"Chair Forum" for members of Superannuation Trustee Boards

Peppers Moonah Links, Mornington Peninsula, 20 January 2014

© Nicholas Whitlam



I have been asked to speak to you today on “board composition, corporate governance and corporate politics”.

So far as the last two are concerned – corporate governance and corporate politics - I’ve seen some of the best and much of the worst.

More than thirty years ago, as a young man of 35, I was appointed CEO of the State Bank.  My chairman was Sir Roden Cutler.  He had seen the lot, the savagery of the Second World War (where he won a VC), the politics of the Australian diplomatic service, and then a record fifteen years as until he was appointed Governor of New South Wales.  Sir Roden had a degree in economics but had never been a banker. 

Well, I knew all the technical stuff - I’d worked and prospered at the best and the brightest – JP Morgan, American Express, Paribas – but Sir Roden had wisdom.  That takes time.  I like to think that the success of the three port corporations I now chair is not just a result of the well-qualified board members working harmoniously together but is also a result of the some of the things I’ve learned along the way. 

The State Bank was a good board, as are the three port boards - hardworking and demonstrably successful, prepared to address the difficult questions.

As to the bad boards, well, the NRMA and IAG - in the days immediately after we listed it in 2000 - must rank among the worst.  In both cases, board composition poisoned its governance.  I shall draw upon some of this, and I’ll try to be polite.

One lark, on the basis of my exposure to this full spectrum of human behaviour once awarded me a PhD in corporate governance.  I’ll refer to some of my experiences today, and hope I can hold you for the next thirty minutes or so.  Perhaps inevitably, the worst behaviour provides the best stories. 

Governance is the exercise of authority or control.  It follows that “corporate governance” means the exercise of authority or control of companies. 

In some commentator’s minds “corporate governance” has come to mean simply how company boards should be constructed and how they should operate and while that is important, it is but a part of the subject “corporate governance”.  In my view, the extensive debate on the role and responsibilities of a board can be a dangerous sideshow to the health and success of a company if the broader context of corporate governance is ignored.

The OECD has done much work in the area.  It says:

"Corporate governance is the system by which business corporations are directed and controlled.  The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.  By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.”

[OECD, April 1999]

Fair enough.  Note “the board” is only mentioned once.

There are many types of companies.  Companies may be large or small.  They may be “private” or “public”. Companies may be new or well established.  They may be trustee companies.  All share the common situation that they are a legal person.  And usually they enjoy limited liability.  It is a system that has succeeded for centuries. 

Why do I enunciate this?  Because: not all companies are alike.  Not in their legal structure, let alone their purposes and history.

The vast variety of companies means that, as a species, they have many more differences than the obvious similarities.  It follows that the laws and rules that cover the governance of companies should accommodate the differences among companies as well as their similarities.

Typically, companies operate under umbrella legislation.  In Australia, corporate law is now Commonwealth legislation. 

Once the framework of the corporate law has been established, the law needs to be supervised, regulated and administered.  As you know, the 1997 Wallis Report recommended the creation of a new super prudential regulator, the Australian Prudential Regulation Authority (“APRA”), which would supervise banks and insurance companies, other deposit-taking institutions and most of the superannuation industry.  It was established in 1998. 

To date APRA has had mixed success.  John Phillips AO, a former Deputy Governor of the Reserve Bank and a very wise man, had warned as much in 1997:

“Such bodies tend to become huge bureaucracies, with all the problems that go with big bureaucracies – lack of flexibility, slowness to respond to problems, empire building, more concern with procedural matters than with underlying issues, etc.”

The new supervisory entity had a large task and, to put it bluntly, APRA’s staff was not up to the job.  First off, they didn’t spot HIH, our largest corporate failure - when all the insurance industry knew it to be in trouble.  In that case, APRA staff were asleep at their posts.  In my view, John Phillips’ warning about bureaucracy is still valid - albeit that APRA is certainly getting better at its job.

The Australian Securities & Investments Commission (“ASIC”), the regulator of corporate and financial services laws, has been a particular disappointment.   Under David Knott, who briefly held the ASIC chair, from 2000 to 2003, it went of the rails.  Rather than doing the hard grind of establishing the very standards he espoused, that of being an “exemplar” regulator, Knott took the easy option.  He went after tall poppies.  By doing he achieved his purpose of sharing those tall poppies’ notoriety, and found some of his own. 

Under Knott ASIC played favourites.

What else can the following internal ASIC note, dated 23 December 2001 from then commissioner Berna Collier, mean?

 “In summary – go for Rich, Keeling & Greaves – strategically and legally not go for Packer, Murdoch & Adler [indecipherable] – not going for P, M & A – media frenzy – briefing in Greaves complicating matters.”

