National Conference day one – News wrap

It was a packed first day of Governance Institute’s 38th National Conference.

Here is a news wrap of all the key lessons, insights and takeaways.

Courageous Leadership

Chair: Lisa Edwards, President and Chief Operating Officer, Diligent Corporation (USA)
Carol Austin, Non-executive Director HSBC, State Super & Grattan Institute

It’s a pivotal moment for leadership, and the great leaders will step up just as they have done during history.

“Leadership has never been more important, and in the future we will remember the people who step up and lead during this time, as much as what happens,” Edwards says. “There are great expectations from leaders.Purpose gives direction but culture … shapes the road you travel.”

Austin says Liberal democracies are under threat on several fronts. In the post war period through to the Kennedy years in the US, altruism held the balance. Strong leaders like Ronald Regan and Margaret Thatcher changed the economic and social outlook. And in 2021, the balance between individualism and altruism is shifting.

“Courageous leadership is really hard. It requires determination, commitment to drive change, a preparedness to make unpopular decisions and preparedness to fail,” she says. “It’s not just leaders in corporations. Everyone has a roll to play to guide companies.”

She adds: “Ideas matter, but alone they don’t change the world. You need strong leaders to drive change … Great leaders seek information, take advice and act boldly.”

Austin forecasts economies and societies will change, particularly if the Biden Administration’s ambitious agenda on climate change, economic growth and social reform is carried out.

This will have implications for the tax system, relationships between government and community, and businesses and community. Healthcare and low paid workers, which the COVID pandemic has shone a light on, will be particularly affected.

Taxation will be a battleground of the future because all these changes will need to be financed, Austin says.

Many of these issues are enormously difficult, balancing the long- and short-term goals. Leadership from political leaders is critical for corporates to navigate their way through the changing landscape.

Government and business partnership– harnessing the momentum

Chair: Megan Motto FGIA, Chief Executive Officer, Governance Institute
Professor Sir Edward Byrne AC, Group Chief Medical Officer, Ramsay Health Care
Romilly Madew AO, Chief Executive Officer, Infrastructure Australia

One of the benefits of COVID, at least at a bureaucratic level, has been increased collaboration among the public and private sector. It has taken courageous leadership, and courageous partnerships, Motto says.

The challenge now is to keep these partnerships going. One way to do that is to teach private businesses how to engage with government.

“It doesn’t matter whether I’ve worked on the government or advocacy side, it always works better when there’s collaboration,” Madew says. The National Cabinet is a great example collaboration, she says.

“There was an eye watering amount of collaboration and coordination in infrastructure during COVID,” she says. She also outlined the best way to do it wasn’t always to go directly to the government minister in charge.

“Find out who is the gatekeeper,” Madew says. “Federally the gatekeepers are deputy secretaries [of ministries]. If there are other similar industries, get together. The more the government hears a common voice, the more it’s likely to react.”

“Know who to go to, what their levers are and have evidence and be prepared for a collaborative approach.”

Sir Edward said when working together, private and public have to be respectful, ambitious and strategic.

He said there had never been such a stressful time in health delivery as during COVID. “We’ve seen phenomenal commitment to ensure health delivery from both the government and private sectors.”

In the UK, the National Health Sector has been under-resourced by successive governments and fewer people have private insurance.

“As the COVID crisis developed, the public sector focused on COVID and the private sector stepped up to the mark, looking after non-COVID care. And that’s opened the way to closer collaboration.”

In Australia more people have private health insurance, and the sector has played a major role in health during the crisis.

“In the years ahead, the public and private sectors will collaborate more closely. It’s important this happens in Australia to reduce waiting lists and deal with capacity going ahead,” Sir Edward says.

COVID is the pointy end of change, but collaboration is needed across the economy.

“The next ten years in Australia will be challenging,” Sir Edward says. “The role of China, different supply chains and the fourth industrial revolution… needs the government, private sector and university sector to be working on the same track.”

Both speakers said the not-for-profit sector could also play a role in bring different groups together or playing a strategic role around how integration best occurs.

Board diversity: Who is missing at your table?

