A call to action swept through sessions at the 2023 Australian Governance Summit in Melbourne in March. Directors and stakeholders discussed the Opportunity of Tomorrow, the AGS theme, and shared candid perspectives on dealing with the weighty risks of climate change, cyberattacks and tectonic shifts in the geostrategic environment and economy.
Among the highlights, ASIC chair Joe Longo called on directors to exercise “continuous curiosity” to grasp a company’s core business, and AGL chair Patricia McKenzie FAICD said that decarbonisation was “not for the fainthearted”. David Gonski AC FAICDLife questioned an impression by some colleagues that a directorship is a job to “squeeze in between golf sessions”. “To enjoy being a company director, one must treat the role as a profession,” he said.
We cover several of the major themes through the lens of core director competencies and macro challenges.
Core director competencies
AGL’s existential moment
There’s nothing like the existential threat and strategic opportunity in climate change to test the board of a venerable listed power company. AGL chair Patricia McKenzie FAICD provided a glimpse into the ESG lessons.
The massive transformation needed to drive a net zero economy provides a once in a lifetime opportunity for growth, but it will require a huge effort by all, said AGL Energy chair Patricia McKenzie FAICD.
“This opportunity to transition cannot be delivered by AGL alone, or indeed by the energy industry alone — it requires a whole-of-economy transformation and every board will need to lean into the decisions on what to do and how quickly to do it,” she said.
Her opening address to #AGS23 revealed no better example of a company grappling with the existential transition risks and commercial realpolitik than AGL.
McKenzie said that over the past two years, the board and the company have been navigating one of its more challenging periods. “We are excited by the opportunities for growth that this transition provides, but we are also acutely aware of our responsibility to bring about real change as Australia transitions to a net zero future. It is a deep responsibility to the whole community,” the AGL chair of five months told the summit.
Formed in 1837 as the Australian Gas Light Company, AGL supplied town gas for the first public lighting of a street lamp in Sydney in 1841. Nearly two centuries later, supplying 4.3 million services daily to customers, it is publicly undertaking one of the most significant decarbonisation initiatives in the nation’s history.
In September, it announced that it would shut down all coal-fired generation by the end of fiscal year 2035, a decade earlier than planned. Annual greenhouse gas emissions are forecast to reduce from 40 million tonnes to net zero for operated Scope 1 and 2 emissions, with an ambition to reach net zero for Scope 3 emissions by 2050.
The closure of Liddell Power Station in the NSW Hunter Valley, scheduled for this month, will see it converted to an integrated, low-carbon industrial energy hub.
McKenzie said that the issues surrounding each company’s decision on these matters are complex. “For AGL, these decisions are not about an input to our business, but rather go to our core business. So the AGL board has leaned into those decisions earlier and in more depth than most companies.”
Since 2021, AGL has seen a plan to spin out its carbon-intensive power stations derailed after public pressure from shareholder Mike Cannon- Brookes FAICD’s Grok Ventures, the exit of its CEO, chair and other directors, two rejected takeover bids, unprecedented wholesale electricity price volatility, followed by government market intervention and a new strategic plan.
“Issues-rich is almost an understatement,” she joked, noting that after a review of its strategic direction — “an open, transparent and consultative approach with shareholders” — AGL now has seven new directors, a new leadership team, and is executing a plan to significantly accelerate decarbonisation and create value for customers and shareholders through the energy transition. However, the transition does not come without significant cost.
McKenzie, a lawyer with a 45-year career in the energy sector, including time as AGL corporate counsel, became chair In September 2022, after joining the board in 2019.
“As a director, if you shy away from the difficult issues, you shy away from opportunities to make a difference,” she said, adding that she’s most often asked how the new board is settling in. While it’s true that the board has come together in an unusual way, she said the best example of the ability of the directors to work together was the unanimous decision in January to appoint interim CEO/MD Damien Nicks GAICD to the role permanently.
“We were in total agreement on one of the most important decisions a board makes,” she said at the Q&A session. “We were at a pivotal time in our organisation. It’s an existential moment — either we change and implement transition or we will not survive as we move forward. If we shut down our coal-fired power generation without moving to renewable energy, we will have no business. So [for] the appointment of a managing director at this time, [it] was crucial we got the right person.”
