Generally, Boards’ relationships with their management teams are strong within the ASX 300.
6% of NEDs say they are experiencing or dealing with unhealthy tension with management in response to governance developments.
The majority consider their Chair to be an effective sounding Board to the CEO, providing wise counsel without getting too close.
Overall, 44% reported that a boundary shift has been necessary as a result of governance developments, albeit only a small proportion indicated that the required shift was significant. Many comments received supported the majority view that the boundary has not changed; however, NEDs are now generally doing more or are expecting more of management.
“The boundary remains the same but what is expected of Boards to satisfy their duties on their side of the boundary has expanded.”
The key challenge for NEDs remains the same, impacted by the quality of information and insights received from management.
“There remains the critical question: how does a Board know what is really going on? With all the best will in the world, directors can diligently read the material, interact with the business, customers and stakeholders, ask challenging questions … but if senior management do not know what is going on it is incredibly hard for NEDs to know. This is where experienced, constructive, curious directors with great EQ who can read soft signals, people etc come into their own.”
When asked to select the top three changes to management reporting that would be most helpful, over half chose the need to see improved reporting on non-financial risks (57%) and customer outcomes (55%). Almost as many (47%) selected the desire for shorter Board packs with less information and more insights.
“We continue to ask for a greater shift of emphasis toward non-financial performance and risk; as well as a richer, plain speak view of performance and risk.”
“The volume of information coming to the Board has increased, heightening the concern as to ‘what have I not appreciated the significance of’ and management feeling that throwing more at it is the answer. Evolving to sharper, more concise information that has the ‘so what’ aspects addressed will take time and trial and error.”
“Change will need to happen in information coming to the Board and I believe Boards will need to be more prescriptive about what is needed.”
In the financial services sector, 72% of NEDs indicated that changes to the richness in reporting on customer outcomes - including insights from feedback/complaints data and verbatim - would be most helpful to the Board; compared to 48% across other sectors.
Many NEDs reflected on the need to increasingly verify, validate and probe management’s representations and actions (past and proposed), resulting in getting into greater detail than previously required.
"It’s no more trust and get an explanation; it’s now trust, get an explanation and verify.”
“The whole area of verification means Boards will be getting deeper into the areas that were previously the role of management.”
“The greater need for the Board to verify management commentary inevitably means the Board gets into more detail than was previously the case. For example, the focus on the tail outcomes for customers rather than the averages inevitably means the Board looks at specific issues in great detail.”
Overall NEDS indicated there is room for improvement in management, 37% indicated their company had a high performing management team requiring no material changes to behaviours and practices.
“I think what we need our management to do a bit more of is to step out of the day to day and be willing to be different.”
Close to 40% of NEDs commented that management tended to ‘present’ to the Board rather than engage in a frank conversation, and a third said their executive teams tended to be over-optimistic and not realistic with the Board when addressing complex issues.
A number of NEDs reflected on the risks involved from the growing expectation of regulators and the community regarding greater involvement of the Board in the management or their companies.
“It is important that directors don’t try (and external stakeholders don't require directors) to do management’s job. It is important we give management space to run the company. I am concerned that some (including regulators) are becoming excessively focused on ticking boxes around compliance and crowding out the main role of the Board, which is to provide strategic advice and guidance to management.”
“NEDs are not executives and their independence of mind will be lost if they must become executives.”
“The community appears to be developing expectations of the role and purpose of Boards which ultimately would make it impossible for a Board and its NEDs to have an appropriate level of independence from management, which in my view is unhealthy and unhelpful.”
Partner, PwC Australia
Tel: 612 8266 3034
Senior Executive Advisor, Risk Consulting, PwC Australia
Tel: +61 421 056 456
Partner, People and Organisation, PwC Australia
Tel: +61 (2) 8266 2420
Partner, Strategy& Australia
Tel: +61 (2) 8266 1299