Aussie directors face growing expectation gap

  • 7 out of 10 Directors believe there is a growing expectation gap around the role of listed company Boards
  • One third of Directors believe significant change is still needed to respond to recent governance developments with two thirds believing no or no further change is needed
  • Culture is the number one priority boards plan to invest more time into, with remuneration a close second
  • Strategic acumen, financial, and industry expertise are the three most highly rated skills by Boards when looking for new Directors
  • Non-financial risks and customer insights / data are the two areas Directors want more detailed reporting on from management

Seven out of 10 Company Directors believe there is a gap emerging between the role and purpose of the board and what the community expects of them according to PwC Australia’s inaugural ASX 300 Many Hats non-executive directors survey.

The survey, which was completed by 112 Directors from ASX 300 companies, also shows that more than one third of respondents believe recent governance developments, such as the Financial Services Royal Commission and APRA’s report into the CBA have been a catalyst for significant change, with many others commenting on the need for moderate refinements.

Chairman of PwC Australia’s Board of Partners Peter van Dongen said, “While Australia’s top Directors have had their ears finely tuned to governance changes, one of the frustrations we’re hearing from Directors is what they perceive to be an unrealistic expectation around what the board is responsible for.

“Directors are concerned that there is confusion around the purpose, role and obligations of Directors, versus the role of the management team.”

Nearly half of those surveyed said there had been either a significant (6%) or minor (38%) extension of the boundary of responsibilities between Board and management in response to recent governance developments. Many highlighted they are also doing much more in their roles – including more ‘deep dives’ (80%) and devoting greater time to ‘connecting the dots’ and contemplating emerging issues.

“As one Director commented, the boundary remains the same but what is expected of Boards to satisfy their duties on their side of the boundary has expanded,” Mr van Dongen said.

“Many also said they felt a greater need to verify, validate and probe management’s representations and actions to the Board.”

Mr van Dongen said that while you would expect Boards to be considering their role in light of recent governance developments, it was vital that the boundary between Boards and management remains crystal clear.

“Non-executive Directors are not executives and if they are expected to operate as executives, their independence of thinking, challenge to management and advice will be lost, significantly reducing the value delivered by a Board of Directors.”

Directors are also concerned that if the expectation gap is not closed, it may lead to an exit of talent from the Director pool and a flight to private company boards where the glare of the public company spotlight and regulatory overlay is not as strong.

“More than a third of Directors believe increased expectations on Directors of listed companies could become a deterrent to potential candidates for board positions,” Mr van Dongen said.

“The talent trap is particularly bad in financial services with only 62% of Non-executive Directors confident their Boards will find the talent they need, compared to 83% across other industries.

“A number of leading recruiters have shared with me that five years ago candidates were knocking at their doors for board positions on financial services companies. Today, there are a lot less knocking because people are not willing to take on the time impost and personal risk now associated with these Board positions.

“A seat at the Board of one of Australia’s top listed companies was once a coveted position for a high performing executive. Today, this talent is increasingly considering directorships with innovative private companies as a more attractive destination post their executive career.”

Culture number one priority

The number one step Boards are taking in response to the royal commission is to invest more time in corporate culture (77%), and more than two thirds are investing in more sophisticated ways to monitor culture in their organisations.

“With Commissioner Hayne reiterating that boards are on the hook for culture and an increasing acknowledgment that many of the recent shortcomings have a direct link to culture, it’s not surprising that Directors are investing more of their time in understanding these issues. And there has been a ripple effect beyond financial services,” Mr van Dongen said.

“96% of the Directors we surveyed said they are clear on what they want their desired culture to be, with slightly less (87%) feeling like they are across the current day to day reality, including sub-cultures and negative traits that need to change.

“While corporate culture has for a long time been considered important for strategy execution, never before have we seen the level of urgency to remediate the liabilities it might create. We are seeing an uptick in focus on culture, particularly by regulated institutions, which recognise that while changing culture can be challenging, shifting critical behaviours is achievable within reasonably short timeframes and has considerable rewards.

“Boards are getting involved by setting the tone from the top and pushing for better insights to monitor whether the desired culture is being lived and breathed right throughout the organisation and whether breaks in culture are being adequately echoed back up to the Board.”

The rise of the customer voice and non-financial risk management

When asked what changes to management reporting would be most useful, the top two responses from Directors were more detailed reporting on non-financial risks (57%) and customer insights (55%).

“Better oversight of non-financial risks and customer outcomes were strong themes throughout the survey,” said Mr van Dongen.

“Unsurprisingly, Directors in the financial services sector were most passionate on this topic, with 72% indicating richer reporting on customer outcomes would be most helpful to the Board, compared to 48% across other sectors.

“Many B2C companies are already responding to this challenge by lifting the voice of the customer across the organisation and ensuring customer interests are consistently at the forefront of decision making.”

Boards also recognise the need to carefully balance the interests of shareholders, customers, employees and the community in the Boardroom, however, they are also acutely aware of how difficult this is to achieve in the face of the relentless market demands.

“Many of the Directors surveyed commented on the misalignment between the time horizons of institutional investors with those of the company, with little patience for longer term strategies that could impact short term performance,” Mr van Dongen said.

“The solution Directors pointed to was a need for improved transparency and communication with investors and taking the time to explain the benefits of longer term plans and how, sometimes, short term growth may not be in the best interests of the company in the long term.

“As one Director commented, we need to get better at explaining to shareholders why we take measures that have long term payoffs; what we know is that taking short term decisions is costly in the long run.”

Remuneration reform starting to strike

Following the release of APRA’s draft prudential standard on remuneration in late July, PwC asked ASX 300 Directors in a separate survey about its likely impacts.

Of the 130 Directors that responded, 41% said it will result in more change than they were anticipating making around remuneration (35% slightly more and 6% significantly more) and 38% believe it will result in a substantial (an extra 5-10 hours) or major change (an additional 10+ hours) to their roles and workloads.

“While APRA’s draft prudential standard on remuneration directly impacts regulated entities, it will have a knock-on effect across industries as it starts to become the gold standard that all boards work towards,” said Mr van Dongen.

“PwC’s FY18 executive remuneration trends report shows there has already been an increase in the prevalence of non-financial metrics in remuneration outcomes, reflecting a push by boards to assess performance more holistically and beyond financial measures.

“With more prescriptive requirements, including for financial metrics to be capped at a weighting of 50 per cent, and for more substantive deferrals to apply for longer periods, APRA’s standard helps provide boards with the clarity they need to go forward with remuneration.

“However, its impact cannot be underestimated, and the challenge ahead for Directors is to work out how to execute on APRA’s full package of remuneration measures practically, without adding additional complexity to an already complex process.”