This incredible note relates to ASIC’s investigation of One.Tel and the proceedings it took against some but not others.  If it is any guide to senior ASIC functionaries’ tactics and thoughts, I hate to think what ASIC’s internal notes on the NRMA and IAG would show. 

ASIC knew, for example -

  • that IAG management had deliberately leaked the financial results of the company - on two occasions; and
  • that an NRMA director had recommended to members that they vote against a motion to remove the director’s factional opponents; that the director subsequently solicited proxies related to those removal motions - and that the director then voted those proxies in favour of the removal motion!

But they did nothing about these matters.

We’ve been through three ASIC chairs in the decade since Knott, but the problems remain. 

ASIC should start to get its priorities right.  I suggest these should be:

  • to seek out and hire some really good new people. At the SEC and similar OECD authorities the remuneration constraints of the public sector constraints are overcome because those authorities have a reputation for observing the highest standards; having worked there looks good on your CV.  Regrettably, no-one could seriously say that of ASIC’s reputation; too often, ASIC’s senior staff are seen to be refugees from law firms at which they have outworn their welcome or career public servants who could never have made it in the private sector.  This must change.  I think it is a good sign that former Treasurer Swan headhunted Greg Medcraft from the financial services industry to head ASIC.  And
  • to concentrate on the big issues. Like when shareholders or creditors have lost money, or when employees have lost jobs.  Like making prospectuses intelligible to ordinary investors.  Knott should have pursued Ansett’s failure, and moved against those who caused losses of tens of millions of dollars for creditors and investors and tens of thousands of jobs; but there were no big names at Ansett that he could piggy back on.   Allco’s prospectus was a joke.  And so on.


Let me move to board structure, for a moment.  In recent years we have had various government committees and business groups tell us much about the appropriate roles of the board and how it should be structured – they’re great for prescriptions, even proscriptions.  We hear that size matters: what’s too large, but rarely what’s too small.  We hear about the desirable split between the role of CEO and that of chairman; we hear about gender balance, and so on. 

Let’s look at the roles of CEO and chairman, and independent directors.

The British tradition is that the roles of CEO and chair should be split.  Let us have no illusions about the origins of this tradition: the British class system had the owners and their friends on the board and, until the last generation, the system had the managers off it.  Now that the managers are on the boards of public companies, we are now told – in a new British paradigm- that owners want “non-executive independent directors” to form a majority. 

Such independent non-executive directors should have no past or on-going association with the company.  They are people who come to the job “pure”.

Much is made of the need to monitor management, and that in order to do so directors must be independent, as defined, from the management and the company.  It is hard to monitor performance, though, if you don’t know anything about the industry.  Often, in truth, suppliers or persons involved in the industry would be best served to do such monitoring; too often they would not be “independent”. 

I’m being difficult, deliberately.  Of course there is merit in finding new faces to review complex issues, particularly when they bring relevant experience or knowledge to the exercise.  But “independence” is a vexed issue.  After all, who appoints the “independents”?

In order to comply with “corporate governance” guidelines –often this simply means board composition guidelines - checklists are provided.  Companies will take pages of their annual report to describe their corporate governance practices. 

To be listed on the ASX you must comply with a fairly-standard template of a chairman/CEO split, a majority of independent NEDs, a proper audit committee and so on – or explain why you’ve decided to do otherwise.  Fair enough.

ASX says that a company should “recognise and publish the respective roles and responsibilities of board and management.” 

Ironically, when the then CEO of IAG and I worked out what we thought our respective roles and responsibilities should be at IAG and took our proposal to the board (which approved it), the Sydney Morning Herald attacked me, as chairman - asserting that the articulation of the respective duties of the chairman and CEO was a manifestation of a dysfunctional relationship between me and the then CEO!   

The separation of these two roles - chairman and CEO - flows from the age-old dilemma of the conflict between ownership and control.  More than two hundred years ago Adam Smith was on to it:

“The directors of such ‘joint-stock’ companies, however, being the managers rather of other people’s money than their own, it cannot be expected that they should watch over it with the same anxious vigilance with which the partners in a private partnership frequently watch over their own.”

[The Wealth of Nations, 1776]

Advocates of the merits of what is called “agency theory” argue that shareholder interests are protected by the separation of the roles of CEO and chairman.  Notwithstanding Adam Smith’s insight, this is now the British default position.  Advocates of “stewardship theory”, where the same person holds both roles, side with Adam Smith.

Which gives the best results? Well, while the research – both here and abroad – is not definitive, it clearly favours stewardship. 

