THE CHAIR of the FUTURE Towards 2025 Header

THE CHAIR OF THE FUTURE Towards 2025 Header.

1 I...... 2 Contents

Our approach 4

Acknowledgement 5

Key findings 6

Introduction 7

The Chair of the future – from 2020 to 2025. 8

10 ways Covid-19 will impact boards in the future. 11

Demand for digital understanding will shape board composition. 14

ESG issues will rise in priority – and climate risk will feature more strongly. 16

The ability to manage divergent shareholder and stakeholder interests is paramount. 18

Mixed views on business activism. 19

Risk and regulation will remain an issue – and non-financial risk will continue to be elevated. 20

Diversity is an enduring challenge for boards. 22

Preparing for 2025 with strategic Chair succession. 24

The NEDs of the future. 26

Our uncertain future needs strong and resilient boards. 29

Contact 30

Korn Ferry 31

3 Our approach Korn Ferry conducted 28 hour-long interviews, 18 with Chairs of ASX listed companies. The superannuation industry fund sector was represented by two Chairs, three CEOs and one Chief Investment Officer. We also spoke to three representatives of proxy adviser firms.

The interviews were conducted between March and June 2020.

4 Acknowledgement

Korn Ferry would like to acknowledge the David Gonski AC generosity of those who gave their time Chair, ANZ Bank and shared their knowledge to assist in the Rick Holliday-Smith preparation of this report. Chair, ASX and Cochlear Respondents Vas Kolesnikoff Head of ANZ Research, ISS Governance Patrick Allaway Chair, BOQ Catherine Livingstone Chair, Commbank John Atkin Chair, AICD and Qantas Super John McFarlane Chair, Westpac Ilana Atlas Chair, Coca-Cola Amatil Rebecca McGrath Chair, Oz Minerals Debby Blakey CEO, HESTA Super Fund Hamish McLennan Chair, REA and Rugby Australia Michael Carapiet Chair, Link Group, Smartgroup Corp and iCare Robert Murray Chair, Metcash, Southern Cross Austereo Gordon Cairns and Hawke’s Brewing Company Chair, Origin Energy and Woolworths Group Pat O’Sullivan Philip Chronican Chair, Carsales Chair, NAB and The Westmead Institute for Medical Research Bernard Reilly CEO, Sunsuper David Clarke Chair, Charter Hall Group Deanne Stewart CEO, Aware Super Neil Cochrane Chair, Aware Super Anne Ward Chair, Colonial First State Investments Ltd Louise Davidson and Redbubble Ltd CEO, ACSI Peter Warne Mark Delaney Chair, Macquarie Bank CIO, Australian Super Karen Wood Paula Dwyer Chair, South32 Chair, Tabcorp and Allianz Australia

Sir Rod Eddington AO FTSE Chairman, Lion Philip Foo Director of Research, CGI Glass Lewis

5 Key findings

Attributes of the Chair of the future

RESILIENCE – NEEDS TO BE A FEATURE OF THE CHAIR’S LEADERSHIP.

AGILITY – MUST THRIVE AND MAKE COURAGEOUS DECISIONS IN AN INCREASINGLY AMBIGUOUS ENVIRONMENT.

HIGH EMOTIONAL INTELLIGENCE (EQ) – THE ABILITY TO TAP INTO OTHER PERSPECTIVES AND ENGAGE WITH DIVERGENT STAKEHOLDER INTERESTS.

COURAGE – ABLE TO LEAD A BOARD IN UNCERTAIN AND COMPLEX TIMES AND HAVE COURAGE OF THEIR CONVICTION.

CURIOSITY – BE TUNED INTO EXTERNAL FACTORS THAT ARE NOT USUALLY PART OF THEIR PURVIEW.

A LEARNING MINDSET – BE COMFORTABLE WITH CHANGE AND DIFFERING PERSPECTIVES.

Issues Chairs face towards 2025

DEMAND FOR DIGITAL/TECHNOLOGY UNDERSTANDING WILL SHAPE BOARD COMPOSITION.

ESG ISSUES WILL RISE IN PRIORITY – AND CLIMATE RISK WILL FEATURE MORE STRONGLY.

RISK AND REGULATION WILL REMAIN AN ISSUE – AND NONFINANCIAL RISK WILL CONTINUE TO BE ELEVATED.

DIVERSITY IS AN ENDURING CHALLENGE FOR BOARDS.

6 Introduction

The global economy is facing an increased key factor of an exceptional NED. Since 2012, the risk of stagnation, climate change is risk focus of boards has increased substantially and with it the spotlight on NEDs has increased, striking harder and more rapidly than particularly the public profile of the Chair. And, expected, and fragmented cyberspace while thinking big is still valued, it is pragmatism, threatens the full potential of next- clear headedness and high EQ that are the characteristics needed for NEDs to take us into generation technologies — all while 2025. citizens worldwide protest political and economic conditions and voice concerns What does this mean for Chairs and the boards they lead? What will ‘greatness in the about systems that exacerbate inequality. boardroom’ look like in 2025? What are the The challenges before us demand global and domestic trends and events that will immediate collective action, but fractures influence the profile of a Chair in 2025 and how are Chairs resetting the boards they lead to be within the global community appear to fit for the future? only be widening. Stakeholders need to act quickly and with purpose within an Korn Ferry interviewed Chairs of our most prominent organisations and other leaders with unsettled global landscape. a stake in future board governance, among them World Economic Forum, Global Risks Report, many who hold leadership roles in Australia’s 2020.1 largest superannuation industry funds along with the increasingly influential proxy advisers. As the world reels from the impact of Covid-19 We discussed the key challenges now and in and economies are being restructured at pace, the future that are shaping board effectiveness, the Chairs of Australia’s leading companies composition and the skills and experience of are reacting to the crisis while ensuring the Chairs and NEDs. companies they serve have resilience and strength for the future. The Chair of the Future – Towards 2025 is a resource for boards, executive teams, investors It is clear that Chairs and the boards they lead and others with a stake in board quality. face challenging headwinds. When defining the scope of this research, which is to learn the skills, experiences and attributes of the Chair of the Tim Nelson future, the full risk of coronavirus wasn’t known. Chief Executive Officer Understanding the impact of the virus coincided Korn Ferry, Australasia with the timing of our interviews and has served Alexandra Goodfellow to sharply focus this research through the lens of risk and ambiguity. Vice Chair Korn Ferry, Australasia In 2012, Korn Ferry conducted research on the theme of greatness in the boardroom. Then, the highest ranked characteristic of exceptional NEDs (76%) was that they should be a big picture thinker. Just 30% of interviewees nominated a deeper understanding of risk as the

1 https://www.weforum.org/reports/the-global-risks-report-2020.

