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Wednesday 27 October 2010, ASX Sydney
Professor Thomas ClarkeAlice Klettner
UTS Centre for Corporate Governance
Board Effec tiveness & Performanc e
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Boards of Directors
Out of the Darkness
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Boards of Directors
Into the Light
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Research Project
This research is primarily motivated by the call for further vigilance andeffort to strengthen corporate governance. While it is uncertain if theworst of the global financial crisis has passed, the expectation remainsthat boards should not just monitor management, they should also takefull responsibility for their own performance to ensure business
longevity at the optimal level that shareholders also seek.
The regulatory changes occurring overseas also suggest that interestin board evaluation is likely to increase over the next few years. Takinginto account that corporate Australia is part of the international
financial landscape, it is prudent to understand how our directorsconduct board evaluations and if improvements could be made.
Ann Byrne, CEO ACSI
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Board Effectiveness and Performance
Aims and objectives of the research.
Methodology and its limitations.
Board evaluation in context.
Key findings.
Significance and impact.
Where to next?
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Aims of the Research
To examine current practice in boardevaluation, both on paper and in practice,here and overseas.
To explore its value in terms of improvingboard performance and effectiveness.
To understand how best this value can becommunicated to investors.
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Research Questions
How should Australian Boards assessperformance at both individual and grouplevels?
What does effective board evaluationcomprise?
How can shareholders recognise highperforming boards?
How can information on board evaluationand performance be communicated bycompanies or extracted by investors?
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Methodology
Stage One
What are companies disclosing in their annual reports regarding theirboard evaluation processes both here and overseas?
We reviewed 70 annual reports
Top 30 ASX
Top 10 LSE
Top 10 NYSE
Top 10 Europe Top 10 TSE
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Methodology
Stage Two
What do directors and investors think about board evaluation?
The process
The outcomes Improving board performance and effectiveness
Indicators of good board performance
We interviewed 12 directors and 3 fund managers representing:
26 companies in the ASX 100; and 3 significant institutional investors
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Limitations
Stage One
We chose the largest companies on the basis they are usually atthe forefront of corporate governance. Our findings may not applyto smaller companies
Stage Two
Director interviews - our sample was not random which couldlead to bias. There are many reasons why directors might agreeto be interviewed which have to be balanced against the
difficulties of obtaining access Fund manager interviews small sample was designed to
explore the issue of disclosure from both sides and was notintended to comprise a stand-alone data source
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Context
InternalExternal
Roles and responsibilities
of directors
Regulatory requirements
Post-GFC reforms
Board evaluation processes Investor engagement
Board
Internal External
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Post-GFC ReformsNew Focus on Board Performance & Effectiveness
Revised UK Corporate Governance Code published June 2010:
To encourage boards to be well balanced and avoid group think, there arenew principles on the composition and selection of the board, including theneed to appoint members on merit, against objective criteria, and with due
regard for the benefits of diversity, including gender diversity.
To promote proper debate in the boardroom, there are new principles on theleadership of the chairman, the responsibility of the non-executive directorsto provide constructive challenge, and the time commitment expected of alldirectors.
To help enhance the boards performance and awareness of its strengthsand weaknesses, the chairman should hold regular development reviewswith each director and board evaluation reviews in FTSE 350 companiesshould be externally facilitated at least every three years. (FRC, 2010)
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Post-GFC ReformsNew focus on institutional investors
UK Stewardship Code for investors published July 2010:
sets out good practice on engagement with investee companies.
Investors are encouraged to publish on their websites comply or
explain type statements against the Codes seven principles.
Principles deal with overall stewardship, conflicts of interest,monitoring, intervention, collective action, voting policy and reporting.
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Stage One Findings: Disclosure
Regulatory regime strongly influences style and extent of disclosure.
The USAs prescriptive regime appears to lead to more perfunctorystandardised disclosure than the principles-based regulationelsewhere.
Leading companies in the UK, Europe and Australia are voluntarilydisclosing more, including information on the outcomes of boardevaluation.
