As the year slides to a close what are the hot topics that we as Directors need to be taking out of 2018?
Let’s keep it short and settle on three issues that have been centre stage this year. There are of course other issues but these three are probably on everyone’s list.
- The role of the Board in setting an organisation’s culture.
- The shift from shareholders to stakeholders.
- The remuneration of Executives and Directors.
Culture and the role of the Board
“The Fish Rots from the Head”, “Set the Tone from the Top”, “Culture eats Strategy for Breakfast” shout the headlines and, in one way or another, the Directors I talk with agree with all those sentiments. So, given that, how can the board contribute to or act on those?
In line with the theme of keeping it short here are three areas of practical guidance for Directors:
- Select a CEO that can clearly demonstrate, based on past performance, alignment with the culture the Board wishes to re-enforce.
- As a Director, walk around, chat to staff, buy the service, use the offering and try and do that as an everyday customer…everyone’s on best behaviour for a director’s visit.
- Ensure you have a reporting system that captures the critical elements of organisational culture. In turn, those critical elements need to be reflected in the Remuneration and Reward system…at every level.
Who are the companies’ stakeholders?
Directors, by and large, know the Corporations Act (2001) does not put Shareholders at the top of the pile…it does say that directors must act “in the best interests of the corporation”. Over time this has been translated to become “in the best interest of shareholders” That is undergoing a reset and has shifted to become “in the best interest of stakeholders”.
Two areas are worth considering as directors:
- Establish or maintain a clear definition of who the Board considers as key stakeholders.
Peter Drucker did a good job of laying out the key stakeholders back in the 1940’s…it does not look to have changed much BUT the ‘ranking’ for your business might be different and the individuals who make up that list up will be specific to your company.
- Have a good mechanism for getting feedback from those stakeholder groups.
It’s worth remembering that the Corporations Act states that directors and officers “must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise…”. The more feedback you have from your various stakeholders the more likely you are to cover off a broad range of “reasonable people”.
A ‘Pub Test’ would probably show a lot of people seeing Executives and Directors as being paid too much…much too much. So, is that about quantum or is that about reward for performance? The answer is it’s a bit of both BUT the voices become louder when Stakeholders, not just Shareholders, see a mismatch between performance and remuneration.
The Proxy voters tend to shout loudly for an alignment with ‘hard’ performance measures. That is simply not going to work anymore. If there is one thing the Royal Commission has put firmly in the spotlight it is that a Company’s performance has been deemed to be much more than their ROE, RONA, EBITDA etc. The ‘Hard’ measures on their own do not cut it with many stakeholders….nor should they.
One thought on remuneration to take into 2019:
- Ensure that the remuneration of the Executives and Directors is well articulated and, whatever the underlying complexity, can be clearly explained to the stakeholders. Part of that explanation should be what happens (the penalty if you like) when corporate performance is found to be lacking by ‘reasonable people’.
The load on Directors is increasing and if the load is not then the expectation certainly is. As Directors we must listen and act (not react) to the expectations of our Stakeholders and adjust accordingly.
If we truly listen and then adjust, we will re-set the corporate ‘trust barometer’ from Stormy to Fair.
I wish you a Fair, not Dry, holiday season with your families and friends and hope that the positive winds of change blow through your personal and corporate life in 2019.