7 The Chair of the future – from 2020 to 2025.

It’s a changed world from what we’ve known for they serve equipped to manage an uncertain the last, say 20-30 years. It’s more difficult to and potentially erratic future. have long-term strategies, therefore companies need a culture of real agility so that as Chair, Some current features of board oversight will when you’re not quite sure what’s coming over amplify as we journey towards 2025. They will the horizon, you are still able to respond. And provide both challenges and opportunities for you need to be confident that your company Chairs and, depending how companies manage has people with the ability to respond in an each, will reveal strengths and weaknesses appropriate way. at board level. Sir Rod Eddington noted – Gordon Cairns the breadth of the role: “It would be all but impossible to find a Chair who is experienced in Asking Chairs to look forward five years may, in financials as well as all aspects of the business.” usual times, be a reasonable period to forecast, but in the time of Covid-19 this is proving to be The foundational skills of a Chair will remain, impossible. As one Chair noted: “Anyone who however our interviewees agreed that the long- tells you they know what’s going to happen, term impact of Covid-19 will be keenly felt and doesn’t. Nobody knows.” will influence the composition of boards and the attributes of the Chairs who lead them. It is clear Covid-19 has been a formidable disruptor, that boards require a strong leader who thrives however predicting five-year cycles with any in an ambiguous environment. The Chair of the certainty is difficult in ‘normal’ times. Businesses future needs to possess a learning mindset, operate in an environment of continuous resilience, agility, high EQ, courage and curiosity transformation making it challenging at any to guide their boards towards 2025. time to set the business model and strategy for five years. Most are continuously reviewing their The bottom line, as a Chair and with your strategy and in this time of Covid-19, they have board, is that you have to have the courage had to become very comfortable working in of your convictions. There are many interests changing market conditions. The ‘new normal’ with different perspectives. There are many is that there is no ‘new normal’. The ability to stakeholders as well as shareholders. Therefore, deal with ambiguity, to be agile and resilient has you have to be persuasive with your arguments, quickly escalated to the top of the skills and which means being absolutely convinced of characteristics required of Chairs and NEDs. your position – that is the courage of conviction I’m talking about. I think the future is likely to be very different – Catherine Livingstone to the past. There will be need for careful Chairs of the future will be multi-dimensional in rethinking of strategy, together with an agile their approach. They will be equally comfortable and continual review approach to strategy. applying a conservative regulatory mindset to This will need the involvement of experienced risk as they are at recognising and supporting people with sufficient thought capacity to technology-enabled innovation. really understand the shape of the future

business, in addition to understanding the

cultural and governance issues.

– Rick Holliday-Smith

While our interviewees could not with certainty consider the specifics of market forces they expect their companies to face in 2025, they did discuss what makes boards and the companies

8 I think the best Chair has a good idea of the us because the growth of technology is strategy and success factors of the business. exponential; the machines are inventing They need to be a good listener, but they also the machines. have to be more than collegiate; they have – Robert Murray to be leaders at the same time. It’s balancing the two, at times, conflicting objectives. If you ESG reporting has been growing in consider financial success as the objective of prominence for some years and will be the business and stakeholder management more dominant in 2025. Vas Kolesnikoff being the constraints around that objective, noted that in Australia, ESG solutions then Chairs have to manage those constraints were among the highest selling research effectively. products for ISS Governance in 2019. – Mark Delaney Social licence to operate, which is linked to ESG, requires deeper understanding I think the boards, and particularly the Chairs of by corporate Australia. Shareholder the future, or even the present for that matter, activism will also increase, and Chairs need to have a real learning mindset. They can’t will need to be able to manage come to it thinking they know all the answers, divergent shareholder interests and and that their experience is all that’s required. community expectations. They need to be good listeners and must listen to multiple stakeholders to hear comments and Corporate Australia has been focused challenges from every direction. But they also on the profit motive but come 2025 then need to be able to challenge others. It’s no the importance of a social licence good just being challenged and defending the to operate will be something that current position. people need to better understand. – Peter Warne They will also need a much stronger understanding of governance and Four key issues that will be prevalent in 2025 that it goes well beyond just the were identified by most leaders interviewed for legal implications of governance; this report: technology, ESG, regulation and it reflects the way we approach diversity. They are summarised here with further business. I think that’s going to be commentary in the chapters that follow. a quality that a director will need to understand clearly. Technological forces will continue to have – Neil Cochrane a major impact on how companies conduct business in the coming years, and Chairs will Community expectations of Chairs need to ensure the NEDs on their boards have and the boards they lead have the right mix of experience, and understand changed over the past few years, the challenges and opportunities that a greater and this will continue. Boards reliance on, and exposure, to various aspects are operating in an environment of technology will bring. Whether boards of increased transparency and accelerate their understanding of technology with that, a stronger voice and its profound impact on all aspects of from community stakeholders. business in 2025 will depend to some extent on Directors need to be in tune with board composition decisions made now. community expectations of the companies they represent and Technology is the biggest global risk. I haven’t their governance role. seen a single industry I’m involved in that hasn’t been fundamentally disrupted in the last five years, and it’s happening so fast for all of 9 Australian business operates in a highly regulated Diversity is an enduring issue for boards. It was environment and that will continue. The amount frequently cited by interviewees in discussions of compliance that a board addresses increases on how boards need to adapt for the future. most years, and this has in turn increased the Our conversations went beyond discussions on workload of directors. Some interviewees felt gender diversity − which in Australia, where it regulatory intrusions and enforcement are a is 30.9% (May 2020) for ASX200 boards, has growing component of the market rather than been the main driver of diversity for boards − to a leading indicator. Chairs and NEDs need to diversity of ideas, perspective and experiences. be satisfied that they deeply understand what and where risk lies within the organisations they The thinking around diversity on boards needs serve as directors. to change to be more than gender. Age is becoming as important depending on what A flexible and innovative mindset will become board you’re involved with, and diversity in more important as will the need for an even terms of background is also becoming more more powerful risk radar. The Hayne Royal important. Commission and other recent issues have – Pat O’Sullivan shown the critical importance of non-financial risks, the impact of culture and the risks of The Chairs and other leaders we spoke to are flawed decision-making. Conduct in small parts confident that diversity strengthens boards of organisations can dramatically affect the and that true board diversity – where NEDs reputation of the whole company. Boards will have different backgrounds, experiences and need to be even more vigilant around reputation views – is the next challenge in Australia. As risks and their duty as directors to protect the John McFarlane noted: “Diversity is important company’s reputation. to ensure the best ideas and alternatives are – Anne Ward pursued.”

