Interview: Fred Hilmer AO — the board model, best practice vs best fit

We speak with Professor Fred Hilmer AO about his career and his new book What’s wrong with boards. Professor Hilmer will be speaking at the Governance Institute's 2022 National Conference.

Fred Hilmer AO

Fred Hilmer AO started his career as a lawyer in commercial practice. But he was frustrated by law because the lawyers were brought in after the deal was done. He was more interested in shaping things rather than coming after the fact and tidying things up. At the time he was at the University of Pennsylvania as a law academic and took the opportunity to do an MBA at Wharton. ‘I joined McKinsey straight after Wharton and stayed there for 20 years, ending up as the senior partner and the manager of the Australian practice. But I didn’t see myself consulting for the rest of my life. I was still relatively young. I always had a strong feeling that I would like to do something in education. So, when the Australian Graduate School of Management (AGSM) Dean and Directorship was offered to me, I did not hesitate.’ It was also during this time that he wrote an exploration of board performance, function and governance in his book titled Strictly Boardroom

‘I was completing my tenure as dean and director when one day I had a call from Brian Powers, who was chair of Fairfax at the time.’ When Professor Hilmer went to see him that evening, Brian Powers offered him the role of the CEO of Fairfax. ‘I said to him, I cannot see the logic in that! Where does that come from? He said that they had tried many CEOs — ten in ten years!’ Explaining the logic for this offer, Brian Powers said that the board knew Professor Hilmer well and felt that managing university staff would not be that dissimilar to managing journalists. For the next seven years he steered Fairfax. ‘It was very exciting, and it had its hard moments. The one lesson was, never manage a company whose revenue is smaller each quarter! We made some progress that was controversial. The journalists didn’t like the fact that I was not a journalist. But we kept our eyes on the prize; that was to get control of the economics and not spin out of control in high-risk, high-cost efforts that were going on in the industry at that time. Anyway, I had taken this on for a five-year term, but it got extended, probably because nobody else was silly enough to take it on.’

In 2006 Professor Hilmer stepped back into the academic world as the vice chancellor of the University of New South Wales, holding this role until 2015, while also becoming the chair of the Australian research universities body Group of Eight (Go8) and the international research universities network Universitas 21 (U21). He also held numerous board roles including chair of Pacific Power, deputy chair of Foster's Group Limited and as non-executive director of Coca Cola Amatil, TNT and Macquarie Bank.

What’s wrong with boards

‘I always said I would work full time till I was 70. Once I hit 70, I would do things that interested me part time. I didn’t want the discipline of a job. So, I retired from the university the day before I turned 70. Since that time, I have done many indulgent things. I also wrote this book which has kept me sane and interested.’ The book he is referring to is his new book, What’s wrong with boards, where he reflects on the state of corporate leadership and board function. The book is due for release in August 2022.

Several colleagues had suggested to Professor Hilmer that he should do an update on his 1992 book, Strictly Boardroom, because things had changed and a fresh look at board matters would be timely and well received. Now with multiple executive and board roles under his belt, and breadth experience and insights from across industries and sectors, there was an opportunity for a substantive update. ‘When I thought about it and did some outlines, it struck me that things had changed too much to just take an existing template and fit what’s happening now into what was a 1992 book. I tried to see what was different now about governance.’

What is changing the board model

‘It all started with Adrian Cadbury in 1992. Cadbury had four big ideas that shaped the way that governance has been framed and carried on. The first was that you had to have independent directors whose only interest was improving the company. They had to be led by a non-executive independent chair. Thirdly that there should be transparent and accurate disclosure; the board should not be surprised but must be well informed about what was going on and what they might need to turn their minds to. And lastly, he set up some processes — committees and membership of committees — and in terms of how the board would do its work.’ That was Cadbury’s ‘92 model.

What is changing, Professor Hilmer says, is not so much the model, as what is now being asked of boards. Because in ‘92 boards were still focused on a single objective, which was wealth creation. While that is still an important objective it must now co-exist with concern for the environment, jobs, ESG, ethics, values, diversity. So, we have boards doing things in a traditional way; but the demands on them are growing. However, the boards are not given any time or any particular way, Professor Hilmer says, in which to handle what was going to be a trainwreck between the time available and a growing suite of new objectives and challenges.

In the book, Professor Hilmer argues, that we need a more flexible approach in three areas. First is in the model that we use. ‘There is nothing magical about any one model. You need to look at a variety of models and be able to choose one that fits. So, in addition to the ASX model, there is the executive heavy board. I sat for many years on the Westfield board which was executive heavy and did not strictly comply with the existing model but created enormous wealth for its shareholders and for the country. Then there is the private equity model. There is also the very interesting idea in the US called Corporate Governance 3.0. Then we have the European two-tiered model.’ As you look at these models, they all fit differently. The European model for instance has the two-tier structure of a management board and an independent supervisory board. Professor Hilmer says, that instead of best practice, what is need is best fit. Fit between what the model would do well and what the demands of the business and community which it served requires. So that is the first idea the book discusses — shake off the shackles of a single ASX model and be prepared to have other board models, when the circumstance made it reasonable for you to expect that they’d be better.

The second set of ideas in the book is about focus and delegation. The conflict between more to do and less time to do it in, must be resolved. And the way it must be resolved Professor Hilmer says, is for boards to focus on things that only they can do. They must delegate the more aggressively the tasks that are less necessary for them to do, rather than oversee. The third recommendation, and this one was hugely supported in a series of interviews that were done for the book, is that the role of the chair and the selection of the chair need a lot more time and attention. ‘If you are going to improve governance fundamentally, then the role of the chair is pivotal. At the moment, there is a fuzziness about what the chair does, how the chair interacts with the CEO, how the new chair is chosen. Clarifying those issues is the focus of that part of the book’s recommendations.’

Looking back on the governance failures of recent times, Professor Hilmer reiterates, that it is really about the increasing conflict between the capacity of the board and the time it has, and the challenges it must face. A collision between the immovable object and the unrelenting force. ‘That is part of what’s going on. I also think that in the past few years, you couldn’t be completely satisfied. Australia is a lucky country and has been the lucky country. But I don’t think there is strong evidence that the wealth we have is earned rather than endowed.’

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