What happens to the director who "rocks the boat" in the boardroom?

Boards rarely take a vote, preferring to arrive at a decision by consensus.  The most commonly cited reason for this is the perception that a board that votes must be dysfunctional or adversarial.

But what happens when a director is the sole dissenting voice in the boardroom?

There are several ways directors try not to rock the boat. It can be a policy of the board, for example, that directors give the chairman a “heads up” about issues of individual concern before the meeting.

Other chairmen encourage the chief executive to “take the temperature” of directors before the board meeting to ensure a proposal is well explained.

A director who is still dissatisfied, but is disinclined to “hold up the meeting” by digging in on an issue, may speak with the chairman or the chief executive privately afterwards.

If a board discussion has reached a stalemate, a chairman may force the issue and offer a director who has argued against a motion to have his or her name – and the nature of their opposition – formerly recorded in the minutes of the meeting.

This can be a tricky course of action though. As one director once told me : “If you are in the minority and six months later you’re proved to be right, it’s cold comfort to say ‘I told you so’ because at the end of the day, you were simply not compelling enough in your arguments to sway the board at the time.”

There is a subset category in the academic research on group dynamics that is concerned with “group think”. This is a term used to describe a mode of thinking that group members engage in when they become intent on maintaining the status quo.

When this happens, the members of the group lose the ability to think critically. If a board has succumbed to group think, it is more likely to be falsely confident in its collective abilities and knowledge and therefore become more reckless when making decisions.

Tolerance to risk is higher in groups than it is with individuals, because responsibility is diffused in group. If no one person is responsible for the decision, then all will share the consequences of the outcome. The majority model, which is used by many boards, is also a factor in the group being more likely to take the less conservative path.

If the board operates by consensus, the group decision equals or approaches majority opinion; if consensus can’t be reached, majority rule applies.

When faced with a decision that is perceived to be highly risky, board members tend to choose one of three courses of action - they seek the counsel of any board member who is deemed to be the "subject matter expert"; they call for independent advice, or; they defer the decision for as long as required in order to ensure that all the information is available.

When all other factors are stripped away, the role of the board is about one thing: making the right decision for the organisation. If we accept this premise then it follows that how a board makes decisions is a key issue of leadership for the chairman, and a key issue of process for the board.

A board can check itself against this simple but important purpose by evaluating its tolerence for dissent, articulating how it deals with a director who "digs in" on a issue, and determining whether it has a culture of too easily conforming to the majority view.

.

Interview with David Gonski (2): The Curse of "Unconscious Bias"

The term “unconscious bias” has a rich academic pedigree steeped in psychological thinking. In layman’s terms, it describes the practice of judging others by stereotype: we hire people we like; people with whom we feel an affiliation. The lack of diversity on Australian boards and in senior executive ranks is often blamed on unconscious bias. In the second part of my interview with David Gonski, AC we talk about why familiarity is considered important in choosing our colleagues and how unconscious bias can stymie good decision-making.

 “We tend to choose from the circles we know and trust,” says Gonski, who is the chairman of Investec, Coca Cola Amatil and the Future Fund. “It’s regarded as less risky to take people who are already in those positions or to take people who’ve had to break in to those roles.

“But the circles you draw from won’t include diversity unless you consciously decide to make them diverse. And my theory is that it is worthwhile doing that. In fact, the actual exercise of exercising your mind to think outside of your circle is a good thing. You can create the benefits of diversity by breaking out and not just having people who are similar to yourself.”

Gonski cites the example of a board colleague with whom he rarely agreed. The director had completed his term on the board and Gonski spoke at his farewell party. “This person was from a very different world with very different thinking,” he says.

“At his farewell I stated publicly that he had created better decisions. He had done this because of his ‘needling’ and his constant questioning; I knew he would give us a hard time on any issue. But as a result, the decisions were more carefully framed and much more talked through. So he actually did a great service for the organisation. He made people think harder – and he made me think harder. I carefully checked everything he said.”

My research on “leading for diversity” at the board table concluded that chairmen who are experienced in leading boards of directors who are representative of their own type will need a set of additional skills to help them lead a diversely-composed board. The skills I identified include patience, understanding, the capacity to accept other viewpoints, the ability to listen and a tolerance for dissent - in addition to the traditional skills that a good chairman will bring to board leadership.