In June 2020 Korn Ferry surveyed NEDs in Australia and New Zealand to learn how Covid-19 had affected how their boards work, and the insights they gained from the experience. The key findings were:

The cadence of board meetings changed significantly. Virtual meetings to continue. NEDs are deeper in the business. 60% of NEDs gained a deeper appreciation of the ELT.

https://focus.kornferry.com/coronavirus/boards-in-the-time-of-covid/

10 ways Covid-19 will impact boards 10in the future. We asked the Chairs we interviewed to reflect upon Covid-19 and its future impact.

Covid-19 is the most serious crisis our community − government, business, citizens 1 − has collectively experienced. It is having and will continue to have a more serious impact on performance than the global financial crisis.

The world order will be changed following this and there will be more uncertainty 2 surrounding what we have previously relied upon. Financial risk is always important but increasingly risks such as geopolitical, societal and technological will be an area of focus.

Chairs are working in the present and in the future. They are working with their 3 boards and executive teams on how to manage the crisis now with their business recovery skills − and plan for a future rebound. This involves great resilience and agility from all parties.

Many of the learnings that have come through managing business recovery will 4 be part of the rebound − in particular the speed at which organisations adopted digital solutions.

Covid-19 gives boards an appreciation of the interdependence across the world 5 and all sectors. There will be lessons around liquidity and greater understanding of the protections needed to build resilience.

It is important that early learnings from the impact of Covid-19 are not lost as we 6 go through the survival stage. Those learnings will impact how we come out of the crisis and dictate how the business operates in the future.

There will be a lasting impact on companies and on society. There have been a lot 7 of people living beyond their means and many companies that have set themselves up to take advantage of that. It is not sustainable.

There are key attributes required of NEDs that have been highlighted by this crisis. 8 They are: courage, humility, listening, agility and resilience. If there was one great bureaucracy buster that we should be thankful for it was the 9 sense of urgency created around the Covid-19 response. Board diversity is increasingly important as we move on from this crisis. We must 10 have diversity of thinking, ideas and experiences.

11 Chairs working deeper in the business.

I’ve been a CEO and I’m conscious that I don’t want to be seen as a meddling chairperson but the truth is that finding good contact points within the business, whether they be strategy days or meeting staff or clients who are important to the success of the company, does help. – Hamish McLennan

12 While Covid-19 has temporarily drawn Chairs into day-to-day decisions for the business, many Chairs noted that in recent years they have needed to work more deeply. For some, it was to better inform themselves in their board committee work by engaging directly with those responsible for a particular area. For others it was to support the CEO and the business by working as a mentor and sounding-board to the leaders.

However, for most, this trend was due to increased risk-management demands on the company and the board’s role in setting the risk appetite of the company. The tendency in recent times of the Chair needing to be closer to business operations than previously does not mean they are becoming more operational. It relates more to the recent focus on non-financial risk, and clear lines of responsibility for the culture of the company, reaching up to board level.

It is counter-productive for individual directors to have open access to managers at will and divert executive resources − the Chair has to play a leading role in facilitating communication between the board and management. The principal forum by which the board informs itself and engages with management is through scheduled board and committee meetings; it is important not to undermine the formal structure and rhythm of engagement. However, it is also very important that the leaders of committees understand the responsibilities vested in them by the board and spend appropriate time engaging with key executives to fulfil their responsibilities as Chairs. This does, inevitably, require deeper engagement in the business for some directors. – Paula Dwyer

