A series of highly publicised corporate takeovers thrown the spotlight on the role of non-executive company directors. Is a seat on the board possibly more trouble than it’s worth?
Story Tony Malkovic Illustration ProMotionStudios.com
Over the past year, Australia’s corporate world has had a dizzying array of highprofile takeovers hogging the headlines. The buyouts – often part of the private equity boom – have featured multi-billion dollars deals involving big corporate names such as PBL Media Holdings, Channel 7, Coles Myer, Qantas and Alinta.
While not all were successful, the key players have been the focus of considerable media and shareholder scrutiny.
Of course, that’s not always the case. Becoming a director with a not-for-profit organisation can be light years away from being on the board of a Top 100 company. But what should you look out for if you’re thinking of becoming a company director? And what makes an effective board and good directors?
According to the main body representing company directors, a diversity of backgrounds and views is desirable along with the ability to be a team player.
“I think the thing that makes excellent company directors is a combination of their business skills and their social skills,” says Ralph Evans, CEO of the Australian Institute of Company Directors (AICD).
“The board is a group of people working collectively or collegially. They need to be able to function as a group so that a good set of decisions can be reached in discussion around the board.
“The very best of them have social skills, lots of business experience and a third component is good judgement.” That last quality is crucial.
“When it says you have to act in the best interests of the company it means you’re acting for the entire company not for some party that might have got you on the board in the first place,” Evans says. “This is a thing that’s frequently misunderstood.”
And those misunderstandings can abound in times of takeovers and mergers.
Duties and Responsibility
So much so, that earlier his year the AICD issued a warning for company directors to be very conscious of their duties and responsibilities during boom times. A sort of corporate “be alert, but not alarmed” message.
The warning wasn’t aimed at Chartered Accountants, but is relevant for anyone thinking of putting their hand up for a seat on a board.
Evans says directors need to be constantly aware of declaring potential conflicts of interest. Not only might they be liable under law if they do the wrong thing, but there can be a more personal price to pay.
“You need to know what to do. You need to know what your duties are. And you need to be prepared to act very resolutely because your duty is mainly to act in the interests of the shareholders of that company,” Evans explains.
“If you do otherwise, you can get in pretty serious trouble and the company can get in pretty serious trouble as well. The reputation of you and the company can both be badly damaged.”
The AICD even released a position paper alerting directors of their responsibilities during heightened market activity – when there’s substantial mergers and acquisitions activity and private equity deals – urging them to be aware of potential risks. It says three main areas of concern relate to:
- continuous disclosure
- disclosing and managing conflicts of interest
- directors’ responsibilities and duties to the companies they serve.
Chartered Accountants may feel they carry extra responsibilities as a company director, for example, being part of an audit committee.
“That’s not unique to accountants, I’ve heard among AICD members – a number who’ve been directors of high level companies – who say: ‘It’s very onerous these days, the exposure of your reputation and potentially to penalties is quite serious and the remuneration is not necessarily all that spectacular so it’s not that good a trade-off’,” he explains.
“The special case for accountants is that every company needs to have an audit committee and if the company is in the Top 300, it has to have somebody with financial expertise on its audit committee and, of course, that is usually an accountant. So it’s very common for accountants to end up on the audit committee of a company. “Whether they think that’s a great prize to win or not, it’s really up to them. But it is a
special responsibility they tend to get.”
Multiple Boards
Evans says there’s a reason why many directors sit on multiple boards, but it’s not a shortage of company directors. In fact, it’s probably the opposite.
“There are a lot of people who are keen to pursue the avenue of becoming a company director. For instance, we have 2000 people doing the AICD course each year, which is the introductory course on the necessary skills and requirements of being a company director,” he says.
“It’s true that there are some other people that you’d really like to be directors who have been (company directors) and have outstanding abilities, yet are shying away from it because of the responsibilities. “But I don’t think it is strictly true that there is a shortage.”
He says people often have multiple directorships because they get known for doing a good job.
