An Effective Balance

Monday, October 1, 2007 - 11:11

Diane Grady, full-time non-executive board member with some of Australia's top companies, believes good boards achieve an effective balance between competing pressures. By Jennifer Alexander

Currently on the board of directors of Woolworths Ltd and Bluescope Steel, Diane Grady has been a full-time independent board director since 1994, following being a partner at McKinsey & Co where she consulted on strategic and organisational issues. Grady talks here about a board's role, governance and being an effective board member.

Q: What is the role of a company board?

A: I think the main role of a board is to help create a healthy company that delivers good returns for shareholders over time. To achieve this, companies must consider the needs of all stakeholders, employees, customers, suppliers and communities. Some boards have stumbled by focusing too much on short-term financial objectives and as a result have made decisions that have hurt the company in the longer term.

Q: So it's more than just meeting shareholder needs?

A: Yes, some may see it as an "either/or" equation; but I consider the way you satisfy shareholders over time is by meeting the needs of the various stakeholder groups.

Q: What is your definition of corporate governance?

A: I define corporate governance as the way that a board interacts with an organisation, and the way the organisation interacts with the regulatory bodies.

Q: What makes for a good board?

A: A good board is one that manages a complex set of challenges, is good at managing paradoxes, and in achieving a balance between sometimes competing pressures. For example, a good board is both open and reserved, which is a paradox in some ways. It is open in the sense that it is not afraid to debate tough issues or deal with bad news. A good board has access to the organisation through many points of contact; it doesn't get all of its information through the CEO. But it is reserved in making judgements, and doesn't believe everything that it hears. Nor does it panic when there is bad news.

Good boards are both flexible and disciplined, another paradox. Sometimes boards get stuck in a rut, with the same agenda every meeting, the same type of information, and the same time frame. It can be a very rigid process with little ability to adapt to challenges. Flexibility is important, but so is discipline. Directors need to receive papers on time and agendas need to be managed so issues are addressed.

A third paradox of what makes a good board is to be both inquisitive and decisive. By inquisitive, I mean that it is hungry to learn and it values diverse points of view, seeking input from the non-executive directors as well as outside people. It values different opinions, is not afraid of real debate or to challenge conventional wisdom. On the other hand, a good board is one that is decisive and not bound up by analysis paralysis. Inevitably, sometimes decisions must be made without perfect information; the key to moving forward is fulsome discussion looking at choices from different angles.

Q: You mentioned diverse points of view. Could you expand on what you mean by diversity?

A: To me, diversity means a collection of people who have different perspectives that have been built up through different life and career experiences. If you have a board entirely made up of white, male, former CEOs, it's tougher to get really diverse views. The key is having people around the table who look at problems from new angles. And that's actually one of the advantages of having directors who are on more than one board. At times this isn't appreciated adequately by some shareholder groups.

Q: You've been around a few board tables. Are our boards diverse enough?

A: When you look at the boards in Australia, they are fairly homogenous. For example 49 per cent of the top 200 company boards have no female directors. Even fewer have any Asian directors. Many of our top graduates have Asian backgrounds, and yet you just don't see that reflected on boards, or in senior management for that matter.

Q: The chairman's role: how does it differ from that of the other non-executive directors?

A: The role of the chairman is very different depending on the board. On good boards the role of a chairman typically is one of "coach"; trying to get the best out of the team. And the team includes the CEO, the non-executive directors, and key senior executives. Of course, sometimes when there are performance issues tough decisions are required, so it's not a good idea for the chair to be "best mates" with the CEO, or other directors for that matter. On what I consider less attractive boards, the chair tries to control everything, including the CEO. Other directors are kept out of the loop. The chair makes most of the decisions, possibly in conjunction with the CEO, and that is it.

Q: What is the role of the chairman in good governance; and the role of the chief executive?

A: I think the role of the chairman is to keep productive dialogue going between the directors and management. Another key role is to act as a sounding board for the chief executive. Being a chief is a lonely job, and an effective chairman can provide that kind of mentoring support. The CEO is responsible for developing and executing the strategy on a daily basis.

Q: What are your views on board assessment?

A: There are benefits in having performance assessment; it can lead to better boards. More and more boards are doing legitimate performance assessments, but certainly not all. How can we expect serious performance reviews down the line if the board is not prepared to look at itself? I have personally learned things through this process that have helped me be more effective as a director.

Q: Can you give an example?

A: Yes, on one of my boards, management wanted to get me more involved in strategic issues with the top team, but were concerned that my direct style might be misinterpreted in the broader group. They asked me to soften my style a bit. So it was an easy thing for me to change.

Q: Do the principles of governance vary for corporate and not-for-profit boards?