13 Demand for digital understanding will shape board composition.

The biggest issue that boards and management meet the challenges of technology and, more teams are going to face in 2025 is the flow importantly, use the often small window of time of data – correct or incorrect – about their available to grab opportunities.” companies and their activities. How they weed through that data, what they respond to, their That’s not to say that Chairs of the future, policies and approaches will lead to a profound or their fellow NEDs need to have specialist breaking down of the corporate veil, leading to backgrounds in technology; rather that they transparency − intended or not. understand how technology impacts the – David Clarke economic environment they operate within. Broad commercial, cross functional experience Technology, including digital, is both enabler was valued highly by all respondents with and disrupter, providing a platform for different boards needing a number of directors with operating models and new styles of competitors industry experience. that can quickly establish a market presence. It also shapes and changes how customers I would say there is less demand for very interact with companies, and how companies specific functional experts who don’t have interact with their customers. The challenge is wider commercial experience. Now that’s fine to anticipate, rather than react to, the speed of if the person also has significant business change. experience and has run a relevant business but there was a period when boards wanted digital It isn’t surprising that an understanding of directors and I think that era of very functional digital was highly valued in a discussion with our experts is coming to an end. interviewees on the skills of a NED, especially – Rebecca McGrath when considered in the framework of taking a board into the future. An understanding of, None of the Chairs advocated for ‘digital and interest in, technology and innovation are directors’, preferring that all directors need to important characteristics of Chairs if we are to understand operations through a digital lens. have strong boards in 2025. Chairs of today have Technology is pervasive. It is a fundamentally to stay current if they wish to be Chairs of the different way of looking at a business and every future. They need to understand the impact of director should be able to apply that lens. technology-enabled risks and their impact on – Catherine Livingstone corporate resilience. This doesn’t mean they will have core technology skills, but more that they What qualities do Chairs now need that were understand the role and potential of technology. not so important five years ago? It’s got to be Digital risk is growing along with developments tech because if you look back, the heads of IT in technology, with cyber-risk a clear and across most organisations at that time were present threat. neither the most commercial nor the most senior amongst the executive service providers. Anne Ward cited a broad and deep You’d struggle to find a major organisation now understanding of technology and the where the head of tech and innovation wasn’t opportunities that come from technology as either the most important or the second most an important quality for Chairs and NEDs now important executive after the CEO. and in the lead-up to 2025: “Digital, machine – Michael Carapiet learning, AI, all present disruptive challenges, but also huge opportunities. Often there’s quite Complexity of board work is expanding, and a small window to grasp an opportunity and every skill required will not be found among boards need to be able to understand and seven or eight directors. This may increase the

14 need for specialist board advisers who can be commissioned by the board at the very time their specialist skills are required. For example, cybercrime was singled-out in our conversations with Chairs as an ever present and increasing threat, as it escalates at pace with the expanded volume of data. A board may receive the best advice from an adviser who lives and breathes the issues relating to cybercrime daily and can offer insights to the board that few NEDs will possess.

If you look at the practical applications of artificial intelligence, machine learning, robots and a greater shift towards a digital workplace, technological trends and applications are becoming more prevalent. I think boards and Chairs are going to be required to keep pace. – Pat O’Sullivan

The organisational challenges of adapting for the digital era are undeniable and Chairs who do not understand its full potential will not remain relevant in the future. The entire board needs to understand how digital can transform organisations time and again to respond to change.

15 ESG issues will rise in priority – and climate risk will feature more strongly.

When we think about the broader ESG issues, that climate risk is investment risk. Indeed, of which climate is obviously one, we consider climate change is almost invariably the top how our investors and our employees might issue that clients around the world raise with be prepared to see continued investment BlackRock.”3 into broader ESG strategies, and how they will view the trade-offs we need to make to It has become very clear and accentuated continue that investment – not only as a result by events over the last couple of years, that of this crisis but as we evolve through the next directors need an understanding of how decade. community expectations are changing. You – Karen Wood can’t only have a static view about the role and purpose of a company, or about what The ESG reporting framework has increased in role the company plays in society. It has to prominence throughout the past decade and be very much attuned to what else is going will further frame the performance narrative for on in the organisation. A lot of that does rest companies towards 2025. with the board because executives, quite understandably, get fully engrossed in the The Chairs we interviewed, when asked for their issues they’re dealing with at a point in time view on global challenges impacting risk, all and one of the roles of the board is to inject identified environment as a major risk for now that external perspective into the operations 2 and in the future. of the group. – Philip Chronican It is unsurprising that the leaders who represent industry superannuation funds were clear on Climate change ranks consistently high as a their ESG expectations of the companies they financial risk for investors. A recent survey invest in and the ESG experience of Chairs. conducted by the McCombs School of Business found that 91% of investors expect climate risks Shareholder value is always there, it’s never to be financially material to their investments.4 not on the table. But the role of the Chair is to This view is supported by Australia’s industry understand all the drivers of shareholder value superannuation funds whose domestic and drive that long-term view of what it means shareholdings are a sizeable proportion of to deliver for shareholders. It is going to be ASX investors, and whose influence is growing in critical. We’re seeing this focus on responsible accordance with their size. investing in resolutions at AGMs and we’re certainly very active in terms of what we expect We have always believed that we have a on climate change or from a social governance responsibility to invest in ways that deliver factor. strong returns for members and at the same – Debby Blakey time improve outcomes for the community and the environment. Climate change poses Any business leader who doubts the impact of one of the most significant risks to Australians’ climate change on investor sentiment might read retirements savings, and as a long-term BlackRock Chairman & CEO, Larry Fink’s, 2020 investor we are taking bold action to protect letter to CEOs where he writes: “Climate change our members’ retirement savings and we’re has become a defining factor in companies’ taking a leading role in advocating for better long-term prospects...Investors are increasingly environmental outcomes. reckoning with these questions and recognizing

2 Interviewees were asked to consider future risks identified by the WEF – economic, environmental, geopolitical, societal and technological. 3 https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter. 4 https://www.sciencedaily.com/releases/2020/02/200218161717.htm.

16 As an example, this year we will divest from businesses what derive more than 10% of their revenue from thermal coal mining. We’ve committed to reduce emissions in our listed equities portfolio by at least 30% by 2023 and we will use our influence as a major investor to advocate for an economy-wide 45% reduction in greenhouse gas emissions by 2030 – and we’re aiming to replicate this in our own portfolio in the same timeframe. – Deanne Stewart

To tackle climate change – and other ESG issues − a long-term, outward-looking focus is required. As Debby Blakey observed: “You can’t expect people to be tackling climate change if they are worried completely about next quarter’s performance rather than the 10-year horizon.”

The Chair needs to balance the needs of the business across different time frames and be able to make sound judgement on what is needed most and when. Balancing short- term needs with potentially divergent long- term aims is part of their skill.