Gonski has the experience of serving on boards composed of men who are similar to him, as well as boards composed of a much broader range of people. He believes his style of chairmanship is congenial to homogeneously-composed boards as much as those boards which are heterogeneous.

“I would hope that my leadership style has not changed as a result of (having more diversity of views around the board tables I sit at),” he says. “I hope that I have always been inclusive and I hope that I have always led, whatever I’ve led, with a concept of diversity in it.

“However, within diversely-composed boards I think some of the decisions that have been made, the rigour with which they’ve been made and the vantage points from which they have been made may have changed. But my actual leadership style? No, I don’t think so.”

Diversity means much more than gender. Other dimensions of diversity include age, ethnicity and geographic location. There are already boards of listed companies in Australia which are diversely composed in the true sense of the term.

In my “leading for diversity in the boardroom” research I highlight the boards of Orica and BHP Billiton, for example. (See my article, International Governance: leading a truly diversely-composed board published in the peer-reviewed journal of Chartered Secretaries Australia, Keeping Good Companies, in February 2012).

The average age of company directors in Australia is already decreasing as many of the newly-appointed female directors are younger than their male counterparts. Gonski believes Australian listed entities are on the cusp of accepting “diversity” as meaning much more than gender.

“As the gender issue is addressed and moves forward, as the concept of diversity is understood more fully, and as the benefits of having both genders is recognised, it’s natural that we will want to see what benefits could be made in having diversity in other ways,” says Gonski.

The next step will be geographic diversity. “We already have some recognition of diversity of technical background,” says Gonski. “When I joined boards, most of the people on boards were lawyers. Now we’re seeing in the larger companies examples of geographic diversification – for instance, having someone who understands Asia is on the board. Someone who has lived there in an Asian country, who has worked there and who has done business there.”

But Gonski warns that exploring other dimensions of diversity may threaten the progress that’s being made on appointing women, especially at a time when 60 of the boards on the ASX 200 don’t have any female directors.

“I would hope that there’s a total positive to all of the aspects of diversity and it doesn’t have the effect of lessening focus on the gender issue in favour of the others,” says Gonski. “It shouldn’t happen, but we need to be aware of it.”

To ensure against a return to closed thinking about board composition, Gonski advocates a careful approach to using personal networks to gain a board seat.

“A personal network can be the very antithesis of breaking down the barriers to diversity,” he says. “You’re going right back to the old days when there was a club, and those in the club got the directorships and those outside the club, didn’t.  You need open windows and open doors to create good decision-making on boards.”

Interview with David Gonski (1): Diversifying Australian Boardrooms

David Gonski, AC is one of Australia’s most prominent chairmen. He has served on, and led, boards across sectors, most notably in listed companies and in the arts and higher education. As a proponent of good corporate governance, Gonski has championed diversity on Australian corporate boards, and he has actively backed appointments of female directors. In a two-part interview, he spoke to Boards and Governance about why it took a voluntary governance guideline to increase female representation in the boardroom.

“You never know with issues such as these as to whether they are a reflection of what’s going on or whether they instigate change,” says Gonski, referring to the revision of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations to promote more women in Australian boardrooms and in senior executive ranks.

“But there is no doubt that the coming of a new guideline promotes the issue as a board agenda item, it gets people talking and to start to think through whether they’re doing the right thing.”

The Corporate Governance Principles and Recommendations are voluntary guidelines for listed companies to report against annually under a concept of “if not, why not?”.  The Principles were introduced in 2003 and revised in 2007.

The changes to “Principle 3 Promote Ethical and Responsible Decision-Making” mean that companies must now establish a diversity policy. Boards must disclose in the annual report the measurable objectives for achieving gender diversity for the board as well as the progress that has been made towards achieving such set diversity targets.

The creation of a new guideline in October 2010 came at a time when the dearth of female directors on Australian listed company boards was becoming an issue of good governance. For the previous decade, the number of women on the ASX 200 had remained static – only about eight per cent of board seats were held by female directors.

Since the introduction of the new guideline, and aided by high profile mentoring programs such as that organisated by the Business Council of Australia, that figure has risen to 14.2%. (Nevertheless, 60 boards in the ASX200 do not have any female directors).

“The diversity guidelines have certainly had an effect,” says Gonski, who is the chairman of investment bank, Investec, Coca Cola Amatil and the Future Fund. “But even before they were put into effect, there was an enormous injection of discussion and consideration. And this is evident in the number of women on Australian boards now.”