This should not surprise the normally rational observer.  Were not Bill Gates, Steve Jobs, our own Rupert Murdoch and Frank Lowy executive chairs of successful companies?  Equally, in contrast, you need look no further than Bond Corporation, One.Tel and many others to find examples of stewardship failing.

Let me give you another example.

A little more than a decade ago a major Australian listed company had a rogue director.  False stories were fed to the media and the company was in crisis.  The director was asked to stand down on three separate occasions.  The votes were unanimous.  A new chair was brought in to smooth things out.

Rather than pursuing the director’s resignation, however, the new chairman procured an undated resignation letter from the rogue - and sought the same from all other directors.   (One director actually held out.)  So all those signatories enjoyed their directorships at the pleasure of the new chairman.  They were, if you will, non-independent “independent” directors.  The adverse publicity abated; there were no more leaks from the rogue; and the share price rose steadily.

The shareholders of this major company were never told of this bizarre arrangement.  Some would argue that the ends justified the means.  It is history, however, that the company went on to make some very bad acquisitions – acquisitions that were promoted by the new chairman.   The non-independent NEDs went along with the chair’s preferences.  With the acquisitions failing, the shares fell back to the listing price.  All those captive directors are now gone.  And it has taken IAG nearly ten years for the share price to recover.

In this agency versus stewardship contest I suggest the answer lies in people not prescriptions.  If you accept what has sometimes been called the Napoleonic theory of history, in this case, corporate history, you will accept that individuals can make a difference.  And giants of industry – the Gateses, Jobses, Murdochs and Lowys  – have made a difference, and have brought great fortune to those who have supported or followed them.

These founding entrepreneurs may be seen to have “created” companies that can live on beyond their own demise.  This provides both a lesson and a dilemma.  The lesson, as noted, is that an individual can make difference.  The dilemma is that all individuals are mortal and have human frailties.  And too often they don’t know how or when to hand over to new professional management.

So when we look at the governance of an organisation in which we are considering investing, I suggest we should not always accept agency theory and take it for granted that the roles of CEO and chair should be split.  Rather, we should look at what a company is about; where it stands in its life cycle; what risks are inherent in the management structure and the industry, and what risks you are prepared to take on board.

Beware; I do not advocate a dual role, ever, for what might be called fiduciary companies – like bank or trustee boards.  Here there is a clear case for separating the roles.  The analogy of political governance is helpful.  For fiduciary companies, it is essential to have a “balance of power”.  And that means splitting the roles of CEO and chair.


Which brings me to industry funds.

To what can we attribute the success of industry funds?   The Superannuation Guarantee Charge makes for a growing pool of funds for which industry funds must compete.  Being the default fund has advantaged them in attracting funds in the first instance.  And their consistently good results – as you know, long term median returns outflank retail funds by up to 2% pa – are help attract and retain funds.    With competent management this is unlikely to change.

I suggest, though, that there is more.

With equal employer and employee representation from a single industry, early trustee boards formed a mutuality of interest.  It might have been expected that with consolidation of separate industry funds and the opening of funds to the public at large such common interest would break down.  This does not seem to have been the case.  They and their managements seem to enjoy an esprit de corps not found in retail funds.  And, most importantly, members feel engaged with industry funds.  They trust them.

To maintain the trust that they rightly enjoy industry funds must answer the call for greater transparency.  Trustee director fees must be disclosed.  (I am happy to disclose that I took no fees for the six years I chaired the NRMA and IAG super funds.)  Finding the names of the directors of some industry funds is, strangely and unacceptably, not always an easy task.  It should be.  (This anonymity is of course not limited to industry fund directors.)  And all directors must hold qualifications, experience or training suitable to the task.

Cooper has encouraged the introduction of more independent directors in order to provide an “outside perspective”.

It is difficult to argue with the conclusion that the addition of one or more independent directors would strengthen those industry fund boards that have yet to include independents.  As to the optimum size of a trustee board - while a board needs to acknowledge and accommodate whatever diversity its members might have, clearly a large board can be unwieldy.  It seems to me that 7 or 9 board members would normally suffice.  I suggest independents should number more than a token one - just as boards in general should not limit themselves to a single woman.  Whatever the number of independents, however, an essential element in the past success of industry funds must have been the equal board representation of employer and employee interests.

Industry funds will need to make changes to their governance.  The Abbott Government will not give them much more time.  As the funds and the Government address the issues, though, I suggest it be acknowledged that equal representation of employer and employee interests stands at the heart of their success to date - and that it would be unwise to tamper with that nexus.


