Heidrick & Struggles
Chief Executive Officer & Board of Directors
Competing dynamics of age and youth, wealthier executives and governance issues are causing big headaches for the boards of Australia’s major corporations. While companies are bringing younger executives to their top teams to gain fresh ideas and insights, the markets have been spooked by governance issues and are calling for greater depth of experience. Those very governance issues are also keeping potential candidates at bay.
Commonwealth Bank chairman Dr John Schubert says experience is the name of the game. “On the other hand, bringing relative youth to a board often requires recruiting someone currently serving as CEO. But this can be limiting since, due to time constraints, a current CEO usually can only serve on one board and usually it must be in a different industry.”
“The board member must have earned their stripes. The main requirement is that they must have the respect of senior executives, so they must have reached a certain level of achievement in their careers.”
The new wealth
Complicating this puzzle is the relatively greater wealth of executives. Foreign Investment Review Board chairman John Phillips says that many of today’s business leaders have “a substantial capital base” due to higher salaries and larger incentive payments. “Why would they serve on public boards and risk their assets if they can go into private equity?” he asks.
Phillips explains that executives are financially able to put their own equity in an unlisted company where issues of governance are substantially reduced and then capitalize hugely if the company is successful and moves to a public listing. “These people will take board appointments, but only if they get equity,” he says.
Former Macquarie Bank executive director Belinda Hutchinson agrees. “Frankly, from the standpoint of someone who has been financially successful, board pay is insignificant,” she says. “Non-executive directors also have governance exposure if things go wrong. Their personal assets are on the line. Most of them prefer private equity investments.” On governance, Hutchinson says the pendulum has swung too far. “The regulation and compliance burden has been taken to an extreme level.”
Hutchinson says: “There is a need for better public education about the risk of investing in public companies. It’s not like investing in government bonds. There’s a balance and there’s a risk-reward equation.”
Hutchinson says the idea of a former senior executive serving on a board and putting at risk their personal assets, is not appealing. Nor is there a financial incentive.
“My concern is that individuals’ desire to give something back to the community by serving on boards and their interest in being involved at the board level in strategic and operational issues may be outweighed by these risks.”
Australian Stock Exchange chairman Maurice Newman says there is a contradiction between corporations seeking younger executives and the market seeking wiser heads. “Companies are turning over chief executives faster. It’s an average of four years in Australia, longer in the US but only 1.9 years in the UK. It’s an issue for boards.”
Newman says that the “long-term” can mean three years in the current climate. “My view is that we need culture change. Our culture of compensation rewards short-term performance. But we need to develop long-term incentives.” He says the current “age and gender problem” of inexperienced people at board level means that companies are “falling back on proven people” for their boards.
Caltex chairman Dick Warburton says: “You want some grey hairs who’ve been through the mill, so they’re not surprised when things happen,” Warburton says. “They need to have the fire out of their belly – you don’t want someone on the board who feels they should be running the company.”
Warbuton says good directors should understand the financial side of companies and some of the complexities of the legal system. “You don’t have to be a lawyer, but you need to be on top of current legal issues and employ good lawyers. You need to know the questions and traps to ask – how to deal with the brilliant lawyers your company is up against.” Warburton says the issues around new blood for boards are revolving around young people earning bigger packages and a greater range of interests available in corporate life.
“It’s hard to lure young executives onto boards unless they want to drop out of the rat race a bit earlier and look to boards as a career move, perhaps mixed with other interests. “Money is important because you have to have reasonable remuneration. A good board can make a difference. Not many people are on them just for the status. In the past, if you were invited by someone like Westpac to join the board you’d do it for the status and you wouldn’t think much of the money,” Warburton says. “But now people are also looking for income and they may be given equity.”
We believe reputation is important, so the candidate needs to be willing to take risk, deliver on expectations and be motivated to give back to the community.
They need to be collegiate but, as Maurice Newman says, “without being obsequious”. They need to have an interest in expanding their intellectual horizons and to reap the rewards of the camaraderie that exists at the top of Australian corporate life.