Chair: Byron Loflin, Global Head of Board Engagement, Nasdaq (USA)
Nicola Wakefield Evans, Non-executive Director, Lendlease, Macquarie Group and Chair, 30% Club Australia
Tanya Hosch, Executive General Manager, Inclusion and Social Policy, AFL

The milestone of getting a woman on the board of every ASX200 company was achieved this year. But it marks the beginning, not the end, of the journey towards diversity at board level, according to panellists at the session Board diversity: Who is missing at your table?

There is little doubt diversity matters. Loflin says investors are paying more attention to board diversity because the data shows that performance, productivity and a better ability to wrestle with boardroom issues are a direct result. The global financial crisis was probably the moment that the business world realised that boards were technically proficient at managing companies but missing critical issues of risk due to a lack of diversity of experience. Progress towards diversity has been rapid since then.

But as one ASX200 milestone is achieved, the question becomes what diversity at board level means.

“It seems crazy that it’s even a conversation to be had… women are 51 per cent of the population,” says Hosch.

“So, I don’t consider women sitting around the table as representation of diversity as such.”

Instead, boards should look to the next frontier of bringing difference to the boardroom by including indigenous people, people with different cultural backgrounds and people with a diverse range of experiences.

Wakefield Evans says this next phase will happen quickly because more women in leadership roles means the conversation about getting diversity of thought, diversity of cultural background and diversity of experience to board level will be richer than it was when men dominated boards.

“I’m confident it will be faster than getting women to the table,” she says.

But Hosch cautions that diversity is not simply about bringing diverse people to the boardroom table – it’s also critical to allow them to bring their whole experience to bear.

“I have certainly had the experience where there’s an expectation that you will adopt the tone and the presence of everyone else in the room and just look different,” she says.

“If that’s happening then all we’re doing is changing the drapes, we’re not actually engaging in the diversity and the richness that we all claim to believe is there.”

Hosch says boards must consciously and deliberately ensure that people from diverse backgrounds are made to feel welcome in the boardroom to unlock the full benefits of diversity. Simple things like social conversations can highlight differences and be exclusionary.

“If we’re going to take this work seriously… we have to be prepared to do some work on ourselves,” says Hosch.

“We need to challenge some of the things that we’ve always done to make sure that this new person knows that they’re not just welcome but that they can participate fully as themselves and are valued.”

Director Q&A with DSG

Host: Diane Smith-Gander AO FGIA, Chair, ZipCo
Yasmin Allen, Non-executive Director, ASX Ltd, Cochlear Ltd and Santos Ltd
Kevin McCann AO, Chairman, Telix Pharmaceuticals

Results season is complete, and directors are deep in engagement mode ahead of the upcoming annual general meeting season.

“It used to be a conversation with large institutional investors and proxies. It was mostly about financials… and sustainability topics got a quick brush over,” Smith-Gander says. “Not so today.”

There are many topics that now demand attention – modern slavery, climate change and respect for workers. And these are aggressively pursued by shareholders and activists if there’s been any noise around these topics, Smith Gander says.

McCann says AGMs are a great opportunity to engage with shareholders but shouldn’t be the only engagement. “It should be a year-long activity,” he says.

The annual report is now more important than ever, McCann points out, particularly the governance and ESG sections. And directors must take a leading role in setting out the purpose of the company and its activities in relation to diversity, climate change and COVID.

Allen says the focus of AGMs are changing. Last year it was about health and that morphed into the economic impact of the virus.

“Now we are seeing that COVID accelerated many trends such as technology transformations… There’s also much greater emphasis around ESG (environmental, social and governance) and purpose, particularly climate change,” Allen says, adding that it provides opportunities for how businesses interact with society.

Three trends accelerated by COVID that boards need to think are transitioning workforces, decarbonisation and the rise of China.

“Transitioning workforces makes economic sense … because labour shortages will become very real,” Allen says. “There will be opportunities and costs around decarbonisation. And boards must understand the impact of China. It’s already a leader in AI and 5G and global trade flows shifting from east-west, to south.”

ESG issues are relevant for all companies, big or small, she says. “If business doesn’t focus on ESG… it will be hard to attract future staff and customers.”

When it comes to decarbonisation there are three main focuses. One is exit and sell and let someone else fix the problem. That’s why the energy sector is likely to see more mergers, Allen says.

A second option is to transition to renewables and reduce emissions and Allen believes it’s the responsibility of fossil fuel companies to not only reduce emissions but also help their customers do so.

