The former boss of Air New Zealand and the Commonwealth Bank of Australia talks to Tony Featherstone about his remarkable career and how boards can best help their executive teams during periods of great change.
Good chief executive officers (CEOs) ensure their organisation outperforms its rivals during their tenure. Great ones set up the organisation for years of sustained success. Often, the full extent of their legacy is not recognised until several years after they retire.
The same is true of boards. A good board chooses and monitors the right CEO. A great board has an unrelenting focus on succession planning that keeps the organisation’s long-term future on track. The board’s legacy is felt through several generations of CEOs. The impact of Sir Ralph Norris FAICD, at the Commonwealth Bank of Australia (CBA) is still being felt years after his retirement in November 2011. So is the CBA board’s long-term succession planning and the smooth handover from Norris to current CEO Ian Narev. CBA has a three-year annualised total shareholder return of 21 per cent to June 2015. It is one of the world’s highest-rated banks and has a valuable technological advantage over its Australian peers. CBA has barely missed a beat since Norris left –exactly how he and the board planned it.
On joining as CEO in 2006, Norris set out to lift CBA’s falling morale and poor customer satisfaction levels and overhaul its antiquated technology systems. His work laid the foundations for much of CBA’s success today. That is not to downplay the efforts of the current executive team and board, or underestimate how their efforts will help the next generation of CBA leaders in coming decades. Rather, it is recognition that good or bad corporate performance is often years in the making and further confirmation that succession planning is the beating heart of top boards.
The transition of Norris from CEO of one of Australia’s largest companies to chairman of Fletcher Building and non-executive director of Origin Energy and dairy company Fonterra (he retires from that board in November this year) is an important governance case study.
As the former boss of Air New Zealand and CBA, Norris has a useful perspective on how CEOs transition to full-time governance roles, and how boards can best help their executive teams during periods of great change.
The 66-year-old has developed a reputation for turning around underperforming organisations; first, Air New Zealand, which he salvaged from near financial ruin; and then CBA, which in 2006 was known for its customer service problems.
“CBA staff at the time were somewhat demotivated, and some did not even like admitting they worked for the bank,” says Norris. “Everybody, from the board to the bank tellers, knew customer service was not where it needed to be and that it was at the root of so many other performance issues.”
Norris seized on customer satisfaction as the driving force for organisational change. He spent a billion dollars or so replacing and upgrading CBA’s core technology systems, a project that surely terrified the then board after previous costly failures. Before long, customer satisfaction improved, CBA’s market share lifted, and there was significant cultural change.
New Zealand-born Norris never attended university or rose through general managerial ranks. His big break was starting in ASB Bank’s IT department in the early 1970s and later becoming its chief information officer (CIO), and then its CEO at age 41. ASB is CBA’s New Zealand banking operation.
Norris was one of few CEOs in S&P/ASX 100 companies and few directors, who had a strong background in delivering large technology projects – a trend that is likely to change as more companies appoint CEOs who understand the opportunities and threats of digital disruption. In some ways, the CBA board in 2005, then led by chairman Dr John Schubert AO FAICD, was ahead of its time in appointing a former CIO as CEO. How many other non-tech companies could claim to have a CEO who could write software code?
CBA also changed the executive pay landscape when Norris recommended executive long-term incentives (LTIs) be linked to customer satisfaction – a market first at the time, when nearly all LTIs were, and still are, linked to financial metrics such as total shareholder return.
Norris also changed how CBA communicated with the shareholders and helped lift the bar on investor relations (IR) across the market. A decade ago, CBA had a reputation for a slightly prickly style of market communication; in 2012, 2013 and 2014, it won Best IR by a Top 50 ASX Company, at the Australasian Investor Relations Association (AIRA) awards.
Norris had plenty of setbacks along the way. He and his family received personal attacks after CBA’s decision to lift interest rates by more than the official cash rate in 2010, and his salary, $16.2 million in 2011, became a focal point in the executive-pay debate in some media.
CBA’s recent financial-planning scandal also goes to Norris’ tenure as CEO, given a rogue culture was allowed to develop among a small group of financial advisers. There is no evidence that those problems are part of a broader deterioration in CBA’s culture or risk management, but the financial-planning problems are perhaps one of the few blemishes on Norris’ legacy.
Now a full-time director of ASX and NZX-listed companies, and not-for-profit organisations, Norris has strong views on governance. He believes CEOs should not join the board of their organisation on retiring from executive duties, even after a lengthy break, and that many boards are “underdone on their understanding of technology”. He sees so-called “fintech” companies that combine technology and financial services as a serious threat, provided they can manage through an economic downturn, and believes Australian banks are well capitalised at current levels.
