Australian boards have delivered middling results in recent years, as was outlined in the Hayne Royal Commission’s revealing report on corporate Australia. Although the commission focused on conduct in the banking, superannuation and financial services sector, governance practices across the wider corporate environment were brought into question. For greater success and transparency, fundamental changes must be made.
By Engel Schmidl
The Hayne Royal Commission put corporate Australia on notice, delivering a wake-up call that focused on the failures of both boards and executive teams to uphold governance and accountability standards.
Apart from the Royal Commission, expectations around the performance of boards have risen dramatically in recent years as shareholder activism, social justice issues and environmental concerns have all begun to impact the way companies do business. Companies have been under greater pressure than ever to provide both a financial return on investment for shareholders as well as address the demands of a broad range of stakeholders.
COVID-19 has further upped the ante for Australian companies and boards, with executive teams facing many challenges. With economic recovery subject to significant uncertainty, international trade looking shaky, and the health dimension of COVID-19 still an active and present threat, the viability of many businesses is under threat.
How should Australian companies navigate these troubled waters and what role can boards play?
“The challenges for most organisations have mounted considerably during COVID, and it has had an impact on the board's focus,” says Angus Armour, CEO and managing director of the Australian Institute of Company Directors.
He says all businesses have had to increase their focus on the health and wellbeing of employees and customers, and in many cases, rethink their business models. “Much of what had been taken for granted was upended for a period, and that's going to continue.”
Despite the complicating factors introduced by COVID-19, he says boards must remain focused on their fundamental task of overseeing governance and the longer term health of companies while also holding executive teams accountable.
He says board members face a tricky juggling act in doing so. “They need to have their EQ set to 10 but not to step back from their fundamental role of challenging management.”
“I'd distinguish between the board's role, which is to challenge, and the atmosphere they create in fulfilling that role,” he says. “I believe the collegial, professional atmosphere is essential to effective challenge. It encourages open conversation. I don't think that changes, even during COVID. I don't think the board can step back from their fundamental obligation to challenge through this period. The way they go about that conversation probably does need to adjust.
“I've heard board members talk about this being an exciting or challenging period for boards, and it's entirely true. But for most of the management teams that I speak to, I think the words would be relentless and demanding.”
Understand your industry
IBISWorld founder, and CEO and founder of the Ruthven Institute, Phil Ruthven AM, says the challenges posed by the pandemic serve to underline some of the fundamental areas where Australian companies and their boards have struggled in the past.
“We need to go back to basics and ask what it is we’ve got to do with our business to make sure it’s as bulletproof as possible,” Ruthven says. “Secondly, beyond making it bulletproof, we've got to make it successful in terms of growth and profitability.”
Ruthven says Australian companies have often fallen short of the success of American companies in producing higher, consistent rates of return for their investors. The danger in the current environment is that Australian companies could fall even further behind their international counterparts, he says.
He says US-based companies tend to have a firmer understanding of their industry, life cycle and market positioning. He says these three factors are critical for Australian boards and management teams to understand if they want to survive the COVID-19 recession and the post-COVID-19 period. “No. 1 would be to understand their own industry as well as they possibly can,” he says.
“Do they really have a good fix on their industry, and there are 509 of them in the country by definition. I think even more particularly than knowing your industry is saying where they are on the life cycle of their industry because I don't think more than one in 20 or 30 people would have a clue as to where they are. They might know that they're either a growing industry or a not growing industry, but that's too vague.”
Ruthven says highly successful companies focus intently on innovation. He says, historically, Australian companies have not valued innovation highly enough.
“We've never really taken to the concept of intellectual property as a valuable part of running a company,” Ruthven says. “It's not a uniform part of our gene structure at the moment, and it has to be.”
Master of your destiny
He says developing intellectual property is the key to creating high-value products and services that provide a launch pad to international markets, which is where Australian companies can achieve economies of scale.
“I don't care whether you're a crematorium, a fast-food business or an air-conditioning maintenance company, whatever your industry, you need to know what world’s best practice is in your industry.”
Ruthven says executive teams will have to do a lot of the hard graft to keep companies afloat during these difficult times, but boards will also have to weigh in with their expertise. For Australian businesses to survive and prosper, boards will need to oversee the implementation of strategies that best utilise a company's strengths by focusing on core capabilities, he says.
“You've got to be master of your own destiny. And I think over 75 per cent of companies are not in the right position to win because they're either stuck between being a niche and a major player.”
Nevertheless, regardless of these challenges we should not lose sight of the capacity of Australian companies in a post-COVID-19 economic recovery to refocus their attention on the longer term as they re-imagine both sources of competitive advantage and relationships with stakeholders.