In the aftermath of the Royal Commission and related enquiries, Australian directors are reflecting on their performance and how Boards need to respond.
Many say the core challenge is not a large gap in governance, but rather a widening gap around expectations of Boards.
Some two-thirds of NEDs felt their Boards have already responded or do not need to respond to recent governance developments in a significant way.
Having said that, in addition to the third making significant change, many other NEDs commented that their companies will need to make some change - if not significant - of a more moderate nature.
Close to three-quarters of NEDs say their Boards are now investing more time influencing and assessing culture, changing remuneration policies and practices, and improving their management reporting.
Plus more than half are making other governance changes such as evolving their committee structures and/or refining their operating rhythm, more deliberately and explicitly setting the tone from the top, and more clearly setting expectations for management and more robustly challenging management.
A number of NEDs commented that the changes they were making reflected commercial catalysts and natural progress.
“The above changes are more in response to the natural evolution of the company rather than any changes in the external environment as a consequence of the investigation into the large banks and other financial institutions.”
“We seek to improve constantly in all the above facets of Board work, which has always been the case.”
The majority, though, did acknowledge that their thinking and actions were in direct response to the findings of the Royal Commission and related enquiries.
“Yes, they have been a catalyst to revisit some of the governance principles and refine them now that we understand more of the implications.”
“Recent developments have caused us to reflect on our own position and heightened awareness on a range of governance issues where change may be required.”
“We are grappling with how much of the CBA APRA report we need to implement.”
“My view is that we are in a period of significant change with respect to stakeholder expectations and regulatory standards. This will play out over a decade or more and, as a consequence, the role of directors has never been more important.”
Governance expectations have heightened for many Boards - and change is required - largely as a result of evolving community expectations, and in particular, we believe, around what is considered to be fair for customers. The extent of the change typically depends on the nature of the company’s business, with greater implications for those that are large/highly complex/B2C compared to those that are smaller/less complex/B2B.
There is, however, a genuine and major concern amongst NEDs that the expectations have gone too far. Seven out of 10 directors see a widening expectation gap around the role and purpose of the Board. They believe that much of the community does not understand what Boards actually do, and that this misunderstanding is leading to unrealistic expectations being placed on Boards and their directors.
“I don't think the role of the Board is well understood broadly in the community, which leads to unrealistic expectations of NEDs.”
“I think that there is a very large gap between what the public at large thinks Boards do and what Boards are actually responsible for.”
“Many external stakeholders and commentators have an unrealistic view of the extent to which Boards can ‘ensure’ outcomes.”
“Closing the gap requires a fuller understanding of the purpose, role and obligations of directors. Recent debates around governance have been useful in clarifying both the broadness and some of the boundaries of these roles. However, there has also been some perpetuation of unrealistic expectations on occasion.”
Partner, PwC Australia
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Senior Executive Advisor, Risk Consulting, PwC Australia
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Partner, People and Organisation, PwC Australia
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Partner, Strategy& Australia
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