How Australian boards have an opportunity to become future fit

A recent EY study has revealed myriad challenges for board directors. But real reform is yet to follow.

This statement, from a recent study by the EY Global Centre for Board Matters, may seem overstated to you. Or it may resonate. Either way, the findings confirm that boards in Australia are grappling with myriad challenges, from a static governance model to a litigious corporate landscape.

To gather these findings, EY teams interviewed board directors and non-executive directors, along with CEOs and CFOs, from 64 publicly-listed companies and 29 private companies. The research team also spoke to colleagues within the EY organisation who are helping clients with these issues.

The study wasn’t a forensic, issue-by-issue or company-by-company analysis of governance. Rather, it set out to answer the question: ‘If so much around boards has changed (and will do so even faster in future), shouldn’t the traditional governance model change, too?’

The outcomes of the 90-plus interviews will make compelling reading for anyone interested in the current and future state of Australian boards. To make the data digestible, we’ve created a series of articles, to cover:

1. What the study told us about life on Australian boards today
2. Current trends in governance and how they might shape the future
3. What boards can do now to kickstart the process of change.

But just because EY people are putting forward particular scenarios and solutions doesn’t mean they’re the right ones. In fact, these articles should act as conversation starters, not definitive conclusions. So, if anything you read in the series sparks a comment or an alternative idea, please join the conversation and share your thoughts, comments and ideas.

What were the top challenges to emerge from the research?

The findings are grouped into four interconnected categories.

1. Unmanageable regulatory and legal demands

Interviewees were painfully aware of the impact of a stream of governance failures: a risk and compliance overload that’s hamstringing them from adding their full value. As one put it: “The nature of the conversation at the board table is so dictated by governance, regulation and the requirement for supervision that the board can't actually focus on what it needs to focus on, which is the strategy.”

What’s more, efforts to minimise risk can be overcooked or even counter-productive, as another interviewee explained. “[The risk appetite statement] often leads to risk minimisation decisions which can be necessary, but often have destroyed far more value than they have created.” (It’s worth noting at this point that the sample was at the top end of the ASX by market capitalisation. Undoubtedly, there are more companies that are 'undercooked' when it comes to managing risk.)

Despite such risk-heavy reactions, the risk of litigation and trial in the court of public opinion mean non-executive directors still feel like they’re in the crosshairs. “We must be one of the easiest countries to launch class actions,” observed one interviewee. Another raised the rocketing cost of Directors and Officers (D&O) insurance in Australia: “When I started on the board six years ago, D&O insurance cost AU$280,000. They’ve just had a quote for AU$8.4m.”

These factors mean that the potential risks for board directors could outweigh the rewards. As one interviewee said, “If it carries on at this rate, companies won't be able to afford the insurance, or directors will refuse to do the job.” In that scenario, listed company boards might struggle to attract the seasoned and emerging talent they need to be effective in the future.

2. An outmoded, mostly manual modus operandi

A natural consequence of this overload is that some management teams are operating on the basis of “if in doubt, tell them everything”. So the boards of these organisations are drowning in data and information. As one interviewee stated: “We are routinely dealing with 400-page audit committee packs and 800-page main board packs.”

To add to the challenge, there’s little evidence of boards using technology – in particular, AI – to help them interrogate and draw insights from all this data. Another interviewee explained, “Boards in Australia tend to suffer from a legacy mindset where they think that becoming a digital company is a special thing, as opposed to a matter of survival.”

This 'high-touch, low-tech' approach is preventing directors from carving out the time for important conversations. Whether their structure and processes should change to fit the volatile, uncertain, complex and ambiguous (VUCA) world, for example. How they could integrate sustainability into their broader purpose. Or, how the organisation could evolve to reflect the growing focus on stakeholder capitalism.

It’s also depriving boards of the speedier, better-quality decision-making and reporting they’ll need to succeed in a much faster-moving, more ambiguous world.

3. Looming gaps in skills and behaviours

The skillsets of boards will have a massive impact on their ability to tackle these challenges. But while our interviewees saw digital literacy as vital, they were also concerned that the traditional, procedure-driven approach is no longer delivering.

“You can retreat behind your need to tick every box and comply with every rule,” said one interviewee. “But actually, your company faces a vital need to transform. So, at the heart of it, do you see yourself as an oversight controlling process? Or do you see yourself as the most senior leaders in the business, responsible for strategy, leadership, culture? If you do, then you are challenged like never before.”

