Rude light thrown on exclusive club of board directors

The public has every right to be suspicious about the motivations of many company directors.

Some experienced men are being rejected for boards in favour of inexperienced women.

Company boards have been in the news lately for all the wrong reasons. At the beginning of the week we saw Catherine Brenner, chairwoman of AMP, quit after damning revelations from the banking royal commission about the conduct of the company, including its flawed interactions with the regulator, the Australian Securities & Investments Commission.

On the same day, the report of the independent prudential ­inquiry into governance, culture and accountability at Commonwealth Bank was released by the Australian Prudential Regulation Authority. In what was a very ­unfavourable review of the operations of CBA, the panel made the point that there had been “inadequate oversight and challenge (of management) by the board and its gatekeeper committees of emerging non-financial risks”.

The report further noted that CBA’s “remuneration framework had little sting for senior managers and above when poor risk or customer outcomes materialised”. Note that the executive remuneration framework is determined by the board of a company.

The events of this week raise several important questions, particularly since members of the public could easily come to the conclusion that company board positions are essentially cushy, well-paid sinecures that are doled out to members of a very exclusive, informal club. Take it from me: they are not entirely wrong to hold this view.

According to the Corporations Act 2001, “the business of a company is to be managed by or under the direction of the directors”. Most board directors wouldn’t see their role as managing a company but rather as directing the management. Even so, this legislated definition is not particularly helpful.

To be sure, there is a reasonably long list of other roles and responsibilities of company directors, ­including those specified in the law and those that have emerged through case law. The Australian Institute of Company Directors, which is an activist lobby group for directors and a provider of education, regularly produces material about directors’ roles and responsibilities.

There is also the ASX Corporate Governance Guidelines, which have been in operation since 2002 and have been revised on several occasions. Although not binding on Australian-listed companies, these guidelines operate on the basis of a “if not, why not” ­explanation. The panel that makes up the Corporate Governance Council is a motley lot, with an ample number of virtue-signallers.

In a case of extremely bad timing, a consultation paper for the fourth version of the guidelines (which are growing like Topsy, ­unsurprisingly) was released just this week. Using postmodern language that is typical of much of what is now written about corporate governance, one of the proposed new ASX guidelines is to recognise “a fundamental importance of a listed entity’s social licence to operate and the need for it to act lawfully, ethically and in a socially responsible manner in order to preserve that licence”.

Where do you begin with this sort of value-laden twaddle? Of course, all companies (and individuals, for that matter) must act lawfully and ethically. But who is to define “a socially responsible manner”? And who is to judge this thing called a “social licence”, which has no legal basis?

Does Coca-Cola Amatil have a social licence? After all, it produces sugary drinks that are bad for people if drunk in excess quantities. Does Infigen Energy have a social licence given that it installs vast wind turbines that upset many ­locals? Does Medibank Private have a social licence? Many of its customers are unhappy about the lack of value that its insurance products offer. There are numerous other examples.

The point here is that imposing vague, confusing and multiple ­objectives on boards is a highway to even worse outcomes than we see now. If the share price of the company collapses or the dividend is cut, will the directors simply claim they have been operating “in a socially responsible manner” and therefore be unaccountable for poor commercial decisions? Class-action lawyers are likely to have an entirely different take.

Consider also the change to the guidelines that will require companies to “have a measurable ­objective” of having at least 30 per cent of directors to be women within a specified period.

But what is the hard evidence that could underpin this 30 per cent rule? According to the pre-eminent Wharton School at the University of Pennsylvania, “the results of two meta-analyses, summarising numerous rigorous, original peer-reviewed studies ­(indicate) that there is no evidence to suggest that the addition, or presence, of women on the board actually causes a change in company performance”. The total number of studies was 160.

It also should be borne in mind that “research by consulting firms and financial institutions is not as rigorous as peer-reviewed academic research”. In other words, be suspicious if you see studies by McKinsey or other self-seeking consulting firms being quoted in this context.

Let me return to the informal club to which I referred above. It is now populated by many women and their male mentors — in the past, it was a men-only ­arrangement.

Some board recruitment firms are being instructed exclusively to seek female directors, thereby rejecting some deeply ­experienced and suitable men. Not only is there a tendency for some women with inadequate ­experience, particularly at the ­senior management level, to be ­recruited prematurely to boards, but the same women are being ­appointed to multiple boards.

It would seem that the driving force for many of these professional female directors is to have multiple directorships on prestigious companies — that is, large, listed entities. Add in a charity, school and/or other pro bono board, and it’s open to debate whether these women really have enough time to serve the best interests of every individual company on whose boards they serve.

Brenner, for instance, was the chairwoman of AMP and still is on the boards of Coca-Cola Amatil, Boral and a private girls school. She stood down during the week as a trustee of the Art Gallery of NSW. By the same token, the proxy advisers, who are influential in ­determining large shareholders’ voting decisions at company ­annual meetings, are largely ­unconcerned that some directors are extraordinarily overcommitted. It is almost unprecedented for a company director to be voted down for being too busy.

It should not be overlooked that being a company director is a nice little earner. Being on the board of one of the larger companies — top 50 — the all-up board fees are about $150,000 to $300,000 a year, including committee fees. The fees for company chairmen for large companies range from about $600,000 to $1 million. Superannuation is on top of these figures.

Given that company directorships can involve as few as six to eight meetings a year — committee work will be additional — it is understandable why there is such strong competition for board positions. Mind you, most of the hopefuls don’t stand a chance because the positions are essentially locked up by virtue of the powerful force of self-interested networking.

The public has every right to be suspicious about the motivations of many company directors and the companies they manage. There should be no inherent conflict between doing the right thing by customers and producing a good outcome for shareholders. But too many directors are distracted by pushing progressive ­social issues to worry too much about customers.

Few have any real skin in the game — by owning a large number of shares, for instance — which often leads to cavalier attitudes when it comes to spending other people’s money, in this case the company’s, and the taking of risks.

The solution to the present ­undesirable corporate governance arrangements is for boards to ­return to the basics, by focusing on achieving good returns on capital through the sale of excellent products and services to customers.

Directors also need to have a complete understanding of the key risks facing a company and how these can be handled. Proposed investments and transactions should be carefully vetted. There is a strong case for directors to hold only one or two boards ­positions of listed entities.

And let’s just forget all that guff about social licences — the activities of a company are lawful or not. Shareholders can always choose to invest or not.

Judith Sloan has sat on several company and government boards covering a range of industries.