“The very best reference point you can ever get is that you are already known to be a good director of another company,” Evans explains.
“It’s been a very well established pattern that people who get one good directorship, quickly get asked for more.”
Australia’s corporate rulebook was re-written following the country’s biggest collapse in 2001 – the $5 billion implosion of the HIH insurance group. So if people are shying away from becoming directors, have regulations perhaps gone too far?
“We’re certainly amply regulated,” is Evans opinion. “I think since the ASX corporate governance principles were published in 2003, there have been no serious failings of companies, big ones anyway, and the standard of corporate governance in Australia is pretty good, and rates well by international standards,” Evans says.
“I think those things are working well now.” A new version of ASX principles has just been published.
“There is perhaps an accepted focus on conforming to rules rather than building value in the business. It’s pretty hard being a director, they want to build value in the business but they have to comply with the rules and report in very detailed ways which can be somewhat of a distraction from building the value to the business.” According to the peak body that represents investors, the Australian Shareholders’ Association, one of the key attributes of a non-executive company director is the old-fashioned ability to get on with people.
“We think, as retail investors, the most important thing is to get the right directors on the board, and then for the directors to select the chairman and for the chairman to have a good working relationship with the CEO,” says Stephen Matthews, ASA’s deputy chairman.
Like the AICD, Matthews doesn’t believe there’s a dearth of directors. “Chairmen I speak to say: ‘We’re on the lookout (for a non-executive) director and we have 200 names put forward’,” he explains. “But there is a shortage of good directors - and that’s the difference.”
Wake-up Call
Being a good director for Matthews means knowing your role and its statutory requirements, representing the interests of the company and shareholders, exercising oversight – and being proactive: “A good director or chairman is a good listener and has a sense of when to step in or when to make a move.”
Matthews says he believes the spate of private equity deals hogging the headlines recently has been a wake-up call for many boards.
“I think what private equity has done is to put boards on notice that shareholders expect more in the way of performance than may have been delivered previously,” he says.
“And the classic example is Qantas (after the recent failed $11 billion private equity bid by APA). We’re now told by Geoff Dixon that he’s got the opportunity to implement all those pre-agreed strategies with the private equity mob – for the benefit of shareholders.
“I think private equity has given the boardrooms of Australia a bit of a shake and it’s caused some re-thinking of strategies and how acceptable increased levels of debt are to shareholders.”
Another thing the recent spate of big deals has highlighted is the role of board members and executives.
With the proposed private equity buyout of Qantas, ASA was critical that Dixon and other executives – even though they weren’t involved in the bid – stood to make tens of millions of dollars if the deal went ahead. And when the bid collapsed, chairman Margaret Jackson – who’d enthusiastically embraced the takeover – stepped down.
Another takeover which created headlines was the proposed management buyout of Alinta earlier this year, which involved chairman John Poynton and CEO Bob Browning and which led to intense media scrutiny and both of them stepping down. “We played a role in that. I think we were among the first to call on Mr Poynton to consider his position and he did and went,” says Matthews.
The kerfuffle raised over Alinta and Qantas deals brings into focus the question of who decides if there’s a conflict of interest, perceived or otherwise, or any other aspect of a deal that should be scrutinised. The media obviously thinks it has a role, so do institutional investors and groups such as the ASA.
“That’s why we’ve got to get good directors and chairmen in place. Sometimes, directors don’t always recognise when they’re in this situation,” Mathews says. “And the shareholders and retail investors who we represent rely on them to see these conflicts and deal with them effectively.” Dealing with things effectively is also the key to how many directorships a person should be able to hold.
Both the AICD and the ASA say it’s not a black-and-white thing, it very much depends on the person’s ability to carry out their duties effectively and represent shareholders’ interests.
“In our view, directors vary in their capacity and companies vary in their complexity,” Matthews says, but adds the ASA does have a guiding rule of thumb.