A: Yes and no. The key challenge for not-for-profits is defining their performance objectives. Of course the culture of boards differs with the industry. For example, at Woolworths we have a very low-cost culture. Lend Lease had a more "upmarket" environment. I think there really isn't a big difference between not-for-profit and for-profit boards.

Q: Often good corporate governance creates trust among stakeholders, but can it be at the cost of reducing commercial performance?

A: I think that we are heading into the space with disclosure where commercially sensitive issues are becoming more of a concern than they were a few years ago. When I look at requirements to reveal business risks, I think that could be giving away sensitive information. The same goes for remuneration; disclosure requirements have been the major driver of rapid increases in executive pay. Money has become a visible scoreboard and all CEOs want to be on top!

Q: Is there a need to increase director accountability, or will this result in fewer people volunteering?

A: There are indeed fewer people putting their hands up to be directors. The reward for the time and the risks is not balanced. Directors spend almost twice as many days on board work as they did five years ago. That is driven by a number of things: more rapid changeover of chief executives; more acquisitions
and takeovers; and more governance requirements. Fees do not reflect the time or risk, particularly reputation risk.

Q: How do you ensure you are across all the issues impacting on a company?

A: Directors need to go further than just relying on management sign-offs. The board needs to understand the processes that lead to that sign-off. The board needs to understand the culture of accountability, or not, in an organisation. Directors need to get out there and make their own assessments about whether the information they are being given is accurate or not.

I see a change in the willingness of directors to challenge management and participate in strategic decision-making. When I became a director 13 years ago, many directors would argue that "the board's role is to support management, to hire and fire the chief executive", and that's where they drew the line. I think that eople don't feel that way on boards any more, or at least that's not the case on high performing boards today.

Q: Can we really stop business failures? Do we expect too much of governance?

A: Good governance will never overcome bad culture. If you're not told the truth, it is very hard for directors to operate effectively, regardless of how many boxes you have to tick. I believe directors need to be more proactive about understanding the culture of the organisation, and the quality of the information that gets to the board. Directors need to have the opportunity on an informal basis to rub shoulders with people in the business.

Boards also need to see simple employee surveys that test for how things are done in their organisations: just a five- to 10-question probe into the culture will help directors smell any smoke. Very few boards get that, and I think it is a piece of information that they should be asking for. If you look at corporate failures, culture has been a key ingredient in almost every one.

Q: What about the personal stuff, who are the people in business you most respect and why?

A: I tend to respect people who take a long term view, who have high aspirations for what can be achieved; people who put the company ahead of themselves and who understand the importance of culture. I think of people like Roger Corbett, or Lend Lease's Stuart Hornery.

Q: Have you had mentors who have helped you along the way?

A: I have had a number of people help me at different stages of my career rather than one who has mentored me through all of my eras. A professor at Harvard hired me as a research associate before I did my MBA, and he taught me a lot about marketing; Marty Martin was his name. Fred Hilmer at McKinsey had absolute confidence in my ability to help our clients and his confidence inspired me to do more. Stuart Hornery took a risk bringing me on the Lend Lease Board in my mid-forties, as did Don Mackay at Wattyl and John Iliffe at Woolworths. Don Saunders, a director at Lend Lease, taught me important lessons about how to be a more effective director, and so on it goes.

Q: It is sometimes said that females don't mentor other females very well. Is this correct?

A: I think that perception is unfounded. Women often are so busy trying to be successful in their organisation and manage a family life, that they don't actually have much spare time to play golf or mentor anyone. But the women I know who have become more senior do mentor other women. I really enjoy helping other women, in fact it is one of my highest priorities.

Q: This leads into what personal characteristics have most led to your achievements?

A: I am optimistic and I tend to think quite long term. I seem to have an intuitive sense for how organisations work and a logical mind to sort out complex problems. But also just high aspirations; I have never been content with the status quo, and always believe it's possible for the organisation to achieve more.

Q: What is giving you the most satisfaction in your working life?

A: I think seeing some of the people I have mentored be very successful, that's been good. I've been involved in sorting out big challenges for some very interesting companies in a wide variety of industries. Most recently, I'm very excited about the CEO Kit, a guide we developed through Chief Executive Women (CEW) to help companies figure out how they can attract and retain female talent. Australia is behind many countries in tapping the leadership talent of women, and my goal is to change that. We have a big skill shortage, so the time is right!

Q: What has been the toughest thing in your career, the toughest aspect of your career?

A: I think the toughest challenge has been balancing family and career, making those choices. I chose family over continuing as a partner with McKinsey, or getting out and running something when I became a non-executive director. That was a hard choice, but it was the right choice and I have never regretted it.