Discussion with chairmen and directors of asx top 50 companies2015

1. June 2015
Discussions with Chairmen and
Directors of ASX Top 50 Companies
John Colvin

2. Contents
• Background
• We are living in exponential times
• Findings
• Major business issues
• Board operating issues
• Director discussion topics
2

3. Background
• In March 2006, I commenced over 60 interviews with Chairmen and Directors of Australia’s
leading companies – mostly in the ASX top 50
• The purpose of this study was to
• Understand the major business issues facing these companies
• Understand how boards were dealing with these issues
• Understand what issues boards were dealing with in how they discharged their
responsibilities to shareholders
• This understanding would allow Heidrick & Struggles to better serve the major boards of this
country
• One thing that struck me throughout this process was the amazing changes that are sweeping
through the corporate world globally
• Anticipating and dealing with these adds a whole new level of complexity to the work of
boards
3

4. 4GEN0190n.ppt
We are living in
exponential times.

5. 5
Did you know?

6. 6
China will soon become the
number one English speaking
country in the world.

7. 7
According to the U.S
Department of Labor…

8. 8
1 out of 4 workers today is working for a
company for whom they have been
employed
less than 1 year

9. 9
More than 1 out of 2 are working for a
company for whom they have worked
less than 5 years

10. 10
According to former Secretary of
Education Richard Riley…

11. 11
The top 10 jobs that will be in demand in
2010 didn’t exist in 2004

12. 12
1 of every 8 couples married in the U.S.
last year met online

13. 13
There are over 2.7 billion searches
performed on
Google each month.

14. 14
The number of text messages sent and
received every day
exceeds the
population
of the planet.

15. 15
There are about 540,000
words in the English
language…

16. 16
About 5 times as
many as during
Shakespeare’s time.

17. 17
More than 3,000 new books are
published…

18. 18
daily.

19. 19
It is estimated that a week’s worth
of New York Times…

20. 20
contains more information than a person
was likely to come across in a lifetime in
the
18th century.

21. 21
It is estimated that 1.5 Exabytes (1.5 x
1018) of unique new information will be
generated worldwide this year.

22. 22
That’s estimated to be more
than in the previous
5,000 years.

23. 23
The amount of new information is
doubling every 2 years.

24. 24
Third-generation fibre optics has recently
been tested by both NEC and Alcatel…

25. 25
That pushes 10 trillion bits per second down one
strand of fibre.

26. 26
That’s 1,900 CDs, or
150 million simultaneous phones calls,
every second.

27. 27
It’s currently tripling about every 6
months and is expected to do so for at
least the next 20 years.

28. 28
Predictions are that by 2013 a
supercomputer will be built that exceeds
the computation capability of the human
brain.

29. 29
Now you know…

30. Findings
30

31. Findings – Major Business Issues
31
Paradigm shift
20%
Acquisition and
retention of talent
20%
The growth of
regulations
20%
Growing the
business
15%
Risk management
10%
Globalisation
5%
Operational
excellence and
Media
10%

32. Possible Discussion Topics
• The growth of regulations
• GC’s role in using board time effectively
• Managing NED liabilities
• The management of risk
• Where should the GC focus be?
• The PE threat
• Any role here?
• Acquisition and retention of talent
• Rapid decline in tenure of senior management
• What opportunities are there for GC’s to spread out beyond the legal function in major
corporates
• GC role in globalisation process
32

33. Paradigm Shift
Many people have argued that we are observing a new class of active investor who are prepared
to run businesses with a different management model
• This trend has a number of factors supporting it
• Rapid increase in the pool of money
• The growth of derivatives and structured financial products has made the use of this larger
pool of money more efficient
• Technology has supported these developments
• Inflation is low in much of the western world, and this provides relatively cheap debt
financing
• Private Equity (PE) and Hedge Fund operators have used these points to gear underperforming
businesses through debt financing, thereby reducing the cost of capital
33

