Responsible and responsive boards – are directors up to today’s expectations?

Today’s boards of directors look, feel and act differently from those of even a few years ago. What has brought about this evolution, and why? And what should the boards of tomorrow and beyond be doing to meet the expectations of the company’s stakeholders, the New Zealand public and even the global community?

ADLS is exploring these and other questions at a seminar next month entitled “Corporate Governance: New Dimensions, Heightened Expectations?” (Thursday 3 August 2017 – for more details see page 3).

LawNews took the opportunity to speak with two of the presenters – Dame Alison Paterson, one of the country’s most highly experienced directors, and Auckland Law School’s Professor Susan Watson – to get their insights on current and future challenges for directors (and their advisers) of companies both large and small.

Dame Alison has been a well-known leader in the corporate governance sphere for over 30 years, during which time she has chaired or been a director of organisations such as the Reserve Bank of New Zealand, FarmIQ, Gareth Morgan Investments, Abano Healthcare, Landcorp, Wrightson, Vector, Waitemata District Health Board and, most recently, the Forestry Industry Safety Council and the Te Aupouri Iwi commercial arm.

Dame Alison says that she is inspired to keep doing what she does by the desire to “add value and give back”, to increase awareness of the demands of our fast-changing world, and to help companies respond to those challenges. She says that this seminar is particularly pertinent at the moment because of the acceleration in change on various key fronts, including technology, globalisation and climate change.

“Boards need to understand the impact that these issues will have on their businesses. It is the responsibility of directors to anticipate that impact and be able to cope with it – to be aware of what they have to gear up to do. One of the challenges in today’s business is fostering an organisational culture that enables the company to innovate. Innovation requires small, agile teams which have the ability to test things quickly and then decide whether to pursue them or to desist,” she says.

“Boards will have to answer questions such as, ‘how does your business keep up to date in a digital world with quickly changing technology?’ and ‘how does your business innovate and get new ideas tested?’, when so much of that process is bogged down in traditional ways of assessing what’s good for business,” she continues. “Shareholders expect boards to be able to meet those challenges. You can’t ignore these forces – if you do, your company will be left behind.”

Professor Susan Watson researches and teaches corporate law and governance at the University of Auckland’s School of Law, where she also serves as Deputy Dean. She has a particular interest in the corporate form, how it developed, why it is so successful, and the economic and societal impact of corporations. Her research has been published in New Zealand and internationally and has been widely cited by other scholars and courts at all levels.

Looking at corporate governance issues is an “intellectual puzzle” that continues to fascinate Professor Watson. “Companies exist everywhere and are central in society, but there is still disagreement about what companies are and how they should operate,” she says. “Since the GFC, all of the old certainties about corporate law and corporate governance have been called into question. Lots of work has been done by academics, think tanks and directors’ groups about considering more of a long-term focus and looking at questions of sustainability.”

“‘Sustainability’ is a buzz word that has shifted into the area of corporate governance. The slight danger in using that word is that it means different things to different people. In one sense, there is the idea that corporations have to operate in a sustainable way environmentally. But there is now also a broader idea that corporations need to operate sustainably in the long term, which also encompasses economic and social considerations.”

Dame Alison agrees that boards today differ in that directors are facing a number of heightened and ever-changing expectations, which impact on traditional ideas of corporate governance and profit-making.

“The basic responsibility for the board is to grow share value, return an income and manage the risks of running an organisation, whether regulatory, reputational, legislative or financial. While the core principles of corporate governance are important and legislative and regulatory guidelines have to be met, it’s only part of the puzzle.”

She says that heightened expectations around other kinds of diversity, such as gender and sexual orientation, necessitate a new way of involving people throughout the organisation, including at board level. For her part, she considers that having diversity of thought better equips companies to meet the ongoing challenges they face.

“At Vector, for example, there is a Diversity Committee and the company has the ‘rainbow tick’. There is a lot of support across the organisation for having conversations about diversity or, as they put it, ‘bringing your whole self to work’.”

Professor Watson has similar views: “Particularly for listed companies, there should be broad representation at board level – not just in terms of gender diversity but all other types of diversity as well. There is a valid business argument and a reasonable amount of evidence that the more diverse the backgrounds of your directors, the better and stronger the decisions made will be.”

