I am a girl from Western Australia who had no expectation of the career of the sort that I had.’ says Diane Smith-Gander AO. That career is a compelling one which went from an internship while at university undertaking an economics degree, to a marketing consultancy, to a decade in senior roles at Westpac, eight years as Partner at McKinsey in the US and back to Australia where after another short stint at Westpac, she was offered her first major board appointment. Diane joined the board of Wesfarmers in 2009. The rest as they say is history as she built a much-storied decade as a non-executive director and chair. Diane is now Chair of ZipCo, DDH Limited, the Committee for Economic Development Australia, Safe Work Australia member body, and a non-executive director of AGL Energy, HBF and Keystart Loans.
Core tasks for the board
‘The core task for the board is being able to understand the information that is put in front of you, interrogate it in a proper way, understand when you have enough information to be able to make a decision. And to guide management in ensuring that they’ve got enough of the right sort of information to make the decision.’ But Diane notes, at the pointy end of the organisation for both management and the board, you never ever have hundred percent of the information you need. ‘There is no decision that doesn’t involve a bit of judgment. And my definition of judgment, is making a decision in the absence of full information. And we know what happens when we get paralysis by analysis, when people think that they can get all the information. So, I think every board needs you to be able to bring that core skill of judgment to the mix.’
‘The next core task is to assess the CEO and the CEO’s performance. To help the CEO be a positive part of the succession planning for the organisation, to understand whether there are viable internal candidates and to prepare those candidates as best as they possibly can be. You also need to be helping with the strategic reach for that CEO.’
Depending on the phase of evolution of the organisation, and the issues and risks that are appearing at a particular point, the work of the board will look quite different. ‘Sometimes you are in explore and develop a new strategy mode. Maybe there are outside influences that mean the strategy needs to be adjusted in some way. Maybe it is very settled and mature; then you will be in a sort of a maintenance mode.’ Some organisations are in run off in a way, Diane says. Boards will have to understand that. ‘In McKinsey we used to talk about this notion of creative destruction. That companies are not necessarily there for the long haul. You certainly see that when you look at the unicorns in Silicon Valley looking for an exit. On the other hand, companies like Google and Alphabet and Apple have all got themselves to a very large market cap in very short order. Whereas some of the larger legacy companies are going to have to find a different way to creatively destruct and rebuild themselves.’
This is the core of the sustainability argument. Because sustainability has that longer term lens and what you are trying to do is to make sure that what you are doing is relevant and, in some way, differentiating and therefore valuable in the market you are operating in. ‘This strikes to one of the core things that the board always needs to know, that is, what is this company actually worth. If you do not have a perspective on valuation, then you cannot steward the company effectively. And that leads the board to this conversation about sustainability. What do we really think our success is likely to look like?’
Increasing breadth of stakeholders
It was during her term as the chair of Broadspectrum and the work they were doing for the Federal Government on Manus and Nauru that Diane had a light bulb moment. ‘There was a moment when activists, who were trying to change the government’s approach to asylum seekers and work out how to find a better way to stop the boats than having people detained on Manus and Nauru, were not getting much traction with government. So, they thought that it might be a next step to directly act against the companies that were doing the work.’ Diane and the CEO sat down to work out how they were going to deploy the board, particularly her as chairman into this issue with the activist. To protect the company and lean into the question that was raised – “is what you are doing an abuse of human rights?” and to ask the question “how can we make sure that we are not?”. And make sure Broadspectrum was doing this job in the absolute best way that they could. ‘That was when the light bulb went red. The Road to Damascus moment happened for me about the increasing breadth of stakeholders. And how life was going to be different for directors.’
‘Reflecting on that, it is interesting to see how just in the last month we’ve had Exxon Mobil see a proxy fight where at least two of their sitting directors have been voted off the board, and two directors who are publicly saying they are going to address the climate change implications of Exxon Mobil’s activities have joined the board. We’ve seen a court in the Netherlands rule that Shell must reduce its emissions by more than it currently planned by 2030. And we have Zali Steggall in Australia promoting a private members bill that would remove energy policy from the Parliament and create an independent body.’