And the third option is to build new revenue streams via achieving emissions targets. “If you can offset carbon at source, then you’re selling a different product,” Allen explains. “There are customers who want producers of energy to help offset carbon emissions. There’s a range of solutions in this area.”

Remuneration is always difficult, but financial metrics can’t be subsumed by financial metrics, McCann says. But incentivising ESG outcomes via remuneration can have results.

Allen says that financial and non-financial metrics are merging, in part because ESG introduces financial risks.

Concurrent 1A: What is your purpose?

Chair: Simon Pordage FGIA, Company Secretary, ANZ Banking Group
John Lydon, Senior Partner, McKinsey

Purpose is becoming increasingly important to business success, with employees, customers and shareholders all demanding that business plays a role in doing good in the world rather than just focusing on the bottom line.

Young people are leading the way, with 86 per cent of under 30s saying they will choose a company to work for based on its impact on social issues.

But institutional investors are also driving the change, with a nine-fold increase in capital managed in line with environmental, social and governance factors.

“It becomes part of your DNA and needs to be embedded into everything your business does,” says Lydon.

Repeated studies, including from McKinsey, show purpose is correlated with better business results.

Lydon offers a four-step path to embedding purpose into the core DNA of a company, starting with the exhortation to “do no harm”.

“Social expectations go well beyond the law … doing no harm means not having unfair products, not hurting people, not paying suppliers too late, not having tax avoidance schemes that fail the pub test.

“There’s a general expectation in society that business should at least not do harm.

The second phase is “add some good”, which might be through a foundation or pro bono work.

A third step is to be purposeful in all you do and let purpose inform every part of the organisation and all its decisions. Lydon offers the example of US pharmacy chain CVS walking away from US$2 billion of tobacco sales to live up to its purpose of improving the health of their customers.

The final step is to be part of a larger ecosystem of purpose, engaging and collaborating with others to make purpose a part of the wider business community.

Concurrent 1B: Culture is a risk

Chair: Catherine Maxwell FGIA, General Manager Policy and Advocacy, Governance Institute of Australia
Dr Richard Claydon, Chief Cognitive Officer, EQ Lab (Hong Kong)

Everyone talks about culture as an asset, but it also can become a liability. Culture is risk, and it could be your biggest risk.

What contributes to a poor culture? There are many reasons culture is poor, from strategy and management, through to the culture not helping itself, Claydon says. Values matter. So too does conduct, and how management responds to differentiation and fragmentation.

Behaviour is the tricky piece of the puzzle.

Culture needs to emerge and management must be vigilant. They need to create conditions that enable healthy, vibrant, future-fit, adaptive, low risk behaviour that maximise collaborative co-creation.

When culture becomes more toxic, how can people be encouraged to speak up.

Start with collecting stories from employees and cluster them around thematic elements – good and bad and their hopes, Claydon says. Companies can plan culture change around these stories.

In a COVID-19 world, and beyond, teams within the workforce are becoming more tightly knit and doing the work. But communications between teams is less. Senior management need to become the connected hub and better help communications between the teams.

Concurrent 2A: Change is easy; change management… not so much

Felicia Brady, Independent Program Director & Transformation Lead
Matt Nidd, Executive Advisor, DB Results

Change is not only inevitable but accelerating, meaning the skill of managing change is critical for corporate growth and survival.

But despite this, stories of failed change are common and there is a perception that change is difficult and expensive.

This does not have to be true, says Brady.

“Why is it that in very complex industries can consistently deliver low margins of error, but in other industries and other sectors replacing a billing system is fraught with danger and can cost you $200 million?” says Brady.

The answer is that some industries are more practised at enforcing compliance with methodologies and disciplines that reduce errors and drive successful outcomes.

Brady offers four steps to ensuring change management is successful.

First, it is critical to fully understand the scope of any change. Assuming that change is small or easily understood leads companies to under-resource change projects.

To mitigate this risk, Nidd urges companies to spend time genuinely understanding all aspects of a planned change using proven methodologies to define and size the problem and having their plans assessed by an external expert.

The second factor is putting the right team in place, matched to the project scope in capability and experience.

Third, ensure ownership of the change is clear and that the entire executive is aligned.

And finally, make sure the board acts as a check and balance and injects its expertise and experience. This kind of active engagement from the board is critical.