34. Paradigm Shift
Most people think that there are now no companies beyond the reach of the Private Equity
operators
• These PE firms focus on value – not earnings - and
• They have a clear view of the value of each key asset in a company’s portfolio – it is argued that
they have a much clearer view than many boards have of value at a disaggregated level
• Key elements of the private equity management model are
• Hands on board – all with equity that could produce significant returns
• Management has the same significant upside opportunity
• They take a long term view – 3 to 5 years
• They have very aggressive business plans – and everyone is very
clear of what is expected of them
• These private companies have less regulatory and compliance
burdens
34

35. Paradigm Shift
Other implications of this trend
• Many talented CEO’s, Directors and senior managers prefer the new model because
• They can earn more money
• There is much less of a “boring” factor on these boards, because there is much less
regulatory requirements
• They prefer to take a longer term view, rather than the short term view taken by many public
companies driven by
• Institutional investors
• CEO and senior management remuneration systems
• Media scrutiny
• This is reducing the pool of people that would traditionally work in
the public companies
• Are public company boards ready for a phone call
from the KKR’s of this world?
35

36. Paradigm Shift
Alternative view
• 16 years of uninterrupted economic growth will eventually end
• This will drive up interest rates
• Which in turn will make some deals uneconomic
• Which will lead to collapses
• It is just a matter of time
• There is scope for the public company model to observe the PE model and see if any aspects of
that model are worth considering for the public company
36

37. Acquisition and Retention of Talent
Most Australian companies are constrained in implementing strategies by the lack of suitable
talent at all levels of the business
• It is most acute at senior levels
• For many companies – particularly in the services sector – this is the number 1 strategic issue
• Much more emphasis is being placed on building a company culture and policies that attract
talent – and keep it
• It is now commonplace for HR Directors to present regularly to boards about
these issues
• Rigorous succession planning for all key board and executive roles is now standard practice in
many companies
37

38. Acquisition and Retention of Talent
Companies who operate internationally mentioned that this issue is even more difficult because
the employer brand was less well known in foreign markets – this point even applies to Australian
global icons
• The consequences of these points are
• Executive remuneration costs are soaring
• Over the past 4 years from an analysis of ASX top 50 annual reports
• Average CEO remuneration has increased by 88% - $3.2 mill to $6 mill
• Average FD remuneration has increased by 110% - $1.1 mill to $2.3 mill
• Strategy implementation is delayed
• The importance of human capital management at all levels of a company have never been more
important – and have never had such serious attention at board levels
38

39. The Growth of Regulations
There has been an explosion of regulations over the past 5 years fuelled by many well known
collapses overseas and in Australia
• Most business people think that the pendulum has swung too far – the market is now overly
regulated
• The consequences of this trend are as follows
• Boards are now swamped by regulatory requirements – particularly international companies
with operations in the USA and financial
institutions
• Many people have said that as much as 50% of board time is spent
on these matters
• Probably an average would be 30-35%
• Many Directors are having difficulty
keeping up with all these regulations – IFRS, Basel 2, APRA, Sarbanes-Oxley, ASIC, ASX etc
39

40. The Growth of Regulations
The consequences of this trend are as follows
• Many Directors are concerned about the personal liabilities that flow from failure to comply with
these regulations
• The cost of compliance is significant – particularly in financial institutions
• McKinsey did a study recently to understand why London was in the process of taking over from
New York as the pre-eminent capital market in the
world – one of the major reasons was the Sarbanes-Oxley regulations
• The most significant consequence is that if boards are spending much greater time on these
matters – they are therefore not spending as much time as they should on the most important
matters
• Strategy
• Senior management performance and succession issues
40

41. The Growth of Regulations
Many boards are thinking through how to ensure that
• Regulatory risks are managed properly
• This process doesn’t dominate board agendas
• The agendas reflect the most important and value added matters that protect the interests of
shareholders and maximise the value of their shares
• Many people I spoke to felt that there was a way to manage these issues in a constructive way
• A greater level of regulation is a fact of life –
and just needs to be managed
41