Another question was, “How was Cannon- Brookes able to bring about such change with 11.28 per cent of AGL and is he still pulling the strings?”
“We know Mike has been very vocal in his view of the pace of change,” said McKenzie. “We all agree on where we have to get to and Mike would like AGL to move more quickly. We consult with Grok on a regular basis, as we do with many of our shareholders, and we listen to what they have to say, but it is for the directors to make the determination about what is in the best interests of the company.”
In this context, McKenzie said that the AGL board considered the interests of customers, employees and the community in determining its transition objectives.
“The role of the board was to balance these considerations and find the right pathway to decarbonise and deliver on the opportunity for growth through the transition, while maintaining affordability and reliability of supply and delivering value to our shareholders. The balancing act... is not for the faint-hearted.”
McKenzie said that AGL is already building on what is now the largest renewables and firming portfolio of any ASX-listed company. And as a listed company, there would be significant governance challenges ahead. The transition would “absolutely” be easier in a private vehicle, which is not held to the same disclosure standards and does not face daily scrutiny of what are long-term plans. However, with an issue as crucial as implementing the energy transition, there is a very real benefit to the Australian community in accountability and transparency inherent in the transition plan being delivered by a listed company which Australians can own.”
McKenzie said one of the growing governance issues for boards in determining their pathway to decarbonisation is the question of greenwashing.
“This should not be underestimated — there is an acute risk of strategic litigation about greenwashing, because litigants are not required to show that they suffered a loss when they allege misleading statements have been made under the Australian Consumer Law. Nor is it necessary to show that there was an intention to mislead or deceive. Greenwashing and credible implementable transitions plans are clearly something all boards must keep front of mind in considering their decarbonisation plans.”
ASIC chair Joe Longo asked if directors really understand their business and if they are working to ensure accurate disclosures amid growing complexity and regulation.
The Australian Securities and Investments Commission landmark legal action against directors and officers of the Star Entertainment Group raises a number of important issues for directors and executives, says ASIC chair Joe Longo.
ASIC began civil penalty proceedings in the Federal Court against 11 current and former directors and officers of Star Entertainment last December, alleging that its board and executives failed to give sufficient focus to the risk of money laundering and criminal associations, and that it misled shareholders. “This case raises important issues about what reasonably foreseeable risks directors should pay attention to,” said Longo. “For example, we view money laundering and criminal associations as inherent risks in the operation of a large casino with an international customer base.”
Longo noted that ASIC’s investigation of Star also raises important issues about the role of senior officers such as general counsel and CFOs.
“As a general principle, boards are entitled to rely on what they’re told by senior officers, and these officers themselves have a duty to do the right thing. The Star case offers an opportunity to explore expectations around the interaction between directors and senior officers.”
In subsequent discussion on the issue during the Q&A, AICD CEO Mark Rigotti MAICD noted there was a constant struggle to get the balance right. “It’s the role of the board, and then senior management and the directors being interested, relying on them where appropriate... it’s a constant arm wrestle for directors to get right,” he said.
Longo provided insights into the regulator’s increased expectations of directors, its enforcement priorities and legal actions that provide context to its approach, noting that recent ASIC actions demonstrate fundamental principles that should be on every director’s mind. “Do I understand the business of the company of which I am a director? Do I have a continuous curiosity in understanding all aspects of the company’s core business, the reasonably foreseeable financial and non-financial risks posed by that business? And am I committed to challenging management to ensure my understanding is well founded? While expectations will vary from company to company, the importance of being able to answer these questions should resonate with all directors.”
Greenwashing, sustainability related disclosure, and cyber resilience were areas posing non-financial risks that directors need to turn their minds to, Longo said. Greenwashing (environmental claims and claims about the extent to which products are sustainable/ethical) remains one of the biggest non-financial risks to companies. In February, ASIC launched its first court action alleging greenwashing — against superannuation fund Mercer over its claims of investment options to fund members. “Reliable disclosure practices are vital to a well- functioning market,” said Longo.