A few months prior to the introduction of the new guideline, organisations such as Women on Boards (WOB) were agitating for the introduction of legislation to enforce gender balance on boards. 

WOB, which provides a registry of women who are "board-ready", had that year invited Arni Hole, the director-general of Norway’s Ministry of Children, Equity and Social Inclusion to speak to its biannual conference. Norway is well-known for introducing legislation to increase the number of women on listed company boards. Under the threat of delisting, the number of female directors rose from six per cent in 2002 to 41 per cent in 2009.

Gonski had also spoken at the same conference, telling the audience: “I would fight very strongly not to have quotas….people are foolish if they don’t have gender diversity but the way to do it isn’t through legislation.” 

Was the threat of black letter law the impetus for change in Australia? David Gonski disagrees.

“I think the new guideline was independent of any such threat (to regulate for gender diversity on listed company boards),” he told me. “I also think it was more of a possibility than a threat. Some people involved with government said that if things didn’t fix themselves it would have to be looked at; but nobody said at the time that it would be enacted. However, the concept of using legislation isn’t something that I favour.”

Gonski is well-known for mentoring women who want to pursue a board position. Boards on which he serves as either a chairman or a non-executive director have appointed women, and he has promoted women on to boards through his own network. But he concedes that the changes should have come earlier.                                                                                                                   

“The coming of more women in boards has been a fantastic development,” he says. “I’m not aware of any negativity and it has been, in my opinion, responsible for a number of positives.

“Firstly, boards are now able to draw from 100% of the population rather than 48%. Secondly, the diversity of views is a positive and the decision-making is greatly enhanced by having people who come from different walks of life and indeed different vantage points.

“There have been many occasions where having women on boards has not only taught people like me around the board table to think about things in a different way but also to solve them in a different way. But I think we left the issue probably too long. And it was wrong that it was left that long.”

In the second part of this interview to be published shortly, I talk to David Gonski about leadership in the boardroom and what’s next in the evolution of the diversification of board composition. We also discuss the concept of “unconscious bias” a term with an academic pedigree and which has become associated with boardroom diversity in Australia.

How to Win a Board Seat

Every year, approximately one-third of the 1,750 seats available on ASX200 company boards are made vacant. Most vacancies occur because the directors have completed their terms; three terms of three years is the usual benchmark.

Other vacancies arise when board members retire because they've accepted a new board appointment which is in conflict with some of the boards in their current portfolio. For example, a director would not be able to maintain a seat at a regional bank board if they then accept a directorship at a bigger bank.

Or the vacancy may occur because a director simply has too many boards to manage efficiently and properly.

Past practice has meant that the candidates who fill these vacancies will be similar to their predecessors - male, Anglo-Celtic origin, and similar professional, educational and personal backgrounds. However, more of these seats are going to women as a result of new best practice guidelines which encourage listed boards to reflect a better gender balance in their composition.

That said, there are still only about 550 positions on ASX 200 boards that are made available every year. And each one is hotly contested.

Winning a seat on an ASX200 company board reminds me of the school leaver or newly-minted university graduate who misses out on a job because they don't have any work experience. How can they get work experience when no-one will give them a job, they lament.

It's the same in board circles. The way to get a seat on a listed company board is to have a listed company board in your portfolio already.

In my previous post, "Waiting for the Phone to Ring....", I advise senior executives making the transition from a full-time career to building a new role as a professional company director to be patient, tenacious and diligent.

The traditional routes are to register with organisations that advertise board vacancies. One example is Women on Boards, a not-for-profit organisation which campaigns for gender diversity on boards across all sectors.

It's also useful to meet the key consultants in the board search industry. Most large consulting firms provide such a service; there are also a range of boutique agencies which specialise in board placement. But be careful to choose consultants who are truly experienced in board search to ensure your résumé is handled professionally.

The best way, however, is to use your personal network. If it's appropriate, let it be known that you will be pursuing a board career once you leave your current executive role. Your first board is the most critical when you're starting out as a company director because it signals to the market what type of director you will be and the type of industry you're interested in - financial services, health, mining?

The people in your personal network who will provide the best advice are non-executive directors, CEOs, chairmen, company secretaries and board search consultants. Telling your network that you're available for a board seat once you leave your current job is critical to finding your first board role. These are the people who already familiar with your experience and capabilities and are more likely to champion your next career move.