42. Growing the Business
Boards are judged amongst a variety of things by their ability, working with management, to
create shareholder wealth
There are two primary ways to do this:
• Improve the operational performance of the business
• Reduce costs
• Maximise asset utilisation
• Increase customer service
• Redeploy inefficient capital
• Grow revenues
• In existing markets
• In new markets in home country
• In overseas markets
42

43. Growing the Business
• There are two different views:
• Some companies believe that there is plenty of scope to grow their businesses in Australia by
• Increasing product penetration levels in existing segments
• Entering new markets where they are not constrained by ACCC requirements
• Some of the major banks fit this category
• Some companies believe that they have exhausted opportunities in the Australian market,
and they need to go offshore to continue to grow shareholder value
• The companies who have been very successful have built an excellent business model
that they can export to other major markets
and acquire considerable scale reasonably quickly
• MBL, QBE and Westfield are often quoted examples
43

44. Growing the Business
• The challenges of the two views are quite different
• Domestic growth
• For major companies this requires taking market share from another major player
• In turn, this requires some form of differentiation backed up by superior delivery
• This depends on these companies acquiring superior management talent to build and
embed these differentiated strategies
• Overseas growth
• Finding people in the overseas markets who can absorb the Australian business model
and apply it locally with the same quality, ethics and values that have made the company
so successful in Australia
• Companies who set up in the USA need to learn how to compete in the most
brutally competitive market in the world
• Companies also need to adapt to a different position in these much bigger
overseas markets – they might be in the top 3 in Australia, but they find
themselves not even in the top 10 in some markets in Europe or USA
44

45. Risk Management
• The world is now a much more complex place
• Most boards are grappling with how to
• Identify relevant and significant risks
• Measure these risks
• Mitigate these risks through contingency planning or tight day to day management
• There has been the emergence of the Chief Risk Officer role in major companies around the
world in order to undertake these tasks
• The CFO continues to manage financial risks and the internal audit processes
• The GC looks after legal and commercial risks with the FD
• The CRO looks after most other risks
45

46. Risk Management
• The kinds of risks that the CRO looks at are
• Operational risks
• Environmental risks
• Terrorist risks
• Security risks
• Brand risks
• Culture risks
• Business continuity risks
• OH&S
• Directors are very concerned about this one – since there is the threat of criminal
prosecution if something goes badly wrong in this space
46

47. Risk Management
• The role of boards in risk management
• Make sure that there is a good risk management system in place that determines what the
risks are, measures them and reports to the board on these every month
• However, there is no substitute for board members relying on instinct when something
doesn’t feel right
• Many people have said that the best NED’s have an uncanny ability to spot emerging
business risks and constructively challenge management on these
• Boards need to make sure that there is an appropriate balance to risk – business is about
taking managed risks – a risk free environment probably means that innovation and having a
go has been driven out of the organisation
• There is a danger that boards delve too deeply into management matters and blur the line
between board and management accountability
47

48. Globalisation
• Many people believe that globalisation is the most important major issue facing major
companies, because
• Competition intensifies
• Prices get reduced
• Margins decline
• Market share is reduced
• Commoditisation is accelerated
• On the flip side – opportunities are created in other markets, as we have discussed above
• This process and others we have talked about (PE) just mean that Boards need to ensure that
the management team is competent to deliver increasing shareholder value in the spite of these
trends
48

49. Operational Excellence
• Many people mentioned that pushing operational excellence initiatives is simply a requirement
for staying in business
• Most major companies have major projects underway to
• Drive out costs
• Improve asset utilisation
• Implement new technologies
• Design and implement new HR processes designed to attract and
retain the best people
• Boards are interested in how these projects get implemented
• The best management teams are very good at execution
– this is one of the major factors that boards look at in assessing the merits of a management
team
49

50. Media
• Many people feel that the media sees the regulators as the “good guys”, and the companies as
“bad guys”
• There is much scrutiny and criticism of public companies, and in particular on the remuneration
of senior managers
• There is an overall view that there is not a healthy balance of views by the media on many
matters that impact on companies
• Environment
• Social responsibilities
50

