Governance wisdom from Australia

March 2024 provided the opportunity to talk to academics, board members and other governance practitioners about the latest governance developments in Australia.

Lined up against our Top 5 Issues for Directors for 2024, there are some challenges that Australia hasn’t confronted since the 1990s (e.g. productivity), the ongoing aftermath of a seemingly endless stream of inquiries (e.g. banking and aged care), more active regulators focusing on governance and ongoing pressure to reduce greenhouse gas emissions while adapting to the impacts of climate change.

Climate leadership

Climate change reporting and disclosure legislation was a major focus for Australian directors. Joe Longo, the Chair of the Australian Securities and Investment Commission (ASIC), says this is a once-in-a-generation reporting change. And its scope is much more significant there than in New Zealand with 6,000 reporting entities likely! That’s six times more reporting than New Zealand, adjusted for population. Needless to say, this is raising significant concerns for Australian directors and others about capability, assurance and other support required to implement new reporting arrangements.

While New Zealand is leading the pack to some extent on climate-related disclosures, the scope and scale of the Australian arrangements – and some differences with the our approach – will be worth New Zealand directors and boards keeping an eye on.

Future ready succession

Catherine Livingstone, a senior Australian director, raised questions about the tenure of directors. Thinking about tenure, six years was mooted for the future. Current thinking is nine or 12 years. 

Many directors and other governance practitioners commented on the complexity of the environment they were facing. This was requiring new skills and experience on the board.

Proposed changes to the ASX governance code, which promote gender diversity (as outlined in a background document on page 7) reinforce an increasing focus to strengthen the diversity on major boards in Australia, including moving beyond gender diversity. This was not a question of diversity for its own sake. Instead, the focus needed to be on best possible board for the times, the direction and the strategy.

It was clear in discussion with directors and academics that those bringing diversity to a board had to be there as more than representative of their community. If representation was the goal, several suggested that this was best achieved in other ways, including through better stakeholder engagement. Directors in the banking sector observed that the Royal Commission on Banking had made engaging with, and listening to, customers a priority, and at least one bank had established a board committee specifically focused on customers.

Harnessing AI

As in many countries, AI has become a major governance issue in Australia and will continue to be on the board agenda.

A starting point noted in several discussions was director context and knowledge. Boards having a minimum level of AI literacy, as it relates to their companies or organisations, and potentially how they are using as part of their board practice, was a common theme. There is also a need to seek advice from specialists, noting this needs to be appropriately pitched for directors and their governance of AI, rather than at an operational level.

In addition, director and board responsibilities in relation to AI are similar to those related to cybersecurity, climate change, and health and safety. Directors and boards are expected to be aware of AI risks and ensure risks are appropriately identified, managed and mitigated.

Presenting to Australian directors, the chief executive of tech consultancy Addo AI, Dr Ayesha Khanna, focused on the current and growing opportunities that AI would provide to help companies add value. She had a high degree of optimism about the future of the technology, with appropriate and well-managed adoption. There are clear implications for productivity.

On the other side, however, she expressed concern about the need for vigilance from a cybersecurity perspective, generally, and AI hacking in particular. She highlighted the potential for the data that AI was using to be “poisoned”. Khanna used the example of a robotic warehouse operation where the data about the location of goods in the warehouse and numbers of items available could be “poisoned” with the result that orders could not be fulfilled.

Enabling productivity

For the first time in almost three decades, Australia is facing an increasing productivity crisis. Productivity is declining.

Those working on productivity in Australia are advising directors and policy makers that there is little relief in sight.

Much of the issue relates to change in the structure of the Australian economy. This reflects, particularly, the impact of the rise in services (now 80% of the economy) and the limited scope for further productivity gains in mining and manufacturing (which was also a smaller proportion of the Australian economy and had driven earlier productivity gains).

In this context two things were evident:

• A new wave of policy reforms was needed to spark a new wave of productivity improvements. The New South Wales Productivity Commissioner has pointed to the improvements in policy through regulatory innovations during the recent pandemic, which had continued. There needed to be more of this, in his view, on a sustained basis. Policy alone was not sufficient, according to most of the commentators, much as it was important.
• At a more micro level, boards needed to have a strategy and system focus to make sense of complexity, including integration of AI and its implications into strategy and risk management. This would make companies more efficient in the short and medium term.

The value adding board

With all of these issues and challenges at play, Australian boards adopting good governance practice was more important than ever. This sentiment was reinforced by ASIC Chair Longo, among others.

To continue to add value, there was a view that boards needed:

• To make ongoing efforts to understand context – private and public sector.
• To look beyond compliance to strategy, risk and opportunities.
• To work on flexibility and build resilience. They also needed to watch “rigidity”.
• To consider taking more time engaging with, and influencing, public policy. More effort was required to work out how to do this and move beyond lobbying.
• To ensure that chair leadership and board teamwork was central, in order to build organisational resilience when crises hit.
• To consider that there was not a right answer and to look for the “second right answer".