The former David Jones director recalls the invaluable lessons learnt from the company’s turmoil about how to stop a crisis becoming a disaster. Tony Featherstone reports.
One factor more than any other separates good and great directors – the ability to govern through a crisis. Not just a “standard” crisis that is resolved quickly, but a full-blown disaster that rocks an organisation, shatters confidence and puts a blowtorch on the board.
Melinda Conrad FAICD, had a crash course in governance crisis-management when she joined the David Jones board in 2013. Within a year the chairman and two directors left the board in controversial circumstances. Investors were upset with the board’s handling of the Myer Holdings merger proposal and the purchase of shares by two directors the day after Myer’s proposal was received.
The unexpected resignation of then chief executive officer (CEO) Paul Zahra MAICD, the $2.2-billion takeover of the department store by South African retailer Woolworths, and machinations from billionaire rag trader Solomon Lew to leverage a higher price for his Country Road shares through the takeover, added to the rolling crisis.
Three David Jones directors, Philippa Stone, Jane Harvey FAICD and Conrad, effectively took control of the board, at the request of shareholders, until the new chairman, Gordon Cairns, was appointed. Their combined leadership staved off a potential shareholder class action against the retailer, placated key investors and stopped a corporate soap opera.
Conrad will not comment on the inner workings of the David Jones board at the time, or what happens when shareholders challenge the chairman. But it is clear that the crisis, the magnitude of which most directors never experience, has shaped her governance views.
“At the peak of the crisis, the directorship was virtually a full-time job,” Conrad says. “Everything moved so quickly. It was like being on a freight train. Nothing can prepare directors for a governance crisis, but the experience you take from it is invaluable.”
At 46, Conrad is one of Australia’s younger directors and a rising governance star. She is also a case study in how directors who have never experienced a governance crisis get through one professionally and personally, and what they take from it.
During this interview, Conrad talks about boards ensuring their organisation can adapt to unexpected threats and opportunities, the so-called “black-swan events”. She also discusses the importance of directors stress-testing a wider range of scenarios and understanding technology’s potential to disrupt established companies.
Having built and run her own businesses, Conrad has first-hand experience with the challenges of fast-growth ventures, and her directorship of OzForex, an ASX-listed fintech company, provides a window-seat into how “disruptors” are reinventing parts of the financial services industry.
She has also governed disrupted companies through her past directorships of David Jones and APN News & Media. Few sectors have been affected more by the digitisation of business models and changing consumer preferences than retail and media.
The American-born Conrad is interested in corporate innovation and entrepreneurship, and its interplay with governance. She completed an MBA at Harvard University in the mid-90s and had worked there earlier as a pre-doctoral researcher.
Conrad serves on the boards of The Reject Shop, OzForex, Garvan Medical Research Institute Foundation and the Australian Brandenburg Orchestra.
She sees governance as a full-time career, and shares with her husband the juggle of raising three school-aged boys and combining work.
Here is an edited extract of Conrad’s interview with Company Director:
Company Director: What did you take out of the David Jones crisis?
Melinda Conrad: Newspaper coverage of corporate crises rarely covers the sheer velocity of a transaction or issue. A huge amount of tactics, strategy and decision-making goes on behind the scenes and decisions are made quickly.
It is like being on a freight train each day and it can be hard to get your head around if you have not been on one before. You need to create moments where you stand back from the situation, and stress-test your due diligence, decision-making and judgement. You need to think several steps ahead, in quick time.
CD: What did you learn about yourself from the crisis?
MC: To be more assertive when something does not feel right. When you’re in that fast-moving situation, various technical experts are advising the board what to do. You have to create that space to listen to their advice, weigh it up, and test it against your commercial judgement and instincts. You have to be prepared to ask for more information when you don’t understand something. When everything is moving so quickly, it’s easy to assume, “I’m not fully across this particular issue, but I’m expecting so and so is”. Don’t hesitate to double check that you understand technical issues that are outside of your area of expertise and, if required, be prepared to go offline with advisers until you are satisfied.
Also, I learned the importance of being able to look well beyond a specific issue. It is easy to focus on each event and not think through how a series of events could unfold. Directors need to anticipate what steps two, three and four look like, and push the advisers to understand how these steps could play out and what could go wrong. Asking advisers, “what would happen if we went down a different track to the one you suggest,” is important.
The other learning was the importance of directors having spare bandwidth. If a crisis breaks, you might have to work almost full-time on that board role until the issue is resolved. Everything moves and goes public so quickly these days; if you are tied up with too many other board roles and have no excess capacity, you cannot contribute when the board needs you most.
CD: How do you cope when the board is front-page news?
MC: You have to be strong, stick to your processes and keep working in the best interests of stakeholders. It is also a time that tests to the extreme your relationships with your fellow directors. I feel like I’ve fought in a bunker with Philippa Stone, Jane Harvey, and later Gordon Cairns, and I don’t think any of us will ever forget it. I was also very grateful for support from veteran directors around town who had been through crisis situations. I now try to reach out to others if they are experiencing a difficult board situation. You can’t overstate how gestures of support from other NED colleagues can make a difference. When you’re in the middle of a crisis, it can be a pretty lonely place especially because everything is so highly confidential you can’t talk to anyone about it.
CD: What did you learn about corporate communication during a crisis?
MC: Obviously, the board needs high-quality advisers who specialise in crisis management. But it’s very important to get that advice in place well before it is needed. Once a bad storyline starts, it’s hard to undo. Boards sometimes wait until the negativity peaks before bringing in crisis communication experts. By then, it’s too late.
