Royal commission backlash could quash innovation, says KPMG chair Alison Kitchen

Boards are becoming nervous about bold decisions needed to keep pace with global rivals, especially from China.

Alison Kitchen: ‘Our companies need to be innovating’. Picture: Aaron Francis

One of the nation’s top business leaders fears the findings of the Hayne royal commission and a subsequent regulatory backlash could increase tensions between company directors and CEOs and prevent boards from taking the bold decisions required to keep pace with global competitors, especially from China.

Following stunning revelations in the royal commission last week about the governance of the Commonwealth Bank board and fears that board meetings will become longer and more complex in light of commissioner Kenneth Hayne’s findings, KPMG chair Alison Kitchen acknowledged the public had confirmed it was “right not to trust big business”.

Speaking after returning from KPMG’s global biannual financial services conference in Shanghai, she said Australian companies were at risk of being left behind by dynamic Chinese technology firms if they became risk-averse when they should be prepared, more than ever, to confront and embrace disruption.

“Look at the amount of extra pressure and scrutiny boards feel under. Compare that to Chinese tech companies and the speed they are moving, the innovative thinking and the size and scale of some of the investments they are making,’’ Ms Kitchen told The Australian in an interview.

“If we want to even begin to catch up and compete with them, our companies need to be innovating, they need to be moving quicker, they need to be being bolder and that does inevitably mean they need to take on more risk.”

But Ms Kitchen, who is a member of KPMG’s global and regional boards, said this was becoming harder in an ­environment where even companies that had delivered good shareholder returns and admitted to making mistakes were being punished.

Asked what would be the consequence of this, she replied: “You have to say there are lots of companies where there is ­increased tension between board and management and lots where it is really hard — whether you are boards or management — to take the bold decisions and take risks.”

Tabcorp chairwoman Paula Dwyer provoked a vigorous ­debate last month when she said it was critical for the success of ­Australian businesses that boards and management teams make considered investments to drive long-term growth and they should not be punished when they went awry.

“Not all these bets will pay off. However, it does not serve the interests of shareholders for boards and management to do nothing for fear of retribution,’’ Ms Dwyer said, after Tabcorp was heavily criticised for breaching Austrac money-laundering regulations and for a failed British venture known as SunBets.

Speaking at the Melbourne ­Institute/The Australian Economic and Social Outlook conference last month, Wesfarmers and AGL Energy director Diane Smith-Gander questioned whether businesses would be prepared to make the tough decisions to ensure their future in a rapidly changing world of disruption.

“You can say, ‘I’ll be fine in the Australian market. We have a market of 25 million people and we can focus on that’. But the problem is if your offerings are not globally distinctive, someone is going to come from offshore and take your domestic market away from you.”

Seek chief executive Andrew Bassat said at the same conference that increasing pressure from regulators, shareholders and government was coming at a time when Australian companies were losing more than they were winning on disruption.

He warned that in 10 years the nation’s top 100 companies would have fewer employees and would produce lower revenues and profit numbers than they do today.

Ms Kitchen, whose firm advises some of the nation’s biggest boards, said a number of directors were saying to her: “The whole world is telling me what my job is at the moment.

“I am not sure where the line is between board and management. I am being asked to do a lot more to hold management to account to give me a lot more information.”

Ms Kitchen said: “I would say there are some companies saying, ‘we are going to have to be careful’. Because you get savagely punished if you make a mistake. Even if you are delivering good shareholder returns.’’

AMP chairman David Murray has expressed concerns that ­directors are too often being forced to delve into the management issues of companies because of their board subcommittee commitments.

Some commentators have speculated that in the wake of the royal commission, board meetings will become longer, the entirety of their proceedings could be recorded in writing and that this could lead to more lawyers and accountants becoming company directors. Transurban and Mirvac director Sam Mostyn told the The Australian and BHP’s Competitive Advantage forum that the royal commission had forced boards to rethink how they challenge management and keep tabs on corporate culture.

One leading fund manger said directors needed to be able to ­develop their own channels of inquiry within their businesses to stay informed and not interfere with the day-to-day management of the company.

“They need to be able to do their own research and not rely on what management tells them. They need to be prepared to make the effort to build relationships in the company and the chairman and management should be prepared to let them do it,’’ the fund manager said. “That is not about crossing the line with management — that is about doing your job as a director.”

Shareholders and proxy advisers also say one of the few tools they have to drive accountability of boards is the non-binding vote at annual meetings on executive remuneration, even if it can be used to challenge strategic as ­opposed to pay decisions.

They also say the magnitude of executive pay is too often completely out of step with community expectations, irrespective of the issues that drive remuneration decisions.

In the wake of comments last week by Prime Minister Scott Morrison that Australia’s annual immigration intake would be capped at last year’s level, which was nearly 28,000 less than the planned intake of 190,000, Ms Kitchen said she understood the pressures on infrastructure in Sydney and Melbourne.

But she said the change would have an impact on “getting the right skills, the right people in the right places”.

“I’ve noticed a trend in a number of service industries where they are saying offshoring is yesterday’s thing,’’ she said.

“Companies now say they will stop offshoring and automate (instead).

“If you need the skills to automate and the data scientists, will it (the government’s move) slow some of that down?

“They may not be able to get the hi-tech people that they need.”