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Experience or a steep learning curve is the name of the game, writes David Pumphrey.
Competing dynamics of age and youth, wealthier executives and governance issues are causing big headaches for the boards of Australia’s major corporations.
While companies are bringing younger executives to their top teams to gain fresh ideas and insights, the markets have been spooked by governance issues and are calling for greater depth of experience. Those very governance issues are also keeping potential candidates at bay.
Commonwealth Bank Chairman Dr John Schubert says boards are currently facing a huge challenge. “The number of qualified people available is in the minority, there’s no doubt about it.”
Schubert says experience is the name of the game. “Boards of significant companies need a number of successful CEOs who have spent time on boards, or who are recently retired,” he says. “On the other hand, bringing relative youth to a board often requires recruiting someone currently serving as CEO. But this can be limiting since, due to time constraints, a current CEO usually can only serve on one board, and usually it must be in a different industry.
“The board member must have earned their stripes. The main requirement is that they must have the respect of senior executives, so they must have reached a certain level of achievement in their careers.”
Complicating the puzzle is the relatively greater wealth of executives. Foreign Investment Review Board chairman John Phillips says that many of today’s business leaders have “a substantial capital base” due to higher salaries and larger incentive payments.
“Why would they serve on public boards and risk their assets if they can go into private equity?” he asks.
Phillips explains that executives are financially able to put their own equity in an unlisted company where issues of governance are substantially reduced and then capitalise hugely if the company is successful and moves to a public listing.
Former Macquarie Bank Executive Director Belinda Hutchinson agrees. “Frankly, from the standpoint of someone who has been financially successful, board pay is insignificant,” she says. “Non-executive directors also have governance exposure if things go wrong. Their personal assets are on the line. Most of them prefer private equity investments.”
On governance, Hutchinson says the pendulum has swung too far. “The regulation and compliance burden has been taken to an extreme level.”
Hutchinson says: “There is a need for better public education about the risk of investing in public companies. It’s not like investing in government bonds. There’s a balance, and there’s a risk-reward equation.”
Hutchinson says the idea of a former senior executive serving on a board and putting at risk their personal assets is not appealing.
Australian Stock Exchange Chairman Maurice Newman says there’s currently a contradiction between corporations seeking younger executives and the market seeking wiser heads.
“Companies are turning over chief executives faster. It’s an average of four years in Australia, longer in the US but only 1.9 years in the UK. It’s an issue for boards.”
Newman says that the “long-term” can mean three years in the current climate. “My view is that we need culture change. Our culture of compensation rewards short-term performance. But we need to develop long-term incentives.”
Newman says the current “age and gender problem” of inexperienced people at board level means that companies are “falling back on proven people” for their boards.
Caltex Chairman Dick Warburton says the key attributes for board members are: Diversity of experience, balance, understanding of legal issues and knowledge of the industry.
“You want some grey hairs who’ve been through the mill, so they’re not surprised when things happen,” Warburton says. “They need to have the fire out of their belly – you don’t want someone on the board who feels they should be running the company.”
Warbuton says good directors should understand the financial side of companies, and some of the complexities of the legal system.
“You don’t have to be a lawyer, but you need to be on top of current legal issues and employ good lawyers. You need to know the questions and traps to ask – how to deal with the brilliant lawyers your company is up against.”
Warburton says the issues around new blood for boards are revolving around young people earning bigger packages and a greater range of interests available in corporate life.
“It’s hard to lure young executives onto boards unless they want to drop out of the rat race a bit earlier and look to boards as a career move, perhaps mixed with other interests.
“Money is important because you have to have reasonable remuneration. A good board can make a difference. Not many people are on them just for the status. In the past, if you were invited by someone like Westpac to join the board you’d do it for the status and you wouldn’t think much of the money,” Warburton says. “But now people are also looking for income, and they may be given equity.”
John Egan, a board and executive remuneration expert with Egan Associates in Sydney, says there is a growing realisation in Australia that older executives and CEOs are valuable and that organisations led by youth or people in a hurry to make money do not reflect what shareholders are seeking.
He says fees have increased over the past three years and now a chairperson can receive emoluments of $500,000 a year or more. Egan adds that fees need to increase further to attract top people. But money shouldn’t be the motivator. “They need to be motivated by the challenge and the contribution they can make.”
Demands on boards today are increasing, according to Egan. “It’s not the lunch club of the 1970s, but serious business, and a heavy workload and governance expectations. The community expects more of boards today – better people, fully engaged. There’s a premium on independent thought. This quality needs to be reflected in the fees, possibly linked to performance.”
David Pumphrey works as an international executive search consultant and is a Senior Partner of Heidrick & Struggles based in Sydney. He works extensively in the areas of board appointments, education and legal. Before his search career, he was the Managing Director of several consumer products companies in Australia and the UK.
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URL: http://www.austlii.edu.au/au/journals/MonashBusRw/2006/38.html