Diversity in all its senses will be integral to shifting to this new mindset. Yet 'observable' diversity – of race, gender and so on – is moving slowly. Diversity of thinking and decision-making styles remains embryonic. “You’d expect board X and board Y to have some pretty close similarities, and they do,” said one interviewee. “They've got the marketing person, the political person, the customer person… and in some cases, it’s sort of okay. The problem is what we don’t have. Where is the hipster? Or where is the 30-something entrepreneur who's running an FMCG business even though we do e-commerce? Is that diversity?”

4. An identity crisis around stakeholder priority and environment, social and governance (ESG)

The EY study showed that board directors in Australia feel the growing pressure to meet public and investor expectations around sustainability and stakeholder capitalism. To quote just one: “Boards need to recognise we are part and parcel of the social and economic fabric of our communities. That recognition may have been implied in the past, but it’s overt today.”

Yet, despite this awareness, they’re struggling to break away from the gravitational pull of short-term earnings. Research in 2018 found that 83 of the top 100 listed companies in Australia identified the interests of shareholders as their top business priority.

The debilitating focus on risk raised in point one of this article, plays into this. But as one interviewee explained: “It’s worse in this part of the world because we don't have a lot of big companies to invest in; the investors are therefore all over the companies that are available. There's an incredibly short-term lens on reporting timings and any company that needs to undertake transformation is trying to do it under the spotlight of this short-termism.”

These competing pressures create an expectations gap about directors' roles, responsibilities and levels of control. “There is a massive disconnect and misunderstanding in the general world, as a consequence of inquiries and some of the things that have gone on, as to what role the board can realistically play,” said one interviewee. “So, everybody will agree that there's a big chasm. I think where people don't agree is which direction we should move as a consequence, or how you resolve that chasm.”

What’s the cumulative impact of these challenges?

Each of these areas is substantial on its own; together, they point to a systemic, unsustainable set of pressures that isn’t likely to abate.

The COVID-19 pandemic has added an interesting new dimension. By taking up much of boards’ attention, it’s pushed less immediate issues on to the back burner.

At the same time, it’s given boards a taste of the pace, responsiveness and flexibility they’ll need in a VUCA world. It’s no wonder that even the directors who said they and their boards are currently coping, are feeling concerned.

So where are the opportunities and why hasn’t everyone grabbed them yet?

Given everything that’s going on, it’s not overly dramatic to say that boards in Australia are at a fork in the road. Their choices are to keep trying to hold their own, for as long as they can, or to take the path less trodden – and think about what they’ll need to do differently in the long term.

The EY research suggests the former – boards seem to be sticking with current operating models and ways of working, rather than questioning them. Without legal or regulatory pressure to do so, none seems prepared or able to break away from the pack. As one interviewee explained: “I've never seen a board try and recalibrate what it is supposed to do, other than to express dissatisfaction that the conversation at the table is not what it should be about.”

5 questions to help boards rethink the way they operate

EY teams believe life on Australian boards could be much easier – and overall outcomes improved – if they were to look not only at 'what is' but also 'what might be'.

It’ll require dexterity and courage to do this, while also meeting demands for short-term performance. The only other option is to 'keep on, keeping on' for now, and have a rude awakening later.

Asking a few questions will help boards establish the 'what is?'. For the 'what might be?', take a look at the other articles in this series .

1. Are we thinking critically enough about what we do as a board and why we do it? Is what we have today really best practice, or just common practice?
2. Does our governance model, including its nuances, appropriately represent our organisation’s uniqueness? Can we describe in what ways our model is – or will be – different, and where it should remain standard?
3. To carry out our core responsibilities more effectively, have we thought hard enough about the delineation of boundaries between ourselves and management? Have we really engaged them in constructive dialogue on this?
4. Do we have a skills matrix and perspective that goes beyond technical ability and 'domain' experience? Have we considered whether it’ll still be fit for purpose in 2030 and beyond?
5. Where can we improve the quality of analysis and critical thinking we apply to our decisions? Do we have a point of view on how technology should help? And how does this link to the skills matrix in question 4?

That’s just the start of the story…

In the next article, we’ll imagine what the governance trends we’re seeing mean for life on Australian boards in 2030. And we’ll suggest questions you can ask to establish the skills you’re likely to need in that brave new world. Read it here.