It's tempting to defer searching for board roles until after you leave your current executive role because your job is too demanding and leaves you too little time to network. But many executives in transition forget the caché that their job title and company often carries - and how quickly this is forgotten once they've left.

It's often more palatable for a chairman to appoint a new director who is the CEO or CFO of a major organisation rather than to hire someone who's been "retired" for six or 12 months as they "build their board portfolio". 

Making yourself out to be a good catch is part of the game in board circles, just as it is with applying for any new role.

The next steps to consider are:

1. writing a director's résumé;
2. preparing for an interview, and;
3. conducting due diligence on your prospective board's company.

I will cover these in subsequent posts.

An Interview with Professor Mervyn King

I first met international expert on corporate governance and sustainability, Professor Mervyn King, two years ago in Johannesburg when I was presenting at a conference. He was kind enough to meet me for a drink at my hotel in Sandton where we discussed a broad range of topics about corporate governance.

Our meeting coincided with the release of “King IIII”, the third iteration of the King Code of Corporate Governance in South Africa. Mervyn King was the chairman of the group which wrote the code.

Corporate law tells us that the board is accountable to the company but the international governance debate has moved to taking account of strategic stakeholders’ needs, interests and expectations in boardroom decision-making. So one of the key issues we discussed that evening was how to create a sustainable business, and how boards needed to be informed about stakeholder management.

Mervyn King was recently in Australia to present to the 2012 Global Reporting Initiative conference in Melbourne. He spoke to Boards and Governance about the board’s role in sustaining value creation.

“Good governance is about quality and not quantity,” says King, who has campaigned for decades to highlight the broader responsibilities and accountabilities of boards in an increasingly complex globalised economy. “It is not a quantitative, mindless, compliance exercise.”

In his books, and in particular in Transient Caretakers, King argues that corporate boards have long grown beyond their original purpose to take account of solely the interests of shareholders.

“Companies have never operated in a vacuum,” he says. “They operate in the milieu in which they are placed by their directors – and today, that milieu is a changed one.”

The stakeholder is increasingly important in boardroom decision-making, argues King. The growing acceptance of the triple context in which a company operates - financially, socially and environmentally - brings the role of the stakeholder into greater prominence.

“The primacy of the shareholder to the exclusion of other stakeholders and a single bottom line  was based on  false assumptions,” King told me. “These false assumptions of limitless resources and the earth having an infinite capacity to absorb waste were the premises on which yesterday’s companies were directed and managed.

“Today, stakeholders expect a company not to have profited at the expense of the environment, human rights, a lack of integrity or society. They expect the company to have adequate controls in place to monitor and manage material risks and opportunities. 

“Today they want remuneration to be linked to overall performance, which includes social, environmental and financial aspects. They want to be able to make an informed assessment from the company’s announcements and reports that its business will sustain value creation in our changed world.”

This theme also runs through South Africa’s Corporations Act, 2008 which requires listed and private company boards to establish “social and ethics” sub-committees.

The social and ethics committee must comprise no less than three directors of the company and it should be supported by a “social and ethics advisory panel” also appointed by the board. This composition of the panel must be broad and include representatives of the company’s employees and stakeholders as well as members of professions related to social and ethical matters. It names professions such as anthropology, psychology, education, environmental assessment, health, sociology, social services, law and theology.

The function of the social and ethics sub-committee includes monitoring the company as a good corporate citizen: is it promoting equity, preventing unfair dismissal, reducing corruption? It is also responsible for monitoring areas such as the environment, health, public safety and consumer relationships.

“The company, to be accountable and transparent, needs to communicate in clear and understandable language the “state of play” in a company,” King told me. “How else could the trustees of your pension fund discharge their duty of care to you to make an informed assessment about the sustained value creation of the business of a company before investing your money in its equity?”

One of the areas in which King III differs from Australia’s principles of best practice corporate governance is that it applies to all entities regardless of the manner and form of incorporation or establishment.

While the ASX Corporate Governance Council’s Principles are mandatory for listed entities to respond to under an “if not, why not?” regime, unlisted entities are not required to use them. However King III has been drafted so that any organisation, whether in the public, private or not-for-profit sectors, can apply its principles or explain why not.