“Our view is if a director holds with different companies the equivalent of five board seats – where say a chairman’s role is, say, equivalent to two seats – then shareholders have a right to expect that the chairman would have sought an assurance from the director concerned that he or she has sufficient time and that attendance at meetings and preparation and performance will be monitored accordingly.
“We always make a point of asking that question where a director exceeds the equivalent of five board seats.”
Matthews says the world has well and truly moved on from the 19th century notion of a directorship being a reward for past service. And both the AICD and ASA say that directors these days should expect their performance to be scrutinised and reviewed. “We think it’s important, say, every two years that there is some kind of review,” says Matthews. “And this is one of the critical roles of the chairman, of course, to be able to discuss the results of the review individually with the director.
“And we’ve some examples over the years where it hasn’t worked out and one of the things about a good chairman is to know when to tap someone on the shoulder and say: ‘Perhaps it’s time you thought about playing more golf’.”
Is It Worth It?
Some people might wonder why bother being a non-executive director. There’s a heap of corporate governance rules, you’re under scrutiny from many parties, and sometimes your reputation can be on the line. But it can be personally challenging and an enriching experience, or a way of using your expertise to make a contribution to either your community or to help a business grow to new levels.
And remuneration might not always be a big factor. In the not-for-profit sector, for instance, being a non-executive director of an arts company or charity brings virtually no remuneration. While in the corporate sector, the rates of remuneration vary – with about $50,000 for a middle-size company, and maybe up to $100,000 to $200,000 for a very big company.
“With very few exceptions, I think remuneration rates are reasonable (for non-executive directors). They do get out of whack from time to time and each ratchets up the next one,” Matthews says. “But I think generally speaking we can say they’re reasonable.”
He even cites the case of Macquarie Bank’s David Clarke, who stepped down from being executive chairman on a reported $19 million package in his last year, to become non-executive chairman – with remuneration of some $680,000. “Is $680,000 enough, or too much, or about right for the chairmanship of Macquarie Bank? I think it’s relatively modest for an organisation as succesful as Macquarie,” Matthews says.
The Corporations Act 2001 and the ASX listing rules might be the official rulebooks for Chartered Accountants or anyone else thinking of becoming non-executive directors but Matthews says there’s a simpler approach, and quotes the former Caltex chairman Dick Warburton: “One thing he said publicly years ago is that corporate governance needs to be a cultural thing in an organisation,” explains Matthews. “You’ve got to get the people there who have a culture of wanting do the right thing because it’s the right thing to do.”
And getting the right mix is important. “We get asked from time to time by chairmen what do we think of the mix of their board and their skills and that kind of thing,” he says.
“And I remember saying to the chairman of a Top 100 company whose board was absolutely top heavy with legal people: ‘The best thing you can do is get rid of some of your lawyers from your board and put a musician or poet or philosopher there’. That is, somebody who wants to do the right thing because it’s the right thing to do and not because they’ve legally got to.”
Tips For Directors
According to Australia’s corporate watchdog, the Australian Securities and Investments Commission, there are five key things Chartered Accountants and others should watch out for in their role as company directors:
- know your responsibilities. Remember that as a director you are not a captain of a ship, but a member of the crew. You have a responsibility to other people’s money and investments. Learn what your responsibilities are under the law and make sure you have enough time to perform them thoroughly and diligently.
- have a healthy scepticism. You must understand any financial reports presented to you and not simply accept somebody else’s word that they are correct. Be prepared to speak with important staff members to get different perspectives on the same story.
- maintain a strong, independent and reliable audit committee. The audit committee is a vital part of a company’s governance structure. It is crucial that you have confidence in their integrity and commitment and that they have confidence in yours.
- maintain a rigorous and reliable financial reporting system. An accurate, timely, cogent, coherent and reliable financial reporting system is essential to the life of any company. Monthly rigorous budgeting and comprehensive reporting are absolutely necessary to maintain a correct picture of the company’s wellbeing.
- cultivate trust. As a company director, all responsibilities can be traced back to you. If you do not have the trust and respect of people within the company and they do not have yours, disaster is imminent.
Source: ASIC
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