51. Findings – Board Operating Issues
51
Recruiting NED’s
15%
CEO & senior
management
remuneration
15%
Chairman & CEO
succession
10%
Board skills needed
10%
Board performance
evaluation
10%
NED fees
10%
Monitoring health of
culture
5%
Others
15%
Prioritising board
work
10%

52. Recruiting NED’s
• There is a feeling that a problem is brewing in terms of attracting high quality people to take on
NED roles in publicly listed companies
• The reasons given for a shrinking of the high quality talent pools are as follows
• CEO’s and FD’s are now paid so much that when they retire they don’t need the money
offered by NED roles
• Many of these people are put off by the “boring” aspects of regulatory compliance that is a
major part of board work today
• Many of these people are more attracted to the Private Equity model with higher returns and
less compliance work
• There are real legal liabilities associated with NED roles. There are a number of cases that
people look at and question whether the risks are worth the rewards
• Some people commented that Chairman of the Audit Committee is a dangerous job
• There is now a much greater workload for NED’s, and many people believe that the rewards
are not in keeping with the workloads and risks involved
52

53. Recruiting NED’s
• However it is unlikely that these points will make it difficult for a top 20 company to find suitable
talent for their boards
• Other points
• More Australian companies are looking to put international Directors on boards
• There are real logistical issues with this – however many companies are using video
conferencing for some of the meetings to alleviate the travel burden
• Many boards are looking at the skills mix required for the board to ensure the balance of
talent is available to discharge the board’s work
• Many Chairmen told me that there will be a significant refreshment of boards over the next
3-5 years. It is felt that the days of people spending 15 years as a NED of one company are
gone
• Candidates from the professions are now less likely candidates – unless they have had major
management jobs in their firms
• There is a view – if we need legal or tax skills - we will go out and buy the best available
talent
53

54. CEO and Senior Management Remuneration
• CEO and senior management pay is one of the most vexed issues on board agendas for a
number of reasons
• Competition for talent is fierce, and if you don’t pay market rates then that talent will walk
• In a perverse twist of the regulatory framework – it is generally believed that
remuneration disclosure has had the effect of causing salaries to increase more rapidly
than they otherwise would have
• This subject is played out in the full glare of public scrutiny – all the stakeholders have a say in
this matter – and boards have their recommendations put to a shareholder vote
• This is a very complex and technical subject. Many Directors find it difficult to understand all
the nuances
• Most of the remuneration models tried have not worked – eg TSR
• And in the absence of a generally agreed system which treats shareholders and management
fairly – negotiation skills and the loudest voices tend to win the day
• At the AGM – there is often a barrage of questions from disgruntled shareholders on this
subject
• There is a general consensus that major companies need a much better system for paying senior
management
54

55. Chairman and CEO Succession
• Most Directors believe that one of the most important tasks that a board undertakes is to plan
for the succession of the existing CEO
• Some boards take this process extremely seriously – the recent publicity surrounding the BHP
Billiton process shows the investment that some boards have made to do this job extremely well
• However, most Directors I spoke to felt that most companies can improve this process
significantly
• The process needs to be open and transparent so that good levels of trust build up between the
board and executives who are engaged in this process
• Failure to do this well could lead to many of the failed CEO internal candidates leaving the
company
• Several Directors commented that PE firms do the job much better than public companies. I was
given an example of one PE firm who took 70 references to make sure they were getting the
right person to lead the company
55

56. Chairman and CEO Succession
• Many people believe that the second most important person in a company is the Chairman
• This person sets the tone for the board and therefore the whole company
• In my discussions with Directors, it seems to be much less clear
• Who decides when to initiate a Chairman succession process?
• Who drives the process?
• Who decides the timing?
• Other points
• Good CEO’s don’t necessarily make good Chairmen
• Chairmen don’t necessarily need to have been a CEO
• It is the personal attributes of the Chairman that are much more important
56

57. Board Performance Evaluation
• There are two schools of thought
1. There needs to be a formal process of evaluation of overall board performance and
individual board member performance
2. There should be a focus on how to make the board flourish – not to delve deeply into the
past
• Some advocates of the formal process however say that many of these processes are “tick the
box” and therefore of not much value
• As with other board matters we have discussed, there is a trend toward a more rigorous
process in determining whether the board and it’s members are adding value to the business
and discharging their responsibilities to the shareholders
57