The rhythm of ESG priorities also changes depending on external forces, such as extreme weather events, a global health emergency like we are currently experiencing with the coronavirus, or market failure, such as the global financial crisis. The zeitgeist also shifts due to political or generational change. Therefore, a Chair of the future will lead a board that is tuned in to external factors that are not usually part of their purview and which appear, on the surface, beyond their reach.

17 The ability to manage divergent shareholder and stakeholder interests is paramount.

The principal responsibility of the board is to ensure the company makes a lasting contribution to society and a positive long-run economic returns – in that order. It is perfectly legitimate for us to have a societal, sustainable philosophy. I don’t think it’s inconsistent with producing superior long-term returns. It does stop you doing the wrong things. – John McFarlane

The Chair of the future will be a skilled communicator and experienced at managing diverse shareholder interests. They will also understand the importance and influence of stakeholders who are not investors but who, through their connection to the company – as employees, community, consumers or affected by decisions made by the company – deserve to be heard.

I try to understand exactly where they’re coming from and why they hold the views they hold. Some of them have a long-term investment horizon, others have a very short-term one, while others desire an ESG type outcome, a social benefit or even a philosophical one. – Peter Warne

Boards adhere to a ‘shareholder primacy’ approach which traditionally may have led directors to act solely to further the interests of shareholders. Clearly, over recent years, this approach has broadened to include the interests of other stakeholders. Providing a return to shareholders remains the core role of a listed company, but as the profile of shareholders becomes more divergent and the influence of other stakeholders rises, it is incumbent on the board to listen to and understand divergent views.

18 Mixed views on business inclusiveness and equality, sexual harassment, activism. human rights, mental health, Indigenous issues and LGBTIQA rights. Climate change advocacy If a company is going to take a is also represented in ESG reporting and is frequently advocated for by executives. This is public position on something, evidenced by its prominence in a list of public there must be a business statements of corporate leaders on social issues, case which clearly explains produced by media research company Streem.5 how taking that position will be to the long-term benefit The views among Chairs in relation to business activism and advocacy were mixed. For some, of the company. It could issues that are important to the operation of be the creation of value for the company should be addressed within the shareholders or improving company but not necessarily in public forums. employee engagement and Others felt where the business case was solid, morale. It might be directly then public advocacy is warranted. related to the products or There were also Chairs who noted that there are services that the company political and social issues that are important to provides, or it might have a their stakeholders – including their employees – positive impact on reputation and relate to their purpose. It is therefore which will allow us to do certain appropriate that the company has a view and other things. But if you cannot states it publicly. explain the business case you It’s perfectly legitimate for us to advocate should not do it. for inclusiveness for the 34,000 people who – Anne Ward work for us. It’s perfectly sensible for us to have views on things that will affect our commercial interests going out 5, 10, 20 years, and that would include climate-related issues. There are some issues where the linkage is so During the latter part of 2017 a postal vote was tangential that it’s probably better that we held to decide whether Australia should adopt don’t have a view and I think that’s the filter marriage equality laws. This was a watershed that most boards, Chairs and CEOs should period in Australia politically and socially, and apply and ask: how is my view legitimised by several businesses nailed their colours to the our organisation’s needs and requirements? mast by contributing their voice and resources Because if it is just a personal view then to campaigning ‘Yes’ for marriage equality. The you don’t really have the right of using the ‘Yes’ vote won the day and marriage equality corporate platform to make it. became law in Australia. – Philip Chronican

Marriage equality is one of several issues that business has taken a position on publicly. Others include: anti-slavery, domestic violence,

5 https://www.smh.com.au/business/companies/bhp-boss-andrew-mackenzie-most-outspoken-ceo-on-social-issues-analysis-finds- 20191020-p532dx.html

19 Risk and regulation will remain an issue – and non-financial risk will continue to be elevated.

Risks are there to be managed, not eliminated. And the more you eliminate the risks, the more you compromise the value in the business. Therefore, it’s managing the risk that’s the key. – Catherine Livingstone

There’s no doubt in my mind that boards need to be more alert and more agile in the way in which they think about risk and governance. – Philip Chronican

The board has ultimate oversight over the statement. One pointed to a lack of a globally company’s risk-management framework and, accepted measurement for risk appetite as a as such, risk and regulation are a prevalent part challenge for boards, while another suggested of board work. The focus of boards is towards a local risk appetite parameter needs to be strategic risk-management – an approach that developed. considers the risk appetite of the company when evaluating various aspects of risk Patrick Allaway noted that disruption and speed including compliance, financial, non-financial and of change will continue to accelerate against reputational risk. a backdrop of erosion of trust in institutions: “This needs to be addressed and leadership The Chairs interviewed cautioned against a risk- must respond to that. You’ve also got a further management approach that focusses too heavily backdrop of increased regulation across all on compliance ‘box ticking’ at the expense of industries trying to deal with poor conduct and creating value. better cultural issues in companies. So, we’ve got a very different dynamic that Chairs, boards and Being overwhelmed by the compliance burden senior management teams are looking into as in itself and spending all your time ticking we look forward to the next three to five years.” boxes becomes a pretty empty exercise. You certainly don’t want that as you may become Ambiguity in determining risk appetite impacts risk averse on the substance. It comes down to the board’s ability to apply a benchmark of what balancing and accepting risk but also managing too much – or too little – risk looks like. This is and mitigating it. That’s how you create value – more prevalent when assessing non-financial you don’t make money without taking risk. You risk where there are challenges in measuring and also need that entrepreneurial spirit where you valuing reputational and cultural risk. do embrace risk. – John Atkin NEDs need a better understanding of non- financial risks including ESG health and the Non-financial risk will receive more attention in broader social licence issues. They also need the future as ESG issues are further amplified. a view on how to manage stakeholders other In 2019 Korn Ferry hosted a roundtable of 15 than customers and staff; regulators are NEDs, representing 90 listed companies, for a the new group of stakeholders they have to discussion on risk.6 The directors noted that the manage. process of risk – and identifying risk appetite – Mark Delaney – has changed in the past five years. Some directors questioned whether the risk appetite framework is properly understood and called for greater debate between the board and executive committee on setting the risk appetite

6 https://focus.kornferry.com/wpcontent/uploads/2020/08/TheRiseoftheCRO_Nov2019.pdf..

