Renovation time

Corporate governance failings have been in the news in Australia recently following scandals at Rio Tinto and AMP.

Rio Tinto received widespread condemnation for destroying Aboriginal heritage sites, thought to have been inhabited more than 40,000 years ago, in Western Australia. The board received flak from shareholders for initially recommending cuts to the short-term bonuses for the executives responsible. Subsequently, the chief executive has announced he will step down.

AMP lost its chairman in 2018 after shareholder disquiet over financial irregularities, including charging fees without providing a service. In August 2020, replacement chair David Murray and board member John Fraser resigned due to pressure from shareholders when an executive previously disciplined for sexual harassment was put in charge of AMP’s capital business division.

The initial failure of the boards in these cases to recognise the risk to their brands and to react strongly reveals a culture of complacency in Australian governance, says Graeme Samuel AC. A professorial fellow in the Monash Business School, director and governance commentator. Samuel, who sat on the inquiry into the Commonwealth Bank of Australia in 2018, was the opening speaker at the IoD New Zealand’s Audit Chairs’ Forum in November 2019, in association with Chartered Accountants Australia and New Zealand.

“Those who are currently entrenched in board seats are just not recognising that there needs to be renovation,” says Samuel.

“It doesn’t help that in the financial services area we have had a pause – I put that politely – on the issue of corporate governance culture and accountability due to COVID-19. But that hiccough has now passed and we need to get back to the issue of governance culture and accountability.”

With regulators prioritising financial stability in the face of the pandemic, Australian boards have moved back to a business-as-usual approach rather than focussing on improving governance, he says.

“The regulators need to keep the pressure on because, fundamentally, corporate Australia does not recognise the failings that were exposed in Hayne [the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry], or the aged care Royal Commission.

Complacency

The complacency among many Australian directors is based on a misunderstanding of changing attitudes to governance, Samuel says. Many directors simply don’t see a problem with the status quo.

“Our inquiry into CBA, the leading corporation in this land, revealed fundamental failings that were shocking,” he says. These included inadequate oversight by the board of emerging non-financial risks to the business and a remuneration structure that did not promote good outcomes for the bank’s customers.

“That the leading corporation of this land, apparently led by the elite of corporate directors, showed such obvious failings as demonstrated in the report is a flashing red light. But directors don’t recognise the problem. And why would they acknowledge that they are the fulcrum of the problem?

“It is almost impossible for people at the top to acknowledge that they have got it wrong and to be prepared to change dramatically. It takes a real strength of character to do that. You not only have to acknowledge your failings but you have to convince those who work for you that you were wrong in the past. That’s a fundamental problem.”

New ideas

Samuel’s solution is to bring new people with new ideas into the top ranks of Australian governance. That is what worked at CBA, where the board was rejuvenated with fresh faces.

“Catherine Livingstone, the sole surviving director at CBA appointed people from left field. She has done a terrific job restructuring that board.”

As a person often asked to recommend people for board appointments, Samuel says there remains a tendency to choose “names” as directors rather than fresh faces with new skills and ideas.

“I have tried on several occasions to introduce people to boards who are outstanding strategic thinkers, people who have adjusted to the new world of industry, technology and customer expectations, of dealing with suppliers and community expectations. The problem is they are not names and because they are not names they get overlooked.”

Conviction and courage

Stakeholder and shareholder pressure on companies is rising in Australia, but a “renovation” of governance culture is needed if future scandals of the Rio Tinto and AMP type are to be avoided, he says.

“Stakeholder pressure tends to emerge after a crisis. Rio Tinto was a crisis - gradually the Australian investors picked up on it and as a result you got a change of executives. What seemed to escape attention was that there was a board that presided over this.”

By contrast, BHP backed away from plans that would have damaged heritage sites and pledged to consult more carefully with indigenous landowners, he says.

“That’s a cultural change happening because investors are starting to take aim. There are some big challenges facing Australian businesses and the economy. We need more directors with conviction, courage and the courage to challenge management. That is really important.”

The article is featured in the October/November issue of Boardroom magazine