Governing without boundaries

Thursday, 01 October 2015

Julie Garland-McLellan  photo
Julie Garland-McLellan

    Julie Garland-McLellan considers how effective boards govern beyond their organisation down through the whole value chain. 

    Good boards set an appropriate ethical tone for the company. Great boards drive ethical practices beyond the boundaries of the corporation, impacting the complete value chain. “Shared value” is defined as “policies and operating practices that enhance corporate competitiveness while simultaneously advancing conditions in the host communities.” The concept has demonstrated results that justified investments in defining and targeting opportunities that benefit shareholders, customers, value chain partners and society in general. Shared value strategies are not philanthropic costs but legitimate business investments.

    An Australian success

    Property group Stockland was an early adopter of shared value; incorporating shared value principles into planning and investment decisions. This allowed insights into customer behaviour and needs, and better relationships with stakeholders, including planning authorities. High-level support is an important factor for success. Chief executive officer (CEO) Mark Steinhart and his predecessor Matthew Quinn provided visible leadership, supported by the board.  This ensured collaboration from different business units, including marketing, sales, sustainability, development, management and urban design. Matthew Napper, national sustainability manager at Stockland says: “Our board is interested in more than just the financials. They ask about the environment and social capital. We have to be across these issues when we present to them.”

    Not all adoptions of shared value are unforced. Some are driven by harsh necessity. When Atlas Iron announced that it would suspend operations due to the low iron ore prices, few industry observers expected a group of contractors to assist the stricken company. However, that is exactly what happened. Warren Saxelby GAICD, non-executive director of McAleese says: “McAleese already had a collaborative contract with Atlas Iron. That made it easier for us to understand exactly what the issues were and to put together a proposal that made sense for both our shareholders and theirs. Having a quality relationship and greater knowledge of each other’s profit and cost drivers allowed us to get beyond that very quickly.”

    The legal framework in Australia is difficult for directors when companies approach financial difficulty. For Atlas’s contractors it was important to act fast; ahead of any potential solvency event. Atlas’s viability is still subject to iron ore prices.

    Saxelby is confident that his board was right to react as they did. “Contractors normally can’t take iron ore price risk because of the low margins but our interests are aligned with Atlas so the circumstances required a new approach.”

    David Flanagan FAICD, managing director of Atlas Iron, says: “As a result of innovative agreements we have struck with our contractors, and with support of the West Australian State Government, Atlas’ break-even cost is expected to be lower than many hundreds of millions of tonnes of current iron ore production. This major change in Atlas’ business means we can maximise the profits and cash flow we generate from our mines, while providing a measure of insulation for the company against a volatile iron ore price.”

    Shareholders’ perspective

    South African companies radically changed supply chains following the collapse of apartheid. Inclusive and ethical sourcing were encouraged under the King Corporate Governance Code. When South African-based Woolworths Holdings took over David Jones, these practices were adopted locally. As a 100 per cent owned subsidiary, David Jones’ directors can act in the interests of their holding company. The company website states: “David Jones is committed to working with our suppliers to have a positive impact on environmental, social and ethical standards along our supply chain.”

    Ethical failures, or just potential failure, can unsettle shareholders. Superannuation fund HESTA divested its interest in Transfield Services over risk concerns about Transfield’s offshore detention centres. Acting from solely ethical perspectives also carries risk.

    Sinclair Davidson, senior research fellow at the Institute of Public Affairs, was quoted in the media as saying: “If funds do not specifically identify themselves as applying ethical considerations to their investment decisions, then they have a fiduciary duty to make choices based solely on financial considerations.”

    Simon Zadek, co-director of the United Nations Environment Programme Inquiry into the design of a sustainable financial system, suggests four reasons for adopting values-based criteria:

    - To defend reputation and avoid financial loss.

    - To achieve a specific cost benefit for defined activities.

    - To build strategic long-term competitive advantage.

    - To assist innovation and learning in complex and dynamic environments.

    Value chain governance arising during strategic, risk or ad hoc discussions may provide a catalyst. Saxelby says: “All the contractors, mining, haulage and stockpile managers, had to respond to the situation. Our strategy was reactive, not proactive. Atlas made their announcement one day and McAleese had the alternative model in a week. Our CEO went to Perth twice and New York once in that week. The board and managing director were in frequent contact over that period.”

    Dr Leeora Black MAICD, managing director at the Australian Centre for Corporate Social Responsibility, recommends that boards look in their value chain for new sources of value.“A risk-mitigation approach to supply chain issues protects against downside risks but the real winners generate fresh opportunities.”

    For Stockland, shared value made clear commercial sense, says Napper. “It is clear from the success of some of our ventures [Wetherill Park], this focus is generating positive results.”

    As with any strategy, adoption of shared value carries risks. Boards need to decide, case by case, if rewards justify these risks. Boards have a fiduciary duty to act in the best interests of the company. If they give too much value to stakeholders, they may lose shareholder support; too little and they may be accused of cynical “green-washing”. 

    Shareholders’ support is crucial for new strategies, particularly when those changes reduce short-term results even if aiming for longer-term value. Boards that create shared value may benefit from strong and sustained growth, generating even more opportunities; a worthy objective for any company.

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