20 The flipside to tightly managing risk and emphasising compliance in the risk-management framework is creating a compliance mindset that prohibits opportunities for growth. There is a tension between value creation and risk management which involves continually addressing risk appetite.

There is no doubt that well considered risk and governance frameworks deliver better outcomes for businesses and consumers and we are going to see increasing emphasis on this over the years ahead. But the good organisations won’t see risk and compliance simply as a barrier to growth; rather they provide a foundation to guide decision-making processes that align to organisational values and strategy. I think it is the alignment between values and strategy that will create differentiation, competitive advantage and opportunities for growth into the future. – Deanne Stewart

The 2019 Hayne Royal Commission and APRA’s 2018 prudential inquiry into CBA that preceded it, identified lessons for boards in all sectors in relation to culture and trust. Restoring trust in our institutions is challenging and an important area of focus for all boards.

I think companies could and should join the dots for people on major issues because that also helps corporate Australia move its reputation from being seen as self-indulgent or not connected with the average person. I think shying away from that, as some have done, has been ineffective. It doesn’t make people trust you more, it probably makes them trust you less. Preparedness to address issues and have an opinion is almost a necessity. Not on everything but on those things which really connect to a company’s purpose and its core strategies. Pick those themes which are really going to be important to your company, its purpose and its success and have a view on them and, as necessary, tell that story; don’t wait for someone to ask it necessarily. – Rebecca McGrath

21 Diversity is an enduring challenge for boards.

I don’t think boards are diverse enough at The number one request Korn Ferry’s board all. On the CCA Board we have two directors practice receives from clients is help in who were born, raised and have worked all diversifying boards – in terms of gender, their careers outside of Australia in markets as ethnicity, background, culture, thought and diverse as India, Japan and Mexico. The value global experience. that they add from their different perspectives is immense and goes to what true diversity In Australia, diversity on boards has long been means and how much it can improve board focussed towards improving the number performance. of women on boards. It is clear from our – Ilana Atlas conversations with Chairs that diversity itself needs to be more inclusive and should include The aspiration for greater diversity on boards NEDs with different backgrounds, skills, gender, has two layers; the first, is how a board can ethnicity, lived experience, and ways of thinking. attract talented leaders who, whether it be This should not however have an unintended their culture, gender, education, work history consequence of excluding women from board or exposure to a diverse range of experiences, roles by creating further hurdles to their board will make the board stronger. The second layer career. is how this diverse group fits together. Rick Holliday-Smith believes a good board should be It is clear that diversity enhances discussions a major contributor to success: and decision-making by including multiple opinions and perspectives, but diversity doesn’t A good board is one where directors have automatically bring inclusion. a diverse range of commercial and societal experiences. At the same time the core group It’s really important to have a diverse board, must have extensive subject matter expertise but that’s only one half of the equation. The in the activities of the business. As a collective other half of it is inclusion. Unless the Chair they need substantial intellectual bandwidth, understands and commits to inclusion then must be able to think and act in a collegiate they may as well not have diversity. And way, and must be independent. The Chair plays there’s not enough work being done on an important role in forming the board and inclusion. When you do that, you’re going to ensuring they function in a cohesive way. The have a better understanding of where all the Chair is selected by his or her colleagues to stakeholders are coming from, and therefore, play an important role and is both a leader and it’s not a threat; it’s an opportunity. their servant. He or she has the right to set the – Neil Cochrane agenda, sets the tone from the top, and is the Board diversity is an important area of focus for key point of interface with the Chief Executive. proxy advisers. EY, in its 2020 preview of the US The Chair is the ultimate coordinator of proxy season, asked investors what elements the board as a team, and also manages of board composition currently need the most the interaction between the board and the attention from nominating committees. The management. If the Chair has done a good job investors ranked board diversity across gender, all the board members are involved with proper race and other personal characteristics (e.g., interaction with management and together the age, nationality) highest, with 72% of investors broader team can accomplish superior long- saying personal diversity characteristics 7 term performance in a properly governed and should be a priority. strategically focussed way.

7 https://assets.ey.com/content/dam/ey-sites/ey-com/en_us/topics/cbm/cbm-2020-proxy-season-preview.pdf

22 The proxy advisers also spoke of the importance of broader diversity on boards. Philip Foo pointed out, “It is easy for us to recognise if someone is male or female, however we will need to crack the diversity egg beyond gender to promote the best outcomes.”

One of the things we need to see in the future – and the Chairs need to drive it – is greater diversity of thought and background of people on boards. I do worry that a lot of people on boards are in a bit of a bubble and I think the increase in gender diversity has helped but it hasn’t eliminated it because people still come from very similar backgrounds. It would be great if we could think more about how we could diversify the backgrounds people come from aside from these very traditional pathways. – Louise Davidson

No one is saying that NEDs skilled in legal or accounting have lesser value on a board; it is more that they work best alongside NEDs with other skills and experiences who will come to an issue from a different perspective.