“The exclusive approach to governance, namely the primacy of the shareholder and the single bottom line, is yesterday’s thinking,” King told me. “Today’s thinking is the inclusive approach to governance, taking account of the needs, interests and expectations of stakeholders in the decision making process but always aiming to make a business judgment call in the best interests of the company in order to maximise the total economic value of the company not its book value.

“In learning about the needs, interests and expectations of the stakeholders and by identifying the sustainable issues material to the business, management can manage and develop strategy on a more informed basis. The collective mind of the board can embed the sustainability issues into the long term strategy to give the company a competitive advantage in the changed world in which we live.

“We can no longer use the tools of decision making, such as the primacy of the shareholder and the single bottom line. We have to look at decision making in the triple context of finance, society and the environment taking into account the critical interdependent aspects of finance, human, natural, societal, manufactured and intellectual capital.”

Waiting for the phone to ring........

CEOs and other c-suite executives who announce their departure from their companies “to pursue a board portfolio” often believe that they will be overwhelmed with invitations to join boards. For most, it comes as quite a shock that offers aren’t made with the volume and speed that they expected or from the type organisations they believe to be an appropriate match to their skills and experience.

A senior company executive’s life is busy and demanding. In order for the executive to be efficient and productive, an executive assistant (EA) manages the diary, books flights, makes restaurant reservations and ensures a car and driver is ready. The phone never stops ringing; people are always waiting to be seen.

The EA is a lifeline, a diary at the end of the phone. I've seen CEOs and other well known executives walking down Collins Street in Melbourne or George Street in Sydney on the phone to their EA asking: "Where do I have to be next?"

Outside this environment, the former CEOs often find they are fending for themselves. Some lease an office and employ a part-time assistant; others share office space and secretarial support with like-minded people. “Of course, I look after myself these days,” is the clarion call of a former executive in transition to life as a company director.

For the most part, the executive must adjust to a new life of being self-sufficient: booking their own flights, catching taxis, typing their own emails, making follow up calls. Some former executives even confide to me that they’re worried they’ll have to return their membership card to the Qantas Chairman’s Lounge.

As Helen Coonan, a former senator and now non-executive director of casino operator Crown Limited, told The Weekend Australian newspaper: "Things like (having to drive) yourself everywhere. It's a big shock."

But the least understood challenge for most former executives - or former politicians - who are “building a board portfolio” is the wait: the wait for the invitations; the wait for calls to be returned; the wait between appointments. “You have to be patient and resilient because it never happens as quickly as you expected or wanted,” one ASX 200 director told me.

The yardstick is a minimum of two years – of networking and endless coffee meetings in hotel cafes, of waiting for invitations, of being interviewed by board nominations committees, of learning to cope with not being chosen and of dealing with the disappointment and frustration that can follow.

No longer the centre of attention the former executive can find himself outside of the sphere of influence, increasingly isolated and seemingly marginalised.

Making the transition from an executive career to a company director is a tough adjustment to make. My next post on this topic will offer suggestions and ideas for how a serving CEO can start planning for post-executive board career, and how those “directors-in-waiting” can make the transition easier.

Are your Board papers representing your leadership capabilities?

When I teach executives how to write board papers I often start the workshop with the clichéd image of a student cramming for exams. Books and folders piled high on either side of the desk, the message is clear - this person is overwhelmed and unsure of where to start.

This is the image I want workshop participants to remember when they’re writing board papers. I want them to think about their audience which is probably the most difficult group in the organisational structure to write for, and to present to.

Many company directors serve on multiple boards. This means that every month or so they are required to prepare for the next board meeting by reading, absorbing and annotating their board papers. Whether their companies are providing board papers in hard copy or electronically, the impact of volume – and especially unnecessary information – is the equivalent of the student buried under a pile of books.

If it’s unclear why they’re reading the paper – is it for noting, for decision, for information? – the director will become frustrated or worse. One public company engaged me to run a workshop over four days with 30 executives after a director expressed his feelings about the quality and standard of management’s abilities in one very rude word written across the cover page of a returned board paper.

Writing a board paper is the ultimate test of being able to argue well, present facts accurately and logically, and to persuade an audience of seasoned and experienced business people to support a proposal.

Delivering a board paper that is poorly composed, dotted with typos, grammatical errors and spelling mistakes, over-written and lacking logic and supporting evidence is not the way for management to gain the approval and support they’re after.