Concurrent 2B: Communicating and advancing risk culture

James Campbell, Steering Committee Member, Bribery Prevention Network and Partner, Allens
Ken Weldin, Partner, PKF
David Tattam, Chief of Research, Knowledge and Consulting, Protecht

What is risk culture? Campbell says risk culture is part of corporate culture and there are many aspects to it – legal, financial, operational, conduct risk.

Creating a culture of compliance is necessarily based on having a risk culture, he says. And the risks must be assessed in terms of rewards as well. Risk isn’t just about the tone from the top, but increasingly the tone from the middle.

Campbell said an organisation that considers risk a ‘cost’ of business, normally isn’t good managing it. If a company sees it as an opportunity, then it tends to be more successful building a risk culture.

Weldin says risk culture involves behaviours and real-life circumstances. When pressure is on individuals, will they behave consistently? Expand that into teams and organisations making thousands of decisions every single day. How does that play out in terms of a risk framework and is it consistent?

He says it’s important to make risk culture simple. Risk needs to be embedded in everything. And it should be spoken of in plain English.

Campbell says risk culture comes in many forms, though there are some common characteristics. One is the powerful effect risk culture can have when it identifies a risk that’s been key to an organisation. Another is around powerful individuals in an organisation. And finally in some companies it is difficult to trace down who makes specific decisions. But companies where accountability matters generally has a better risk culture.

Fireside chat: The intersection of technology, risk management, operations and governance

Greg Dickason, Managing Director Pacific, LexisNexis
Anil Sabharwal, Vice President, Product Management, Google, Non-executive Director, Wesfarmers

Technology has rapidly become a core part of the way modern businesses operate, whether as a tool supporting operations or as the core platform for serving customers, putting it increasingly on boardroom agendas.

“I find it very difficult to imagine any business in the next five or 10 years where technology is not a core part of their differentiation,” says Sabharwal.

Sabharwal offers three action points for boards to assess their business’s relationship with technology.

First, he asks leaders to imagine that in five years from now, something IT or digital-related has destroyed the business.

“What was it?” he asks. “What was that thing where we were most at risk? Was it a loss of our data? Our brand equity? Is it cybersecurity? Is it people stealing? Then the question is: are we really doing everything we can to mitigate it?”

The second action item is to look across competitors and try to identify one thing that competitors are doing that could be brought on to your business that might be different from what your business is doing.

And the third one is to think deeply about disruption and innovation by considering what the world might look like in 20 years. Why 20 years? Sabharwal uses a quote from Facebook to illustrate.

“You should plan for 20 years in advance, and you should plan six months in advance. Everything between six months and 20 years you should ignore.”

The idea is that if a business can develop a vision for two decades time, then they can take concrete steps in the next six months to get closer to that vision.

Sabharwal points to Microsoft as a flagship example of a company that successfully disrupted itself by thinking deeply about the future.

“[They were] in incredible decline in a period where everything moved from client applications to the internet and everything moved from desktop into mobile,” he says.

“Now they’ve had a phenomenal resurgence.

“They made decisions that they never would have ever made before”, abandoning the goal of owning the operating system on all devices and rolling out their flagship Office product on competitor devices.

“Had they not done this, they would have been disrupted because someone would have built a better productivity suite,” he says.

He says risk is a prime driver of business decisions and should be deeply pondered at board level.

“If I was going to start a business, and my entire objective was to make my current business be unsuccessful, what would I do?

“What new things would I build? What approach would I take?”

So how can business better engage with technology?

Part of it is understanding what parts of technology to buy in and what parts to own in house.

Sabharwal tells boards to consider technology on a case-by-case basis. Some decisions may be clear like choosing to use cloud providers rather than owning servers. But others may be more nuanced depending on what a business wants it core competency to be.

“What are the costs, what are the opportunities if we go external? I think it is very reasonable to lean on external companies to help manage this risk in areas where it is their core competency,” he says.

Fireside chat: Rebuilding from catastrophic governance failures

Chair: Garth Callender, Chairman, Bravery Trust
Dr Sally Pitkin AO, Chair, Super Retail Group
Nick Ryan, Chief Executive Officer, Lutheran Services
Lindsay Tanner, Non-executive Director, Suncorp

Whether it is war crimes in the military, doping scandals at football clubs or neglect in the aged care industry, governance failures can have catastrophic effects on organisations and their most important stakeholders.

