever reason, poor advice was provided, there was also a culture of looking at appropriate remedies.

    CD: Moving to general governance matters, are boardrooms doing enough to groom the next generation of directors?

    LM: I think so. The Australian Institute of Company Directors does a great job in generating interest in the role and, in particular, training potential directors. From a diversity perspective, the age of directors is an increasingly important issue for boards, but you can get the right complement of directors if you work hard enough.

    CD: Are boards prepared for two defining trends: the impact of technology on business models and growth in Asian middle-class consumers this decade?

    LM: Generally, I suspect most boards are underprepared, partly because the pool of talent in each of these areas able and willing to work at board level is limited.  There are other approaches, however, which should enable boards to have access to these skills. Westpac, for example, has an Asia advisory board in the region. I, and two other directors from the main board will meet with that board in Hong Kong in March. On technology, the appointment of Alison Deans GAICD to the Westpac board this year is a good example of how a younger, digital-savvy director can add great value. Her appointment was received extremely favourably at our recent AGM.

    CD: Which governance issue most concerns you?

    LM: The issue of personal liability for directors is very important, especially for companies outside the S&P/ASX 50 that do not have the same resources as large organisations. The lack of a business judgment rule is something we must fix. Directors going about their business, trying to do the right thing, and who have external events turn against them, must be protected. Aspiring directors who don’t have legal training might not understand just how much risk is involved in joining a board and the law should protect them if they undertake their work conscientiously and with reasonable care. A lack of regulation of litigation funding is another problem. One can only see the problem of shareholder class actions worsening in coming years. The saddest aspect about this trend is a mindset that, no matter what caused the event or the loss, there must be someone else to blame. 

    CD: What advice would you give someone seeking their first or second board role?

    LM: Select an industry and business that interests you. Do your due diligence. Understand, as best you can, what makes the company tick, the strength of the board, chairman and CEO. The last thing you want as an emerging director is to join a dysfunctional board or an organisation where the CEO is too dominant. Also, let people of influence know you are interested in a board career. Make yourself known to at least one or two of the big search firms and to current directors whom you know.

    CD: Your various board roles give you a prime view of the economy. Are you seeing the transition from resources investment to housing and infrastructure growth, or is the economy much weaker than people realise?

    LM: It’s not worse than people think, but it is seriously hard to call. How often in our lives have you wondered whether the central bank’s next move will be up or down with interest rates? It’s that unpredictable. I am more positive than negative, but I have been like that for a few years and it hasn’t come through in terms of higher economic growth.

    CD: Are you happy with the Coalition Government’s first year in office?

    LM: A lot of people in business have been waiting for the Federal Government to move on some key reform issues: taxation, industrial relations and so on. Many people were hoping that the change in government would provide a consistent framework in which business could operate.

    But it’s been a difficult first year, partly due to issues with the senate. A frustration is that the message of why things need to change is not being understood in the community. I do think the Government’s intentions are to create a better environment for business, but it’s difficult. All Western democracies are struggling with fiscal policy and structural reform because they feel they will be punished by the electorate for so-called “unpalatable” initiatives.

    CD: How would you describe your governance style?

    LM: That is a question for others but I think I am collaborative and at the same time very focused on what I want the organisation to achieve. Having said that, I am prepared to listen to different views on the best way to get there.

    CD: How do you relax away from work?

    LM: Two chairman roles and a non-executive director is the equivalent of a full-time executive role. At the weekends, I like to spend time with my wife and children. Recreationally, my biggest interest is thoroughbred horses, which I breed and race.

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