Some of the foremost experts on good board governance met at the Australian Institute of Superannuation Trustees (AIST) offices in Melbourne answered six question aimed at teasing out best practice.
Who is responsible for board culture? How do you build it, and fix it if it goes bad?
The discussion broadly agreed that the chairman sets the culture, and when new directors are hired they should be told explicitly of the cultural practices of the board. The three chairs in the discussion all cited the importance of board members meeting socially – outside of board meetings, to find out what each has in common – in helping to build this culture.
While noting that the annual board assessment provides a formal structure through which the board can build culture, Craig Peate, chair of Local Government Super, says his board meets for breakfast before any formal meeting, and that at this breakfast no business talk is allowed.
Andrew Fairley, chair of Equip, describes how his board meets for dinner before board meetings. One director is asked to prepare a talk answering five questions about themselves, including their greatest fears and achievements. “Your perception of what’s possible around that table expands as a result of knowing more about each other,” he says.
Christine Kotur, strategic advisor to boards; leader in residence, Leadership Victoria, sees such interaction as proving its worth in times of crisis.
“We can do a lot to strengthen, to provide boards with workouts, where they can actually build culture and trust in each other in low-risk environments so that when it really counts they will withstand those sorts of pressures,” she says.
Fairley has also changed the culture on the Equip board by preventing directors from representing their organisations in a political way, and points out that he had to be firm in enforcing this.
What does diversity really mean? How many boards have it, and how do you build it?
For the past two years, many funds have put gender diversity high on their agenda and some are now starting to ensure they have age diversity on their boards too.
Cbus has just appointed a 30-year-old to its board, and Robyn Weatherley, general manager, governance, Cbus, says that this “slight variation in demographic” has already led to an impact across a range of different issues and discussion points.
For Andrew Fairley, the value of youth could be measured by input into technology. “They are digital natives, we’re digital immigrants; they understand the power of disruption in our industry.”
Such age differences should be managed with respect. Meegan George, executive manager, education and leadership at the AIST, says: “Obviously you’ve got somebody there who’s potentially 60 listening to a 30-year-old who might have a completely different point of view. So to avoid that polarisation – that culture around the board – in particular, communication and a willingness to listen to each other are vital.”
For Craig Peate, there is a strong argument for members in the pension phase to be represented at board level, something his board has considered but is yet to achieve.
“We seem to forget about older people, those over 60 – diversity is also about them”, he says.The need for geographical and cultural diversity also came up for discussion, and for Christine Kotur, the issue should be focused on being a means of allowing the board to stay attuned to the needs and ambitions of members. “An understanding of how diverse communities’ and members’ views are is really important, and unless superannuation boards are happy operating in a bubble, you’ve got to stay attuned to those shifting needs, thoughts and policies,” she says.
There is also the belief that diverse boards do a better job.
“You need diversity around the board table in order to have good robust discussion, and in order to have good robust discussion, you need people who have different life experiences and who will approach issues from a different perspective,” says Eva Scheerlinck, executive manager, governance and stewardship, AIST. “If everyone around the board table went to the same school and read the same newspapers, you probably could have a board meeting over and done with within an hour, because everyone will think the same.”
Neil Cochrane, chair First State Super, says diversity should not be sought for its own sake. “Sometimes we can allow ourselves to get too diverse and lose that single purpose, which is in the best interests of the members,” he says. “And given APRA only wants boards to be up to 12 strong, the advisory board or subcommittee has its role in accessing diversity.”
He also sees the membership of such bodies as providing a potential stepping stone for new members, while Kotur sees them as a useful reality check. “The examples that I can think of stop a board from becoming deluded and pretending that they can mind-read on behalf of the people that they’re there to serve,” she says. “And you’ll often get people who are not interested in governance – couldn’t give two hoots about board membership – but are prepared to offer the best of themselves in a different setting for a modest period of time.”
How do you align board skills to strategy?
First State Super approaches this through the use of a nominations committee, which looks at potential directors to fill skills gaps on the board in line with strategy. Cochrane says: “Nominating bodies have appreciated the work that we’ve put into it. It has eased their load dramatically, and they know that we’re all then acting in the best interests of the members.”
Scheerlinck says part of the trick is not in replacing the skills that are lost when a member leaves the board, but acquiring members with the skills the board wants for its strategy going forward. One of the most popular skill sets is a familiarity with how digital communications will disrupt traditional business models.
Weatherley foresees a shortage of suitable candidates. “Boards need to look outwards three, five and 10 years,” she says. “Anyone with a very intensive IT digital capability and skill set is going to be able to name their price in a few years.”
What is the ideal process to becoming an effective director?
For Robyn Weatherley, the starting point for every journey towards greater skills is for directors to make a “full commitment” to getting up to speed as soon as they can, and to maintain that. She sees this happening by having new directors observe committee meetings and spend time with staff fulfilling key executive functions, such as the investment team or the administration staff. “I’ve seen a marked difference in directors who’ve gone and spent time on the front line. They invariably bring back an experience set that they can then transcribe into their directorship responsibilities and with a stronger affinity to the business they are serving.”