On climate disclosure and mandatory reporting, he said that given the pace of change domestically and internationally, boards should already be thinking about how to embed robust corporate governance practices ahead of more rigorous reporting requirements coming into place. ASIC also supports a shift to mandatory emissions reporting on environmental disclosure.
The provision of false and misleading information by directors and officers is also attracting the regulator’s scrutiny. In December, it launched its first civil penalty case (against beauty and wellness company McPherson’s) under the amended provision concerning the giving of false or misleading information to the market, fellow directors, auditors or shareholders. “This provision essentially puts the onus on officers to take reasonable steps to ensure information provided to various parties is not materially false or misleading.”
Rethinking directors’ duties
Directors need to dig into the outliers when they look at their customer satisfaction ratings — because that’s where they’ll find the problems, this year’s Australian Governance Summit heard.
The session on rethinking duties heard of the importance of listening to stakeholders, echoing recent AICD guidance that directors can and should consider stakeholder impacts when fulfilling their roles.
AMP chair Deborah Hazelton GAICD said the banking Royal Commission revealed that while financial organisations were listening to customers, they grew complacent that they didn’t have to make any changes because none of their competitors were. That attitude has since switched. “No matter what you’re hearing, it doesn’t matter what the rest of the industry is doing, you have to react on your state as stakeholder feedback,” she said.
National Australia Bank non-executive director Peeyush Gupta AM FAICD said institutions had made the mistake of looking at the aggregate when it came to customer metrics. “We’d say, ‘Oh, we have 98 per cent satisfaction’. But the problem is the two per cent. So now management and boards have learned to probe the tails of the distribution, not the central distribution and say, ‘OK, what’s in the two per cent?’ Because it’s in the two per cent that you’ll find the tales of woe and mistreatment.”
Boards can’t react to every stakeholder and request, and need to do a lot of work in understanding the materiality of their needs and balancing that against the central obligation to the shareholder, said Hazelton.
Gupta agreed that it wasn’t possible to deliver to every stakeholder at the same time, but it was still possible to be empathetic and ensure the board is listening. “If you’re being true to your vision, mission and values, even though people may disagree with the decision you’re making, they will respect you for the fact that you’re being internally consistent,” he said.
Responding to a question about diversity in the boardroom, Gupta said diversity alone isn’t enough. “It is not true that just by having more diverse boards that you get better performance, because the part that’s missing from that is subject matter expertise.”
This is especially true if the organisation is operating in a “complicated industry” because without subject matter expertise, the board doesn’t know the right questions to ask, let alone their right answers, he said. “It’s more nuanced. What you need is a diversity of thoughts and a collegial spirit — that is the hallmark of a well-functioning board.”
Climate risk and opportunities
There will be a cost to companies to transition to net zero, but the cost of inaction will be much higher, the Climate Risk and Opportunities session at the Australian Governance Summit heard.
“Investors understand there’s a cost to transition,” said Australian Council of Superannuation Investors CEO Louise Davidson AM GAICD. But this wasn’t a trade-off for higher returns from not acting on climate. “Failure to make the transition will lead to much lower returns. Are you comparing the returns against what you might get for the next five years if you did nothing? Or against the sustainable future of the company over the next 20 years?”
Geoff Summerhayes GAICD, chair of climate consultancy Beyond Zero Emissions and Zurich Insurance Australia and NZ, said companies wanting to access investment, credit or insurance from the financial sector will need a credible pathway for decarbonising. They will also have to communicate that plan, which raises the spectre of greenwashing.
“You need to think about greenwashing in the context of the broader set of stakeholders,” he said, adding that stakeholders include regulators, consumers, shareholders, providers of finance, employees, the community, activist groups and the courts. “Unlike a lot of other issues, people are very motivated about this issue for good reason — because of its existential threat.”
#AGS23 took place in the same week ASIC took its first greenwashing court action, filing against superfund giant Mercer for allegedly including 15 fossil fuel producers in its Sustainable Plus fund, which, it told potential investors, excluded companies involved in carbon-intensive fossil fuels.
