Highlights. Board effectiveness: The directors cut. Edition

Transcription

1 Highlights Board effectiveness: The directors cut Edition

2 Overview Board effectiveness: The director s cut incorporates the views of over 100 company chairs and directors from the top 200 ASX companies. The survey identifies factors that are impacting board structure, function and roles, trends in board performance, and prioritises the issues that boards place high on their agenda. The purpose is to feed back the collective point of view on board effectiveness of the chairs and directors that were interviewed. The aim is to highlight a range of the issues and trends and raise important questions in order to stimulate further discussion. Factors affecting the board Deloitte s interviews of company chairs and directors left little doubt that most feel life as a director, already complicated, is getting harder. More than that, many feel that there are a significant number of new external influences that will have a real impact on how effectively board directors are able to do their jobs. Compliance Increasing regulation and compliance has almost doubled the workload of directors interviewed. 37% of board directors believe that the current balance between governance and performance is out of kilter. Independence Australian boards are struggling between overseeing performance and ensuring independence. The director s interviewed said that it was contradictory to ask for complete independence while also requiring an intimate knowledge of the organisation. Short-termism There appears to be a fundamental mismatch between the time horizons demanded by shareholders and the market on the one hand, and the reality of growing and building a business on the other. Directors said there essentially is an irrational focus on the short term at the expense of longer-term, sustainable performance. Thirty-seven percent of the board directors we interviewed believe the current balance between governance and performance is out of kilter The Australian board model is creating a real conundrum between knowledge and independence. Private equity Private equity has put unprecedented pressure on boards to re-examine their capital structures, corporate finance strategies, and business models. Many directors felt they hadn t handled the private equity challenge effectively; they were not aggressive enough in defending their companies or in analyzing the sources of value within them. Pendulum swing between CEO and board The pendulum of corporate power and public profile is swinging some way back towards the board from the CEO. Chairs are now becoming more prominent in addressing strategic direction, remuneration and governance issues. Growth The long economic boom has meant that the market now expects exceptional rate of growth as a matter of course. According to our survey results, some boards have been so focused on achieving growth that underperformance in core businesses has been masked through acquisition and investment in new ventures or geographies.

3 Rock star fund managers Fund managers have become more vociferous in their efforts to push their positions not just to the boards and executives, but also to the financial press. Funds are now making judgement calls on board performance and executive management. Globalisation Australian companies are going global, but their boards are having trouble keeping up with them. Directors are discovering that there is a difference between being an Australian board with global experience and being a global board. Board Performance Organisations are becoming increasingly complex, and shareholder pressure is forcing boards to re-evaluate performance and reassess responsibilities. Our survey reveals that directors believe boards will need to raise their collective performance to meet stakeholder expectations and to drive improvements in shareholder value. Current Performance 84% of board members surveyed said that the CEO and chair are appraised annually. The last few years have seen a flurry of board performance reviews however many of these are based on individual director performance rather than a review on the performance of the board as a collective. Measuring collective performance Our survey indicates that the evaluation of collective performance is still based on the skills of the chair rather than employing a more structured approach or using benchmarks to compare a board s performance against its counterparts. We were told that only a few boards have moved to a more management science approach of evaluation. The board - a high performing team Director s attribute as much as 80% of the success of a board to the skills of the chair. Due to increasing demands of regulation and compliance boards are not spending as much time as they would like on strategy. The consensus view is that there are directors on any given board who are not performing to their full potential. (This is not a reflection of capability but more of poor team dynamics) Learning and development is a key area for quick gains in board performance. The directors interviewed considered most boards to be average to good, rather than exceptional. Board succession is a key issue with only 51% of directors interviewed saying that the process of selection is formal and transparent Fifty percent of directors say that director remuneration is appropriate. This is a surprisingly high percentage given the strength of views expressed in the qualitative interviews about the hours and energy directors are putting into board work, the personal liability to which they are exposed, and the discrepancy between risk and reward. It is a challenge to find board members with appropriate industry and global experience. Having specialists affects the dynamics of the board and there is an element of risk associated with one person holding all the knowledge about a particular area. Exemplary boards Most directors struggled to identify exemplary boards. Most directors said that Australian boards were average to good rather than excellent. Few boards were named. The leaders were Wesfarmers followed by Woolworths, BHP, Westpac and ANZ.

4 Issues on the board agenda Directors interviewed believe winning the war for talent will be the number one challenge on the board agenda over the next 12 to 24 months. Talent Management In 2007 the demand for talent exceeded supply. Directors are keenly aware that the traditional methods of attraction, deployment and development of talent are not producing the right results. Growth Growth remains a priority, be it M&A or organic. Understanding value drivers and determining realistic growth targets for management remain a prime concern for directors. Executive remuneration Director s believe that there is a strong need to link performance with executive remuneration. Boards are caught in the middle on the one hand they understand why big packages are justified but on the other, they have to publicly defend the cost. Private Equity Directors told us that a number of boards have taken the lens of private equity to their own businesses, using it to re-examine corporate and capital structures and to determine if additional value can be unlocked for shareholders. Political and economic downturn A change in the economic environment is seen by many directors interviewed to present serious challenges to companies accustomed to operating in growth mode. Strategy Boards see themselves as doing a lot more than just enhancing performance through overseeing strategy. They are now participating in the process of developing strategy. 85% of the board members interviewed said that boards regularly review corporate strategy. Governance and regulatory compliance The burdensome nature of corporate regulation is a major source of frustration for the directors. They believe fulfilling overly onerous compliance obligations is making it difficult for them to undertake the activities they believe really create value for the organisation. Top five issues faced by boards last year: 1. Compliance and regulation 2. Governance 3. Private equity 4. Talent management 5. Strategy Top five issues on the board agenda in the next months: 1. Talent management 2. Political and economic downturn 3. Compliance and regulation 4. Growth 5. Strategy Reporting 95% of the directors believed that financial indicators alone do not capture the true picture of the organisation. In fact 98% of the board believed that it is the responsibility of the board to monitor both financial and non-financial performance. Risk Managing risk is central to all board activities. But while 78% of interviewees attested to understanding risk clearly, what is significant is that 22% did not. Executive succession management 89% of interviewees identified CEO and executive succession as a leading concern. Directors interviewed also saw a greater need to improve the development of internal candidates for CEO and senior management succession. Climate change and sustainability Directors we interviewed believe climate change and sustainability will have a significant impact on businesses over the next few years.

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