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Stage One Findings: International Comparison
UK company GlaxoSmithKline stated:
The Board agreed the following actions to generate more inclusiveengagement with the executive management team and furtherimprove its collective decision making process:
Identify how to utilise the time spent in Board and Committeemeetings more effectively and facilitate further contribution byNon-Executive Directors on a broader range of issues
Seek to enhance further the Non-Executive Directors continuing
education process beyond their initial induction Provide greater visibility to the Board of GSKs executive talent
and the management succession planning process.
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Stage Two Findings: State of Play in Australia
Large companies have been conducting formal board evaluations forat least 10 years.
Over this time processes have been refined but, more importantly,the exercise has become accepted as valuable practice.
Details of the process (questionnaires, consultants etc) less importantthan its content and purpose.
Board improvements should occur continuously, not just as a result of
formal evaluation.
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Process
Purpose
Subject
Content
Lead by
Process
Cycle
Board maturity
Industry changes
Individuals
Whole board
Retrospective
prospective
External
ChairBoth
Include management
Informal mechanisms
Implement actions
Review processes
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Individual v Team
Directors were divided on the value of individual director evaluations
Advantages Disadvantages
Everyone likes to get constructive
feedback
Implies an ideal director rather than
embracing differences
Discussion around individualstrengths and weaknesses canimprove team function
A good board is a good team, Itdoesnt matter if all the individualsare excellent if they cant work as ateam
Links to director re-election andtraining requirements
Rating colleagues can interfere withthe collegiality necessary for a goodboard
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Positive Outcomes
Prioritising board roles e.g. less time on compliance and more onstrategy
Increasing efficiency meeting protocol, papers, delegation tocommittees
Improving information flow bolstering communication lines, moresite visits
Refining composition/skill set clear link to director education and
succession planning
Team-building exercise in itself
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Skills Matrix
Complex with room for improvement in succession planning
Different companies have different [requirements]. At onecompany [the matrix] includes the work experience of all thedirectors, overlaid with knowledge. Its really tricky as you want tothrow other things in that make people valuable.
There can be some skills that you dont foresee that can beextraordinarily useful.
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The Dysfunctional Board
CULTUREAn adversarial atmosphere in the boardroomor an unmotivated board with a tendency to
group-think
COMPOSITIONSkill deficits or lack of genuine independence
on the board
CHARACTERISTICS
Conflicts of interest or factional interests onthe board, perhaps due to a dominant
shareholder
PROCESS
Poor chairmanship a chair who is too weak,too autocratic or too close to the CEO
Poor processes leading to inefficient use oftime
Chair
CEO
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The Effective Board
CULTURE
Honest, RespectfulTransparent
Constructive challenge
COMPOSITION
DiversityExperience
CHARACTERISTICSEngaged
Non-adversarialIndependent
PROCESS
Secretarial supportInformationCommittees
Chair
CEO
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Disclosure
ASX Principles recommend disclosure of whether board evaluationdone and the process
Leads to rather dry and meaningless information a statement onobjectives and whether they achieved might be more valuable
Direct, informal communication valued much more highly by investors
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Indicators of Board Performance
Director history/profile
Director personal characteristics assessed face-to-face
CEO appointments
Company performance within industry
Board performance during a crisis
Proactive communication with shareholders
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Key Findings
International variance
Flexible processes
Continuous improvement
Individual performance
Senior management
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Key Findings
Informal discussion
External facilitation
Outcomes of board evaluation
Implementation
Links to other processes
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Significance and Impact
Access insights from highly experienced directors of some ofAustralias largest companies rich empirical evidence to add to thepolicy debate
Timely post-GFC there has been renewed focus on board
performance and effectiveness and the role of regulation inencouraging board evaluation and improvement.
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Where from here?
Voluntary disclosure on objectives and outcomes of board evaluationand how it links to other processes, particularly succession planning
Measures to reduce boilerplate chairman statements
More externally led performance evaluations
Potential for Australian Stewardship code for investors depending onhow the UK fares
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Board Effec tiveness & Performanc e