On economic reform, the Auckland-based Norris says the New Zealand Government’s effective communication and its ability to stick to its promises provide lessons for other Western governments, notably in Australia, that are struggling to achieve a reform mandate. He sees demand for Australian directors on New Zealand boards rising in the next few years. Here is an edited extract of his interview with Company Director:
Company Director (CD): What are the main challenges for CEOs when they make the transition to a full-time governance career?
Ralph Norris (RN): CEOs are used to controlling all the levers of organisational performance. On leaving executive life for board positions, they are suddenly one layer removed from those levers and are required to act in more of an advisory role. Board work can be challenging for CEOs who are not used to stepping back, or unable to do so. Having previously been a non-executive director on the Air New Zealand and Fletcher Building boards, I was familiar with governance and the transition required.
CD: What makes a good chair/CEO relationship?
RN: It begins with an understanding that the board’s role is to test and challenge the CEO’s views, to get the best possible answer. A good CEO welcomes that scrutiny, accepts it as constructive feedback, and knows it is not personal. For that to happen, the chairman must build good rapport with the CEO, so that there is a high level of trust on both sides.
CD: What advice would you give high-performing executives who are considering building a full-time governance career?
RN: Ensure your skill set is as well rounded as possible and let people know early you are interested in a governance career. Don’t wait until your executive career ends before seeking board roles; the process is rarely quick or easy. Plan for the transition to directorship well before your executive career ends and build relationships with key people or agencies, such as executive search firms, which can help with your transition. Obviously, it’s easier when you are CEO or chief financial officer and you have more visibility in the market.
CD: How can a board best help the CEO when an organisation is going through a period of turmoil in a turnaround strategy?
RN: The board must be absolutely clear on how the CEO will approach the change process and be certain there is no mismatch between the executive’s plans and the strategy. The worst thing a board can do is hire a new CEO to do one thing for the organisation, and he or she ends up doing something different because the board’s requirements were not understood. That’s why good boards spend so much time on succession planning and appointing the right CEO.
Boards must also recognise that even the best strategy might need to be adjusted to overcome internal resistance. Sometimes, a CEO is parachuted in from outside the organisation and other executives, even those highly regarded at board level, are opposed to him or her and the strategy. Those who thought they had a chance to get the top job actively work against the new CEO. The early part of the CEO’s tenure can be very trying in large change-management processes; boards need to provide their full support.
CD: From the CEO’s perspective, how should he or she engage directors during periods of significant organisational change, to ensure the board has full buy-in?
RN: As CEO, I always applied the rule of no surprises. I did not want my team hiding anything or not giving me the full story. The same philosophy applied to my dealings with boards. A CEO must ensure the board is fully informed and that it never hears about things in the organisation, for the first time, in a newspaper, when it should have rightfully heard it from management. When confronting an issue, I always thought, “is this something the board needs to know about?”
The CEO should ensure there are processes for formal and informal communication with directors, between board meetings. For most directors, their communication with the organisation often involves a few days each month around board meetings. The challenge for the CEO is to ensure they are sufficiently informed and engaged between those meetings.
CD: You and your family endured several personal attacks from the media about CBA’s interest-rate strategy in 2010 and your salary. How can a board personally support the CEO when he or she is being publicly attacked?
RN: The board obviously needs to be supportive of the CEO when it is warranted. But it also needs to understand why there was criticism, why the CEO took a particular stance on an issue and if it was the best course of action. There may be instances where the board recognises things could have been handled better and then the chairman needs to discuss this with the CEO.
CD: Why did you push for the long-term incentive in CBA’s executive remuneration program to be linked to the bank’s customer satisfaction levels?
RN: When I joined as CEO, CBA was losing market share in key parts of the business and the common link was poor customer satisfaction. Our competitors had higher market share growth, were selling more products per customer and clearly had more satisfied customers. CBA staff were, generally, demotivated and some did not even like admitting they worked for the bank. Everybody knew its customer service at the time was poor and needed to improve.
If we were to move the dial on customer satisfaction, it had to start with the senior management team, and it had to be linked to their LTIs. At the time, the board thought it was a courageous decision to link so much of the reward to customer satisfaction. But it focused management’s attention on how we served customers, and before long the culture started to improve, staff engagement scores rose, people could see service was improving and complaints were falling. There was a degree of pride in CBA that had not existed for some time.