Summerhayes said it was crucial in greenwashing regulation to reward good actors and punish bad ones, but warned against forcing boards and companies “into a highly defensive position where this becomes a compliance issue solely, and people are thinking about managing risk”. He said this would risk losing the opportunity for companies to engage customers, employees and broader stakeholders, and to strengthen economic sustainability in future.
As CEO of ACSI, Davidson represents some of Australia’s largest investors. She noted climate change and the transition to net zero are financially material for most companies. “These are things all boards need to be talking about, even if your exposure doesn’t appear to be significant, because one way or another, changes that are going to take place within the economy as a result of this transition will impact all organisations.”
Building a stronger economy
Australian federal, state and territory governments should put innovation and skills development at the centre of their agenda for a stronger economy, the audience at this session of #AGS23 heard.
Left to our own devices, Australians tend to under- invest in research — particularly in research that doesn’t have an immediate return, and so governments need to step in to ensure we have the right amount of science and research to support innovation, AustralianSuper chair Dr Don Russell told the Building a Stronger Economy session.
Governments should also ensure Australia has the right training for the right people, funded with the right balance between the individual and the community. The skills people learn need to be those that will enable them to work effectively with companies that need them to be part of success.
“We’re living in a world where we’ve moved beyond simple labour and simple capital,” said Russell. “It’s the cleverness with which we combine that, the cleverness that we give to people and their capacity to not only get skills, but to constantly upgrade their skills, that is really the key to a stronger economy.”
The audience also heard about the importance of migration in providing the economy with skilled workers. Some 29 per cent of the Australian population is born overseas, yet it is a nation with a coherent successful community, said Russell.
Part of Australia’s strength is that we have a skills-based immigration policy — and see it as a source of skills.
Mission Australia chair Ian Hammond FAICD agreed, but said more migration would exacerbate the housing shortage and so should be accompanied by an increase in housing stock, particularly social housing. He said homelessness among people seeking support from Mission Australia’s homelessness and stable housing services grew 50 per cent over the past three years, and that while the $10b the government is putting into the National Housing Fund is welcome, it’s not enough.
Hammond also highlighted natural disasters arising from climate change, such as the floods in northern NSW in early 2022, which have worsened the housing crisis. He said our spending priorities on disasters are wrong. “If you look at the total cost of what we’re spending on natural hazards and their impact, we’re spending 95 per cent on mopping up after the event, and only five per cent on building resilience.”
Treasurer Jim Chalmers has suggested that superannuation funds invest in social projects such as housing. Super fund third, Russell said, but funds should also be cognisant of
the opportunity that comes with investing money their members won’t need for 30 years. “That means funds are in a position where they can take a long-term view. They can invest in a whole range of assets that they wouldn’t invest in if they had to be in a position [of giving] the money back next week.”
Russell said the weight of money pouring into superannuation funds means they have an obligation to be innovative. There is a great opportunity for funds with scale to work with local, state and federal governments to devise and build projects that have good social consequences, but are also designed in such a way that they are attractive to superfund members.
Three lessons from David Gonski AC FAICDLife
Love your work
“I have been on boards in areas of which I am ambivalent and in areas I loved. The difference was marked. On the boards in areas of interest for me, I savoured not just what was given by the company as reading, but scoured with joy all sources on the industry. I loved site inspections and was eager to be as involved as was appropriate for a non-executive director.”
Understand the bottom line
“An analysis of the balance sheet of the enterprise is also important. Whether it be for-profit or not-for-profit, a weak balance sheet can affect the ability of the enterprise to flourish and, indeed, affect considerably both one’s contribution and success on that board. On one of my first NFP boards we had a great CEO and wonderful staff, but the balance sheet was so weak that my job became that of a fundraiser, not just a board member.”
Invest in the team
“In addition to seeing one’s role as a profession, one needs to treat the role as a team member, not as a solo operation. Being part of a team means looking to how you’re adding to the team, rather than making an individual performance. I had to learn to hold back at times around the board table, rather than seeking to speak all the time. One needs to understand the way people operate and the way the particular group around that board table contributes.”
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