With over 30 years experience on company boards, including stints as Deputy Chairman of the Australian Securities and Investments Commission (ASIC) and CEO of the Investment and Financial Services Association (IFSA), Lynn Ralph has seen markets come and go.
A string of company failures in Australia including major firms such as Centro and Westpoint, has raised serious questions about board composition. Ralph is not surprised: “There are times during the cycle that investors choose to be blind.” Having established her own governance consulting business with Alan Cameron, former chairman of ASIC, Ralph believes one of the impacts of the financial market meltdown is that superannuation funds will be forced to re-examine their governance structures: “Whenever circumstances change dramatically, they always cause people to stop and reflect. That is probably not such not a bad thing because a lot of super funds and trustees of super funds have had a dream run for quite a number of years. In my experience when boards of directors have sat on top of successful organisations for the best part of a decade they can, not through any fault of their own, start to become a little complacent. They believe that the success of their organisation is a function of their own value-add. It may just have been that they have been operating in incredibly favourable market conditions. I think what we are seeing now is that boards are having to ask themselves ‘are we really as good as we think we are, or did we just get lucky?
“The first thing to consider when you are talking about board composition and board effectiveness, is whether you have a clear strategy for the organisation and what sort of board do you need to sit across that organisation. That will vary from fund to fund. I think people need to not fall back on cookie cutter solutions - I need one investment person, one accounting person, one person from the employer grou. Let’s get away from the Chinese menu, one from column A, one from column B, and really sit down and say if we have a clear view of what we want the organisation to be doing in five or ten years time, what are the competencies and skills and people we need to get us there?”
The need to ensure that boards have the correct competencies is all the more important because Ralph believes that super funds have yet to feel the full impact of the financial crisis. “We are still in the early stages of this downturn. We have yet to see a fund get into liquidity problems because all their unlisted assets get re-valued down, I reckon in the next twelve months there will be some problems emerge that could result in regulatory change.”
A key element to ensuring the board is equipped for the future is self-reflection. Ralph says “So many boards make the mistake of looking backwards, saying we have done a good job in the past so we must be the right people to do the job in the future. That is not necessarily the case. Sometimes in fact if you have been successful, the organisation has moved on. Sometimes the people that got you where you are, may not be the people you need to get you to the next stage. A lot of boards and trustees are reluctant to tackle their own succession planning. They are very good at crawling over management and making sure management has succession planning but are often not so good at looking at themselves, asking themselves honestly and self critically whether they are the right people and who is going to lead this organisation over the next ten years. If you look around superannuation board rooms, a lot of people have been there for a long period of time and that has given them an enormous amount of experience, but you have to also ask yourself if there is a enough fresh thinking going on in fund boardrooms and that only comes when you have a well thought out succession plan.”
Ralph believes the really big question in the next 10 years is going to be the limits of disclosure. “Everybody has relied on disclosure to be the tool to make the markets work efficiently, but time and again, despite all this disclosure, we have come to a point where we need to admit that the system is not perfect. We can’t rely on disclosure to deal with how people behave. I think it is a real challenge for government and regulators to decide whether whether there has to be more regulation. The challenge for the regulators this time around is to assess whether better disclosure is solving the problem. It is all premised on the fact that, if you give people the facts they will act rationally. And we learned that over four or five cycles, so maybe we should do something else. For trustees, without suggesting that they should become paternal, they need to be asking themselves that same question.”
In an area where super funds have developed governance expertise, Ralph believes there needs to be more consideration on what voting against an executive remuneration package actually means about the company that is being invested in. “It seems to me that if you are unhappy with the remuneration package of the CEO, and you have spent hours trying to understand how it works, and then you vote against it, surely you must have some greater concerns. One concern has to be that either the boards are idiots and didn’t understand the remuneration package they were granting - in which case you have to be worried that they are idiots running the company. Or the culture of the company favours the board and the management and not the shareholders. Or thirdly, the board has been bullied by the CEO, in which case you really should be worried. So here we have these big votes against remuneration packages and the same shareholders re-elect the board.”
Whether it be corporate governance or trustee board governance, Ralph’s core message is the need to constantly question the status quo. Her message will resonate with many super funds that are conscious that the financial market crisis represents a new era.