Let me now return to some basics.  We know that corporate governance means the exercise of authority and control of a company.  We know that there are laws to which companies, their shareholders and officers must adhere.  We know that for large companies, particularly listed companies, non-adherence to guidelines requires explanation.  Is this sufficient for good corporate governance and on-going success?

I argue not.  Frankly I take it for granted that a company will try to adhere to the law.  Everyone knows what is necessary here, and any decent company surely never knowingly breaks the law; nor do its officers.  And it is not a difficult task to go through the corporate governance checklist – ASX, OECD or whatever – and to explain where and why the company in question has chosen to vary from the checklist.  But corporate governance covers much more than the application of rules or laws that apply to the company or to the people who work in the company.  It is more than the prescription of how people must work within a company; it is also how they should work.  It is about the actual day-to-day ethics and culture of a company.  This is where management comes in.

Consider the company where the management is bright, considerate and ethical; where the company prospers and grows; where employees are demonstrably happy and customers fulfilled.  By any measure, the exercise of the authority and control of such a company is a shining light of good corporate governance.  Could anyone seriously argue that this is because of good corporate law?  Or corporate governance guidelines?  No, it’s because of good management.

Now, I don’t propose to set out here what is good management.  There are a thousand theories on how to achieve that.  And as with companies, there are countless varieties of good management.  Equally, what constitutes good management and appropriate management practices will vary through the life and development of a company. 

But I do say this: you know good management when you see it.  And you know the opposite too.  More than anything else, in the achievement of good corporate governance, boards must seek out and insist upon good management and good management practices.  A board's navel-gazing - perfecting its own governance - is a waste of time if the management is no good.


Finally, let me give you some thoughts on what makes a good director and a good board.

John Phillips AO argues for –

“A board of ethical people, committed to the interests of shareholders and the broader community, possessing talents relevant to the nature of the enterprise and willing to put in the effort to fulfil their obligations”

I agree with that.  And I agree with my friend, John Reid AO when he said that:

“You cannot regulate against bad behaviour.

"A good company director will make a distinct contribution to the style of a company.  Evidence of his or her honesty, integrity, experience and courage will be apparent from the strategic moves a company makes, whether in the form of acquisitions, exploration or disposals, or in the way a company communicates with its employees and shareholders.

"A good director is someone who understands the vital importance of the effective management of time as evidenced by the diligent reading of board papers, punctual and regular attendance at board meetings, and time set aside to visits to company operations or held in reserve for unforeseen events.”

And I agree with his conclusion concerning the desirability of –

“…that most vital commodity: courage.  A director’s moral backbone will be of no use to anyone if he or she keeps his or her own counsel when a growing sense of unease, or even some evidence, dictates that something within the company is awry.”

From time to time I read in the press of one ex-NRMA director who puts it about that she stood up to me as President of the NRMA - on some unarticulated ethical grounds.  The picture is painted of a small brave woman facing up to an overbearing tyrant.  The truth is that she wanted the NRMA to award a major service contract to company of which she was a director.  The company’s tender was in my view, and others, a very bad proposal.  In a sober and deliberate way, the board voted in favour of an alternate tenderer, the existing supplier of the service.  Quite improperly, the conflicted director participated in the vote.  My recollection is that she was the only supporter of her company’s bid.  Once she lost, she came up behind me at the board table and hissed in my ear: “You will regret this.”     


Jeffrey A Sonnenfeld, now of Yale, concludes that if following good-governance regulatory recipes doesn’t produce good boards – and there’s absolutely no evidence that it does – it is the importance of the human element that does.

“The key isn’t structural, it’s social,” says Sonnenfeld.  It’s difficult to disagree.

Sonnenfeld argues for a virtuous circle of respect, trust and candour. 

He says the best bets for success are –

  • To create a climate of trust and candour;
  • To foster a culture of open dissent (“there is a difference between dissent and disloyalty”);
  • To utilize a fluid portfolio of roles (“individual directors’ roles – the ruthless cost cutter, the damn-the-details big picture guy, the split-the-differences peacemaker – can become stereotyped and rigid.  Effective boards require their members to play a variety of roles…”; of course -
  • To ensure individual accountability (because we all know who’s pulling his or her weight); and
  • To evaluate the board’s performance.


Thus corporate governance, I suggest, is not the simple topic so often debated by the pundits.  It is much more than the composition of its board and the roles of that board.

In my view, good corporate governance goes to the very heart of how a company is managed, day-to-day, from top to bottom.   Trustee companies included.  (And equally importantly, how a company is managed from bottom to top.)  It cannot be prescribed or proscribed by laws or regulations, important as they are.  Good corporate governance requires well-intentioned and hard working people, people who are aware of the interests of all stakeholders and who seek to find a balance among those interests.  It is an art not a science.