She also emphasises the need for a skill set. “You can’t just come onto a board with an expertise, thinking ‘This is what I’ll only be held accountable for, here are my contribution points and I can relax on everything else’. If you sign that consent to act and you’re appointed to that as a trustee director, you all have the same legal responsibilities.” As part of the continuous professional development policy at Cbus, directors have a non-negotiable 30 hours-a-year minimum training, while Local Government Super has a more flexible policy of 60 hours over two years.
Meegan George proposes this should be done in a strategic way. She suggests that for those on an investment committee the requirements for investment learning would be higher than for those on the board.
How do funds use a skills matrix in determining skills gaps?
Fairley describes how Equip brought in the consultant Heidrick & Struggles to do a skills matrix for the board. This consisted of interviews with all the board members, which identified the four key capability areas each director had. “It determined what knowledge we have, what experiences we have got, what competencies we possess, and what are our personal attributes,” he says. The key finding from the exercise was that the board were “digital immigrants” and that they needed a younger internet native who could act as a disruptor for the fund.
An external assessment of Local Government Super found a lack of skills in currency, and particularly in equities, among their board members. This finding has helped determine the skills set of recent board appointments, which Craig Peate says has transformed the conversation the board has with its chief investment officer.
Weatherley emphasises the worth of an external audit or a robust internal skills matrix. “My experience has been that directors will either understate or overstate. So [for example], if anyone’s ever done a pay run in their day job, suddenly they’re a REM expert,” she says. This is an area of sensitivity, and as such, she sees an external benchmark as “critical”.
It was suggested that a board should assess its skills matrix on an annual basis; that such a matrix should be dynamic and evolve; and that an external audit should be conducted every two years or so. Meegan George noted that board behaviour should be part of the assessment framework. “There needs to be an understanding of how skills are applied at board level,” she says. “This can be done by bringing in an external person every few years to observe behaviours in the boardroom.”
In the case of Local Government Super, skills are brought up to scratch through formalised training requirements. All directors must successfully complete the AIST trustee director course ‘Build your expertise’, including the assessment, within one year of appointment. Within threepyears of appointment, they must complete the ‘Enhance your excellence’ course and assessment. Craig Peate favours the AIST courses for superannuation knowledge, and the Australian Institute of Company Directors courses for audit risk. Cochrane emphasises the value of informal training, such as having external experts visit and make presentations to the board on topics such as China, privacy and technology.
In the search for these certain key skills, how do you balance soft skills and hard skills?
There was general agreement that a board member with great technical skills and a woefully low EQ was not worth it for the disruption they could cause. For this reason, Fairley says interviewing for soft skills was as important as ensuring board members had the hard skills too.
Getting the right soft skills and then training up the right person might be preferable, as teaching soft skills is much harder, says Scheerlinck. “If you don’t have the confidence to speak up, or you don’t have the skills to politely disagree with somebody, then you’re absolutely of no value,” she says.
Kotur says it is a fine balance. “If you want your creative contrarians, your occasional dissidents around the board table, there’s a very thin line between insurgency and creativity.”
Is there a difference in the characteristics you need to look for in the directors of super fund boards versus corporate boards?
The desirable characteristics of super fund board members that might not tally with what is needed on a corporate board were variously described as having “a higher sense of purpose” and “an alignment with the best interests of members”.
For Scheerlinck, a board member needs to be “passionate about delivering the best possible retirement outcomes for members” as opposed to the emphasis on delivering shareholder returns on corporate boards.
For Fairley, there is also an element of altruism on super fund boards. “If you look at the salaries of our directors, the salaries years of appointment, they must complete the ‘Enhance your excellence’ course and assessment. Craig Peate favours the AIST courses for superannuation knowledge, and the Australian Institute of Company Directors courses for audit risk.
Cochrane emphasises the value of informal training, such as having external experts visit and make presentations to the board on topics such as China, privacy and technology.
In the search for these certain key skills, how do you balance soft skills and hard skills?
There was general agreement that a board member with great technical skills and a woefully low EQ was not worth it for the disruption they could cause. For this reason, of some of the senior executives, they’re certainly not at the level of some of the ASX companies,” he says. “There is a real sense that there’s got to be a passion about the role. They are not doing it for the money.”
Cochrane says there is a requirement on all directors, whether they are on super fund boards or on corporate boards, to think independently, to act appropriately, to understand governance and to exercise their responsibilities as directors.
Before hiring a new director he looks for a sense of affinity. “If they don’t have that sense of affinity, it doesn’t matter how skilled they are, they’re not going to be able to contribute to the board,” he says.
The discussion raises the issue of the higher level of regulation faced by super fund boards. Fairley says: “The obligations on superannuation fund trustees are higher in the sense that a prudent superannuation fund trustee has to understand the principles of fiduciary duty and all that that entails, as opposed to the duties under the corporations law, which is the judgment in good faith that a reasonable person who is a director of an organisation would make.”
Registrations are open for the Chair Forum at the RACV Healesville Country Club, Victoria, January 31-February 2. The event will include a keynote presentation from David Gonski.
To register go to www.chairforum.com.au