That, Diane points out, is a little bit like what has gone on with the investors who are putting the resolutions around TCFD onto the medium agenda for several large, listed companies. So, from the 2013-2016 timeframe where the stakeholders started to become more active in Australia, it has only been half a decade to now, where we are seeing major fractures in the way governance will be conducted in developed economies.
‘When you think about TCFD, how quickly that has progressed and how impactful that has been to provide a standard set of yardsticks where people can understand their emissions profiles, what their risks are related to climate change, how they are likely to develop over time, what they look like under different scenarios and what would have to be done in their company to achieve different warming scenarios, you can really see the power of pushing that along quickly. Climate related disclosures have been very financially grounded. And so that’s what’s enabled them to move so quickly into something where we can see standardised disclosure. This is going to be one of the really big changes we will see over the next decade and I think it is going to go faster rather than slower.’
Onus on directors for the future scenario plan
It is challenging to be a board director in an era where investors and shareholders and many other stakeholders have become active voices. ‘I think it’s not just for directors. It is for everybody who is in any sort of leadership position. Your actions of yester years are being judged on the standards of today. And that is a very hard thing to understand how to protect yourself against. How to have a risk appetite that lives in a world like that.’ When the effects test in competition was introduced in 2017, there was a lot of concern about this. Because it put the onus on directors to think about the future scenario plan and think about whether their actions were going to lessen competition in the future. ‘Well, so many new things can happen in the future. Look at the pace of change. It is hard to work out how you can be comfortable with that. To not have a defence that, well at that point in time I was acting in best interests, with due diligence and not in an anti-competitive fashion; but then to later be judged with hindsight, is a very uncomfortable thing for a director.’
But we are now seeing that play out in all facets of leadership. ‘We saw that with Christine Holgate and the Australia Post board where some actions of quite a few years ago, were judged during a global pandemic. And you heard a lot of commentators saying it is just not appropriate in the middle of a global pandemic. But you wanted to put your hand up and say, but those actions did not occur in the middle of a global pandemic. And by the way, they were well within her delegated authority. I think it is very difficult to attract people into leadership positions if those sorts of experiences become more common.’
A principles-based approach to regulation
Are governments and regulators pushing the boundaries with boards more in recent times? The fact that the community in general has been very disappointed with the conduct of some large organisations, be they government organisations, or companies or community service providers, has allowed regulators and government to feel that they should take a stronger enforcement approach. ‘Because they look at the failure and ask, so what was my role in this failure. So, you would expect them to want to behave differently. And in behaving differently, in several instances they have chosen to go in with a stronger enforcement attitude, and a more prescriptive approach to how they apply their regulation. I don’t think that is ever a good thing. Because all a rule teaches me is how compliant someone is - will they follow the rule. If there is a principles-based approach to regulation, then I will understand the values of that organisation; how they choose to apply the principles. That is a more meaningful insight into my regulated population. I think it is a potentially damaging pathway for us if we continue to become too prescriptive and we don’t allow principles-based regulation to develop as it should.’
This trend has been exacerbated and accelerated by the pandemic. Because we have had an existential crisis on our hands and the boundaries and norms of behaviour for regulators or governments or those in leadership, look very different today from what they were pre-pandemic. ‘I know that a number of jurisdictions outside of Australia are now setting up their enquiries into pandemic response. This will be helpful to work out what bits of change we keep and what bits to walk back. And which bits should never have been leant into and find mechanisms and ways to stop them from happening in future crises response.’
Urgency for good governance in government
We don’t have good governance in many parts of the government, Diane says. The Brittany Higgins revelations showed that. ‘The ministers in our governments are in an untenable position because they are solely responsible for hiring and firing. And it is not just in their offices, but it is the boards that steward the government trading enterprises, where the ministers have the final say. Yes, they are the elected representatives, and you don’t want to take away from their role. But I think something like the ABC where a separate nominations committee was empaneled to identify who the candidates should be for the ministers to then select from, is a fine way to go.’
Diane recommends that something like the Takeovers Panel is created. ‘You could have a bench of 45 people who are governance professionals, and they would be appointed probably by the Prime Minister or the Treasurer and put in random order. And when a government board needs to appoint directors, the first three people on the list would be empanelled. If there was a conflict of interest in some way for anyone among the top three, then the next person would be selected, and the person passed over would sit on top of the list. I think that could be a very powerful way to improve governance in government.’
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