Dame Alison notes other heightened expectations in the area of health and safety following on from the Pike River tragedy. “That resulted in the 2015 Health and Safety in the Workplace Act, which now requires boards not only to know that the right safety policies and procedures are in place, but also to know that they are being implemented effectively.”

“In addition, there is an increasing responsibility on boards to look after the well-being of the company’s employees, both physical and mental. Although a couple of decades ago a few farsighted firms encouraged their workforce to have things like half-marathon teams, they were ahead of the times, and I don’t think that many boards have seriously focussed on this yet,” she says.

“Boards also need to be wary that work does not impose too much on employees’ discretionary time. For example, in the forestry industry, workers work long hours and have a long drive to get to and from work. If employees are consistently working too much overtime, it raises the question of whether they are being paid a living wage. If they are not, and are working long hours just to make ends meet, then there won’t be any defence if an incident arises because of worker fatigue.”

These emerging ‘soft obligations’ can feel especially burdensome for smaller companies, says Professor Watson, hence the title of the paper she will present at the seminar, “What more can a poor board do?”. But she thinks that one of the key errors into which boards can fall is overly shortsighted vision, without being able to see the bigger picture.

While she is “always careful about using Pike River as an example”, Professor Watson sees it as a caution against being “blinded” to other risks by the need to make an immediate profit. She advocates companies shifting to a longgame view with a focus on sustainability, while acknowledging that this has the potential to rock the long-standing primacy of shareholders. “On the one hand, boards of directors are now being expected to run the company in a way that is good for the long term, but on the other, they are faced with the apparent imperative to focus on profit for shareholders.”

Professor Watson says that directors will need to carefully consider how best to balance these apparently competing interests. Through her research, she has explored the argument that a corporation should be seen as a “fund” separate from shareholders, rather than simply something made up of shareholders that exists to make money for shareholders, and that this might be a way of navigating through the different imperatives.

“Following this approach, the role of the board is both to maximise and to sustain that fund. So, rather than choosing between the competing interests of the various stakeholders or favouring one group over another, directors should be asking themselves whether something is in the interests of the fund in the long term, not just the short term.”

When asked whether all of this adds up to a more complex role for today’s directors, Professor Watson says that the role has “always been a matter of working through and balancing many issues – that’s why you have a group of directors rather than just an individual”. That said, she does think that there is a “more overt expectation on the part of society that corporations will engage with these issues and take their obligations of environmental sustainability and social responsibility seriously, in return for the privileges of incorporation”.

Dame Alison puts it this way: “It’s business as usual, but it’s much broader than that – if you want to compete, you have to continue to reinvent yourself. More is demanded because the pace of change is so fast.”

And while there is “something about being a director, especially of a listed company, that does draw people”, both Dame Alison and Professor Watson have some words of advice and caution for anyone considering taking on a directorship in the present climate.

Dame Alison stresses that potential directors need to understand the seriousness of the role they propose to undertake, not just its perceived glamour. “Being a director is a pretty insecure way of earning a living – directorships have a lifespan and can come and go, and the supply and demand balance in this country is way out-of-kilter.”

Professor Watson agrees that “for not much financial return”, would-be directors are “taking on a lot of risk and responsibility for a company which you do not own”. “The days of ‘gentlemen directors’ have gone, and boards need to be prepared, have things well-documented and remain independent in their thinking – they should guard against allowing shareholders, management or any other one group of stakeholders, to dominate,” she says.

Dame Alison says that she would ask anyone wanting to join a board whether he or she can articulate the value that he or she will add as a director of the particular company – “otherwise, they shouldn’t be seeking to join its board”. “I would also ask, ‘Do you understand the difference between governance and management, and which are your skills best suited to?’ As a director, you are responsible as for all aspects of every decision made – you can’t rely on the other people on the board to supplement your experience with theirs.”

“You also need to ensure that the urgent does not drive out the important, leaving you not enough time to focus on strategy.”

ADLS’ upcoming seminar “Corporate Governance: New Dimensions, Heightened Expectations?” is taking place in Auckland on Thursday 3 August 2017. In addition to Dame Alison and Professor Watson, presenters at the seminar include John Hagen (Forensic Accountant) and Michael Webb (Barrister, Princes Chambers), with mediator, arbitrator and former High Court Judge, the Hon Rodney Hansen CNZM QC, chairing proceedings.

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