Diversity of experience has kind of morphed into gender diversity, because that’s really easy to see and because gender is a rough proxy for different life experience. However, in my view the drive for diversity on boards has often been hijacked by people who think boards need to be representative but that’s a completely different concept to diversity. You can have so-called diversity appointments but if they all think the same and have the same kind of background or experience then you don’t have diversity. You just have a representative board that makes certain people happy because it ticks a set of boxes. That’s not diversity. – Anne Ward

23 Preparing for 2025 with strategic Chair succession.

The Chair has to start planning three years in During the past decade the process for CEO advance of stepping down and engage with the succession has become more planful but less Nominations Committee to set parameters and so for the role of the Chair. There are various expectations of what the next Chair will need reasons for this: some Chairs are reluctant to to bring. It involves setting a job description move on and their board is reluctant to have the in the way you would for a CEO. It is a very conversation; others stay on longer than perhaps comprehensive piece of work. In describing intended because there is no obvious successor; what you’re looking for you need to be acutely or there is an external event that requires stability aware of the nature of the business and how on the board. There are of course long-term it’s changing, how the culture of it works and Chairs who are presiding over high performing to find somebody who will engage with all boards and companies where there isn’t any the stakeholders, and I really mean all the appetite, from the board or investors, for change. stakeholders. – Neil Cochrane There isn’t a set tenure for Chairs, nor does the ASX recommend one. Some Chairs interviewed The relationship between the Chair and the CEO expected tenure for Chairs to be tightened over is the most important workplace partnership in the next few years with the generally accepted any , and boards work to limit a situation where twelve years moving down to nine. Others were both roles retire in the same year. This isn’t less fussed about the tenure and more about the always avoidable and emergency succession ability of the Chair to lead a strong board. of both roles has been a feature, in financial services in particular, in Australia during the past If you think about the qualities of a good Chair, few years. whatever their tenure is, I want to see a person who builds on what they’ve delivered and that Chair succession has not had the high profile that it can be taken into the future. And it should be CEO succession has, yet the role of the Chair in someone different who does that because you the performance and stability of the company is don’t just want more of the same. of equal importance to that of the CEO. – Debby Blakey

Chair succession planning framework – a process not an event

Access Accelerate Assess Accelerate Align & Assess Transition & Absorb (internal talent) Development (external talent) Impact

Facilitate strategic Identify & Accelerate Benchmark Identify Embed alignment & evaluate NEDs readiness through external talent successor & progression create success on the board. development incl: against success ensure smooth planning on profile of Chair. committee work. profile. transition. the Board.

Source: Korn Ferry

24 ACSI follows the UK model of annual director You always want to be building a board where elections for, as Louise Davidson explained: “We you think you have one or two potential think it would lead to greater accountability successors for Chair from within. But it’s and avoid situations when something has gone not completely uncommon to have Chair wrong in a company, that the only way investors succession from outside and you need to be can express their concern is to vote against a open to that. I don’t have strong views about director who may not be considered the most the merits of either because it is about having appropriate target because other directors are the right set of skills for the company at the not up for election.” time. – Philip Chronican Best practice succession planning on boards extends to the important committee roles on a Early discussions and clear parameters for board and there should be planned succession Chair succession are best practice and the for these roles. Nominations Committee should set the parameters. The timing of Chair succession will be determined largely by the timing of CEO You need to be engaging early with candidates succession to ensure there is, ideally, at least and align their strengths with corporate twelve months buffer between both roles being strategy. For example, if the company has huge vacant, but preferably two, or even three years. growth plans, they need someone who fits This buffer is less important when the Chair is that profile. And discussions need to be early succeeded by a NED who has served on the when talking about Chair succession. Otherwise board for some time and has established a boards risk disruption and lack of continuity. relationship and working rhythm with the CEO, – Bernard Reilly but very important if the Chair is coming from outside.

Key Points

Chair succession to start early. Timing of succession of the Chair and CEO should be staggered. Chair succession to align with the future strategy of the company. The Chair should be considering succession as he/she builds the board. Have a Chair Succession Plan that can be invoked at short notice. Chair succession should extend to important committees. The choice of next Chair should suit the future needs of the organisation. The process is best managed by the Nominations Committee.

25 The NEDs of the future.

statements’ however the other skills are largely for individual boards to decide as they consider The best of the directors I work with are the right mix of directors to suit their industry those who are not scared to ask a question, and the market conditions. Most NEDs will obvious or not obvious, and who have an possess financial numeracy, an understanding openness of mind to listen to different views of financial and non-financial risk and the around the table. They have the curiosity governance rules that relate to their industry. and courage to ask questions when perhaps The executive experience NEDs bring to boards things are proceeding in a different direction evolves to meet market conditions and boards and they assist the Chair and other directors are becoming more specific in how they identify to synthesise the different answers to that their talent needs at any given time. NEDs must question; that person is the really effective be comfortable with the ‘big picture’, and also independent director of today. be able to operate at a high level but not at the – David Gonski expense of offering pragmatic advice.

Many NEDs transitioned to their board career Pragmatism is important. Every board that I’m after a successful executive career and, while involved in operates in the fluid environment boards are composed of a team of experienced that we live in. The coronavirus is a classic case leaders, the tone is not set from the top in the in point. Just a few months ago, interest rates same way as it is in a management role. The were low, the stock market and the property board is a cohort of equals – with the Chair the market were up, and we were feeling very good first among equals. about the future. It is so gratifying right now to have directors who can offer advice in real time This context for how boards operate influences based on experience. So, I really appreciate the type of leader who will succeed in a NED those directors. Most directors on my boards role. John McFarlane said he prefers everyone offer honest, pragmatic advice that’s really on the board to contribute within the framework helpful. of the agenda and end with consensus. “I have – Hamish McLennan never been on a board that has voted. I think of the Chair role as an orchestral conductor: In the past few years, driven partly by the choosing what and how to play, ensuring increased exposure boards have to non-financial everyone is on point and playing their role risk, the traits and characteristics of NEDs have well, but recognising it’s the overall quality become as important as a mark of suitability for and result that matters in the end.” Catherine a board position as their skills and experience. Livingstone said: “if you go back to the role of Chair, it’s about focusing on how you get a good discussion going. You want directors that help you with the discussion. Not just proving the point that they’ve read the papers and can ask a question and seem terribly thorough. That’s not what we need.”