But not only can organisations rebuild from these types of catastrophic failures they can emerge stronger for the journey.

Pitkin says it is important to remember that while not all governance failures are catastrophic, all governance failures have consequences and failures are usually rooted in organisational culture.

She says it is important that businesses acknowledge the conduct or the mistake that led to the failure and to remediate the problem. She says this should take precedence over investigating during the height of a crisis.

“There will be a time for investigation, to really understand the root cause. But at the time of the crisis, you need everyone working together to get through it,” says Pitkin.

After a crisis has passed, Pitkin says organisations can rebuild by taking a three-step process.

First, take a close look at the organisation’s purpose which might be right, but it may not be informing what is going on in an organisation. Second, review the organisation’s governance framework including systems, structures and processes. Third, look closely at organisational culture to assess whether it is what you want. And finally, review leadership.

“Does the board and CEO have the commitment, character and capability to lead the organisation? A governance failure is an opportunity to have a stronger, more resilient and more successful organisation.”

Tanner says alignment is the key, saying he took over Essendon football club after a doping crisis that was a failure of governance.

He says alignment is the key to getting an organisation back on its feet and making sure that people are united behind pursuing the goals of the organisation.

Ryan says not-for-profits like the aged care sector are different from other organisations and can rebuild from crisis by getting board members immersed in the service delivery of the people they serve. “And they are not there to do the royal tour,” he says.

The panellists discussed Rio Tinto’s destruction of ancient rock shelters at Juukan Gorge as an example of a catastrophic governance failure.

“I think operating within an ethical framework for decision making will help you,” says Pitkin. “Community expectations are changing, and our organisations are embedded in our community.”

Tanner says Rio’s problem was a lack of clarity of accountability: “A classic governance failing where you had a bunch of people involved … all of whom thought that somebody else was responsible for ensuring that an outcome of that kind didn’t happen.”

Achieving net zero: The task for business

Chair: Bill Cox, Chief Executive Officer, Aurecon
Alison George, Head of Research, Regnan
Dr Kerry Schott AO, Chair, Energy Security Board
Alex Wonhas, Chief System Design Officer, Australian Energy Market Operator

Australia is currently undergoing the world’s fastest energy system transition, leading the way towards net zero carbon emissions.

“We are twice as fast as Germany – the next country on the list,” says Wonhas, adding that we also have the some of the world’s highest penetration of rooftop solar.

But the rapid transition is being delivered by state governments who tend to step up when there is a lack of policy direction from the federal government.

Schott says that with regards to the national electricity market, the states have all set net zero targets. Consequently, electricity is well on the way to decarbonising.

“If electricity doesn’t decarbonise, neither can transport or other important areas,” says Schott.

But Schott cautions that Australia not moving as quickly towards net zero outside the electricity sector, adding that the federal government will need to step up to encourage the rollout of electric vehicles and charging equipment which will be a key factor in the transition.

“We’ll get to the late 2020s and you probably won’t be able to buy an internal combustion engine car, so we really do need to get EVs and charging equipment in the norm.”

Wonhas says this offer opportunities for business: “If we do this well as a nation, I believe we can enjoy a transition to a net zero economy that keeps prices competitive and ensures the lights stay on and it will also create a really attractive investment opportunity. The total transformation of Australia’s energy system alone creates an investment opportunity of around $100 billion.”

George says much is made by commentators of the long-term nature of climate change as a challenge when compared to short electoral cycles for political leaders, the average tenures of CEOs or the length of the average business cycle.

“Business could fall into that same trap, even though of course, businesses will be around in 2030 and 2050.”

She says the timeframes are also not long when compared with the investment horizons of superannuation funds: “Members joining now will be retiring into that world.”

But she says it could be rocky on the way: “We know the destination – we want to get to net zero – and we know the timeframe, but we don’t know the pathway,” says George.

George says the finance sector is doing much of the heavy lifting in dealing with climate change, focused not only on divestment but also investing in decarbonisation and solutions.

Schott says public support is lining up behind net zero and draws parallels with the rapid uptake of COVID vaccines in the face of a growing case numbers.

“You fairly quickly change your mind when you see what’s going on,” she says.