The board played its part in helping lift customer satisfaction levels. Directors visited CBA’s facilities, listened to staff, and made it clear they were right behind the strategy.
CD: How should the outgoing CEO and board work together to create a smooth succession event?
RN: Sustained success in a large organisation generally comes down to very strong succession planning. When you chop and change CEOs, and are always forced to recruit them from outside the organisation, you lose corporate knowledge. There might be a time when the organisation has to look outside for its CEO, but it is always better to have a pool of internal candidates who have been assessed for several years, and tested against the market.
The CEO should ensure there is a strong pool of internal candidates, at least two or three of whom could lead the organisation, and are well known to the board. At CBA, we worked with a US consultant to develop an identification and development program for my internal successors, and looked at the next generation who could succeed them. Effectively, we looked seven to 10 years ahead with succession planning. It’s fair to say that some of Ian Narev’s potential successors were identified during this program of long-term succession planning, just as I’m sure Ian will have identified other future bank leaders.
Planning for my succession started three years out from my intended retirement. You have to be very sensitive with the communication of this planning, for it can send the wrong message to the market. In the end, CBA had two very strong internal candidates and one external candidate to replace me.
CD: Should CEOs join the board of their organisation after a few years away from it?
RN: No. I would never join the board of Air New Zealand or CBA and would not expect to be asked. The last thing the new CEO needs is the former CEO questioning his or her strategic agenda. I also could not join the boards of other banks or airlines. I have too much affiliation with CBA and Air New Zealand and wouldn’t feel comfortable helping their rivals.
CD: Do boards, generally, have enough expertise to deal with opportunities and threats from technology?
RN: Many boards do not have sufficient capacity to understand how technology could wreak havoc on their sector. More current and former executives with strong technology backgrounds are joining boards. But we need to see more senior technology executives gain that general management experience and prove they are capable of moving into the boardroom and dealing with a range of issues.
CD: Are emerging fintech companies a serious threat to incumbent financial-service organisations?
RN: Yes and no. There is no doubt fintech companies will take a piece of the banking market: financial-service disruptors are not new; one need only look at how Aussie Home Loans, Mortgage Choice and Yellow Brick Road took market share in mortgage lending. The big unknown is how emerging fintech companies will manage through an economic downturn. The new entrants often do very well in benign economic conditions, but struggle in tough markets when there is a move back to stronger financial-service organisations.
CD: Should Australian banks be required to hold more capital?
RN: Good quality management and good risk management processes are always more important than increasing the level of capital. Banks, of course, need an appropriate level of capital, but I’m not convinced that Australian banks are overly light on capital compared with their US and European peers. The capital calculation model the Australian Prudential Regulation Authority (APRA) uses for Australian banks is very conservative and does not provide sufficient international comparability.
Ultimately, it comes back to a risk/reward trade-off: if people want banks to be more highly capitalised, they have to accept returns will be lower.
CD: Turning to New Zealand, why has its economy outperformed most other developed economies in recent years?
RN: You can’t underestimate the effect of the rebuilding of Christchurch on economic growth. Over 10 years, it will add a bit under two per cent annually to GDP. At the same time, more people are migrating to New Zealand than leaving, which is also having a positive effect.
CD: What can Australia learn from New Zealand’s success in implementing a reform agenda?
RN: It gets back to quality communication. The current New Zealand Government is probably deemed to be the most competent in the Western world. It has an excellent Finance Minister in Bill English and an excellent communicator in Prime Minister John Key. The government, when in opposition, and before the previous election, was very clear about its strategy. There have been no big surprises, no broken promises, or attempts to do things not previously communicated. Key also has a very strong personal following and is well liked. When you have a popular Prime Minister and the electorate trusts the communication, reform gets done.
CD: Will we see more Australian directors join New Zealand companies in coming years?
RN: I expect more convergence between Australian and New Zealand business. A lot more New Zealand companies will want input from Australian directors and there will be more cross-pollination of directors and more board opportunities. New Zealand is not as advanced as Australia in aspects of regulation such occupational health and safety. Its companies can learn from Australian directors in these and other regulatory areas.
CD: Will we see you on more boards in coming years?
RN: I’m very keen to keep my life in balance, so I might appear on fewer boards in coming years.
CD: How do you relax away from work?
RN: I like spending time with family, fishing, playing golf and tennis, travelling, reading and following the All Blacks. I spend about a week each month in Sydney and the rest of my time mostly in Auckland. I’ve found there is a different, rewarding professional life after executive life and I enjoy working on corporate and not-for-profit boards.
Already a member?
Login to view this content