Most observers of board governance will agree that there is a core set of skills and experiences that have long been associated with NEDs. They must, as is mandated by the ASX Code, have ‘an understanding of accounting matters to fulfil their responsibility in relation to financial

26 Courageous – Collaborative – Resilient – Agile

In our conversations for this report, we a great director of a listed company. ”His asked interviewees to describe the traits or view was shared by Ilana Atlas who said: characteristics of the most effective non- “NEDs need to challenge but should always executive directors. be constructive. They have to put the interests of the company first, which may Courageous, collaborative, resilient and sound trite but actually, particularly in the agile are highly valued. These traits, when current world where we’re talking about combined with a high EQ, diversity of ideas, significant numbers of stakeholders, that is pragmatism, a clear head and good listening actually quite challenging.” skills paint a picture of a NED who works to strengthen the team effectiveness of a RESILIENCE has, arguably, never been board, but not to the detriment of their core as important as it has been this year. role as custodians of governance. Resilience needs to be built into the business model, and it also needs to be a feature COURAGE was mentioned often, of leadership. Patrick Allaway noted that particularly in relation to contesting resilience is always needed on a board: accepted thinking on a board by being “We’re in a world that changes very quickly willing to put forward a different point of and the impact of that change on businesses view – not, as Pat O’Sullivan described: “just is very fast. Whether it be this current for the hell of having a devil’s advocate, crisis [COVID-19] or continued business but because they truly have a different disruption, boards are going to need to be perspective.” resilient.”

Having the courage to ask tough questions AGILITY is a close cousin of resilience and is most valued when it is constructively is found in people who are able to act and applied. This view is shared by many Chairs think quickly and who are available to step who were dismissive of questions that add in when it’s needed. In an environment of little to the matter being discussed or just constant change, complexity and ambiguity, echo questions previously asked by others. learning agility has become mission critical. Respectfulness for the views of others was Korn Ferry’s research into learning agility also valued. “It’s fine to speak up but if identified people who excel at absorbing you don’t have a view there isn’t any point. information from their experiences and You have to have something meaningful to then extrapolating from those to navigate contribute, you’ve got to be humble and you unfamiliar situations. They are often have to assume you could be wrong,” said described as flexible, resourceful, adaptable, Michael Carapiet. and thoughtful − in short, an ideal fit for mission-critical roles and for NEDs of the COLLABORATIVE rather than future. individualistic is considered one of the most important drivers of board effectiveness. Boards, and the companies they represent, navigate many unfamiliar situations. They Much is made of the relationship between meet more often, making ‘single page’ management and the board, but the decisions on many matters quickly as they relationship among board members is deal with a whole range of matters that equally important. David Gonski believes require speedy resolution. NEDs need to be “Teamwork is a given for NEDs and increasingly more agile – in the way they somebody who is solely antagonistic is not

27 Number of boards

The amount of regulation has increased markedly in the past 10 – 15 years and this has impacted the time required of the Chair and, consequentially, the number of boards a Chair can comfortably sit on. Most interviewees were comfortable with a NED serving on four listed boards with the Chair role counting as two.

Long-term

One of the great learnings of so many years in a resource company is that you understand that what you do today is not going to show the sort of reward that you want people to enjoy for at least ten years, sometimes twenty and sometimes fifty. So long-term thinking is a critical part of how I view the Chair role. – Karen Wood

What is long-term? Well that depends on whether you are an investment bank, conducting medical research or managing a superannuation fund. According to our interviewees long- term, in relation to strategic planning, was anything from two to fifty years with most landing on ten.

28 Our uncertain future needs strong and resilient boards. work and how they think.

We are living in the middle of what our grandkids will learn was the technological revolution. The way boards operate is changing year on year and technology is changing the businesses that we operate in, creating capacity for disruptive forces in industries. Combined with the economic environment and an Australian regulatory environment which is out of date and archaic, at a time when quite possibly global supply chains are going to have to reconfigure themselves, then we’ve got a helluva cocktail of disruptive change going forward. We’re going to need the very best thinkers around board tables enabled by a set of rules that free them up instead of constraining them to just navigate companies through this period. It’s going to be a very, very challenging time. The next five to ten years will be as difficult a period to be a director as I think there has ever been. – Robert Murray

Resilience, the philosopher and writer, Alain de Botton said, is a good half of the art of living.8 He could have been referring to the summer of 2020 in Australia where the bushfires and floods which were a feature of the season were usurped in magnitude in March by the public health emergency, Covid-19. Resilience was key to survival of each crisis, by individuals, government services, business and community groups.

It is unsurprising that resilience was nominated as a key strength of directors by the Chairs interviewed for this report for they were in the middle of testing the resilience of their boards and their response to Covid-19 at the time of our interviews. Their response to Covid-19 demonstrated how important it is for Chairs to create the conditions for an agile and adaptive organisational culture.

Perhaps in 2025, when we look back at 2020 and reflect on the companies that not only survived the crisis but set in train strategies that served them in the years that followed, we will do so through the lens of resilience and agility. For it is these traits, which are stronger together, that will mark the performance of the Chairs. The Chairs of today, with their fellow directors and executive leaders, are guiding their companies into, if you pardon the cliché, the ‘new normal’ that resets the foundations for the future.

The Chair of the future is not one person who possesses all the skills, experiences and traits that companies will need to prosper in 2025. The Chair of the future is a leader who will understand what is needed, and how, when and where to find it. Some have compared being Chair of the board to conducting an orchestra. When you consider that the role of the conductor is to lead, guide and unify performers, while setting the tempo, listening critically and shaping the sound of the ensemble, the importance of achieving an exemplary performance from each player is evidence of the conductor’s skill. The Chair of the future will only succeed if they assemble an orchestra with the breadth of perspective and mental dexterity to play in an increasingly volatile, uncertain, complex and ambiguous context.

8 The actual quote is: “A good half of the art of living is resilience.” 29 Contact

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