I also learned to take the time to put yourself in the shoes of all of your stakeholders. When presented with a course of action, directors should consider how a retail investor might respond to it, or an institutional investor, proxy adviser, employee or customer. Boards need to anticipate concerns and ensure the organisation has strong stakeholder engagement and communication capabilities.
CD: How can boards test the executive team’s capability to deal with a shock?
MC: Directors can read a lot into company behaviour by management’s response to questions. For example, if a director asks, “How would the company handle a significant cyber-security attack”, and management brushes the question off or doesn’t get back to the board, you start to worry. You are continually testing whether the executive team is being sufficiently proactive on issues, or reactive, and has the right people to deal with an event.
A culture of humility is also important. A warning sign for boards is if the executive team is wedded to the past or if they think a disaster could not happen to their organisation. You want to see a mindset where executives think, “If this issue could damage another organisation, it could also damage us, so this is what we are doing about it on an ongoing basis to manage risk.”
So many threats these days cannot be predicted. Most large companies have well defined “risk registers” but that is no guarantee you will predict a threat or have the appropriate risk-mitigation strategy. It’s the capacity to react to the unexpected, in real time, that matters.
At an individual level, directors must be across a broad source of information and views. In addition to following mainstream local and international business media, I also actively follow what key business and governance thinkers are saying on social media, particularly Twitter. It’s a great source of links to thought provoking articles you may not otherwise come across.
I’m a great believer that the best test of organisation health and culture is the customer. Directors need opportunities to listen to customers and question how effectively the company is solving their needs.
By finding out what is and isn’t going right for the customer, you can then start to work back to where, from a governance perspective, you need to be asking more questions.
CD: Which sources of volatility most concern you?
MC: Disruptive technologies that affect legacy businesses are a growing source of volatility. Directors of established companies must understand how technology and the disintermediation of business models will affect their organisation.
Political uncertainty is another source of macro-volatility. Regulatory uncertainty has weighed on Australia for several years and we are falling further behind. Australian business is very dependent on government policy, more so than in the US, so our politicians need to find a way to get on with it. It’s very difficult with the current balance of power.
CD: Why is the gap between Australian and US business widening?
MC: Businesses in the US do not wait for government to sort itself out. They find a way to get things done. The US shale oil boom is an example. Government policy enabled the boom, but what sparked it was significant investment in research and development, technology, and private investors. Nobody sat around waiting for government.
Australia has this subtle, underlying expectation that government will look after us and fix things, so we don’t embrace taking calculated risks as much. That mindset has to change if Australia is to become more innovative and entrepreneurial, and drive the key transitions needed as we move into the post-resources boom era.
CD: You joined the board of OzForex, a successful disruptor in the financial services industry that listed on ASX through an initial public offering (IPO) in late 2013. What are the main differences between being on the board of a small disruptor and that of a large disrupted company?
MC: In a disrupted, established company, typically the business is working to be as lean as possible so that it can compete. And at the same time it is working to have the right people who are prepared to push change, have a mandate to do so and can see it through. Incumbent organisations often have to be prepared to cannabilise themselves. Challenging existing and successful processes, delivery systems, and ultimately margins, is never easy.
In an emerging disruptor company, directors focus a lot more on building capacity for growth. The disruptor might be growing at 30 per cent or more annually, so the board has to guide management to establish monitoring systems and structures that facilitate rapid growth, without being too cumbersome. Talent management is critical in this environment. Developing, hiring and retaining good management while also addressing the limits of others, is paramount.
The board has to anticipate where the company could land in a few years when it is growing at high speed, help shape and test strategy, and prioritise what to do. Such companies usually have so many possibilities and options; the board has to be very focused on knowing what not to do.
Guiding management on governance and investor relations is also more important in disruptor companies.
Going through an IPO and being listed can add a layer of extra work and responsibility to a CEO.
CD: What advice could you give directors looking to join the board of an IPO?
MC: Typically, most emphasis is on directors doing due diligence and ensuring they are comfortable with the risks outlined in the prospectus. Also important is guiding management to ensure they understand what life as a listed company is like and are prepared for it.
It’s not enough for directors to think only about the IPO process itself; you must focus on how the organisation will handle the aftermarket, deal with shareholders and comply with higher governance requirements. Some executive teams find the transition hard. They are used to working in fast, nimble organisations and spending most of their time on growing the business. Suddenly, they have to spend up to a third of their time on investor relations and governance issues. The board can add a lot of value by helping the CEO and management through this transition.
CD: You founded the Conrad’s Warehouse Retail chain of homeware stores in 1997 and was its CEO until 2007. What advice could you give directors who govern small or mid-size organisations?
MC: Having an entrepreneurial background, I tend to focus more on “what’s possible” for an organisation, making sure it’s not wedded to legacy thinking and having empathy with management. I know from experience that running a small company can be lonely at times and the CEO can feel like he or she is in the trenches every day. Directors can add valuable perspective for the CEO by helping them see the woods from the trees.
The board is not there to tell management what to do, but to support, challenge and bring a different viewpoint. Directors typically work across a variety of industries, have more time to think about long-term issues, and are mixing with more people in business.
CD: You have a strong marketing background through your work at Colgate-Palmolive. Do boards think enough about brand position, marketing strategy and corporate reputation?
MC: Boards can never think too much about the customer. And as marketing becomes more embedded in technology,the marketing and technology functions need to work hand in glove as opposed to historically functioning in silos.
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