58. Board Skills Needed
• Many boards are taking a very systematic process in determining the skills needed to discharge
the board’s responsibilities
• Some boards are looking at the following issues
• Should we bolster our HR capability to make sure all the human capital and cultural aspects
are properly dealt with?
• Same with technology
• Do we need international skills on the board?
• Do we have the right level of diversity?
• 15 years ago boards were made up by accountants and lawyers
• There is now a more sophisticated approach to determining the mix of skills and personalities
required for a good board
58

59. Chairmen/ NED Fees
• Everybody thinks that Directors are underpaid
• This is despite for the top 50 ASX listed companies
• Average Chairman remuneration increasing by 92% over the past 4 years from $237k to
$456k
• Average Director remuneration increasing by 72% over the past 4 years from $112k to $192K
• This is explained by the fact that Director workloads have increased significantly over this period
• In fact, some people have calculated that Directors are paid a daily rate of about $3000 – which
is less than many of them could earn as a consultant, with much less risk
59

60. Prioritising Board Work
• Given the challenges and trends mentioned above, many people believe that board agendas are
in need of a radical overhaul
• Some of the issues raised in the day to day work of boards are
• Boards are swamped by paper. There is not enough management discipline to distil key
documents down to a page or two
• A lot of the detail work can be delegated to various committees – some boards do this well –
others struggle with this
• Agendas are often handed down from one generation to the next, and are controlled by
management. Chairmen need to assert authority in setting the agendas for the board
meetings, in conjunction with management
• The agendas need to focus on the important issues that help deliver high performance in the
short term, and also a quality and sustainable business in the longer term as well.
60

61. Monitoring Health of Culture
• Some of the most publicised corporate problems in recent years have resulted from a
breakdown in the culture of the organisation
• Inappropriate behaviours creep into the business over time, they go unnoticed until there is a
major event – and these lead to a crisis of confidence between the board and management
• A number of companies are focussing in on this subject, and are getting professional external
advice on how to monitor the health of the culture on an ongoing basis
• A hallmark of many successful companies is the strength of the culture, and in particular the
strength of personal accountability for delivering results that permeates through the business
• Building strong cultures starts with the board – they set the tone for the whole business
61

62. Some Data Collected
• For top 50 listed ASX companies
• Average board size is between 9-10 members
• 34% of boards have between 6-8 board members
• 29% of boards have between 9-10 board members
• 27% of boards have between 11-12 board members
• Board NED turnover pa = 10%
• Over the past 4 years
• 66% of companies had the same Chairman
• 66% of companies had the same CEO
• 66% of companies had the same FD
• Only 30% of companies had the same Chairman, CEO and FD
62

63. Director Discussion Topics
• Are there aspects of the PE model that could be applied to publicly listed companies?
• What are some smart ways to deal with the regulatory explosion?
• How do you go about determining the ideal mix of talent for a board?
• Is there a better way of managing CEO and senior management compensation?
• What is the best way to manage Chairman & CEO succession?
• How do you assess the capability of senior management to deliver the business outcomes
required by the Board?
• What is the best way of assessing Board and individual Director performance?
63

64. Contact Details
64
John Colvin
Principal
E: jcolvin@johncolvin.com.au
M: +61 409 183 174
S: +61 2 8823 3485
Level 36, Governor Phillip Tower
1 Farrer Place, Sydney NSW 2000, Australia
Sandra Heinig
Senior Associate
E: sh@johncolvin.com.au
M: +61 416 731 897
S: +61 2 8823 3485
D: +61 2 8823 3487
Level 36, Governor Phillip Tower
1 Farrer Place, Sydney NSW 2000, Australia
Sian O’Shaughnessy
Research Analyst
E: sian@johncolvin.com.au
D: +61 2 8823 3485
Level 36, Governor Phillip Tower
1 Farrer Place, Sydney NSW 2000, Australia