Boards: Asset or Liability?Your Dividends at Corporate Governance

Risk

Presentation to Australian Shareholders Association by

Lynn Ralph, Managing DirectorCameron Ralph

17 July 2003

Today’s topics:

What is governance risk?The Governance ChallengeWhat makes a good boardHow can you assess governance risk?A new paradigm for directors/boards

What’s your view of the world?

OPTIMISTSPeople basically goodPower inspiresEthics & compassionWell meaning incompetenceProgress, albeit slowTrustingBoards are only human

PESSIMISTSPeople basically weakPower corruptsGreed & self interestIntentional conspiracyHistory repeatsScepticalBoards are paid to get it right 100% of the time

Readers’ Digest Survey finds:optimists live 19% longer than pessimists!

Disclosure of interests

Cameron Ralph assists boards to improve their performance by undertaking an independent assessment of their effectiveness

We are engaged by the company and typically report to the Chairman

Our principals are ex-Regulators, ex-fund managers, company directors, and individual shareholders

What is “Governance Risk”The risk that decision(s) or action(s) taken (or omitted to be taken) by the board results in significant negative impact on shareholder value

What it’s not:– The sole predictor of share price,

earnings or creditworthiness– The only contributor to good or bad

results

The Governance ChallengeBalancing competing demands is a difficult task:

– Maximise corporate performance (long term) through the board’s contribution (as opposed to mgmt’s)

– Minimise risk of loss from governance risk (along with all other forms of risks….)

– Keep (competing) stakeholders happy!

Doing it as a ‘group’ adds complexity!

What goes wrong with boards?Sidney Finkelstein “Why smart executives fail’

Three reasons of failure - greed, cronyism and denialDenial is the most common!

• how executives perceive reality for their companies

• how people within an organization face up to their reality

• how information and control systems in organizations are mismanaged

• how organisational leaders adopt spectacularly unsuccessful habits.

What makes a good board? (minimises governance risk)

Cadbury– Openness, accountability, integrity

Cameron Ralph– All of the above plus:– Consistently high quality decision

making

Critical Components

Business acumen, courage, integrity, diligence, independence of thought, wise use of social capital

Relationships between board, and board/mgmt

The right amount about the right things

Agenda setting, problem scoping, decision criteria, alternatives, risk analysis

Overseeing implementation; assessment of the board and senior management

Assessing governance risk

What are your current options?– Assess compliance with codes/guidelines– Follow external assessments by research

firms– Your own research about the

people/company

Limitations of the current options

What external assessment can’t measure:– business acumen – courage / social skills– integrity (or greed….)– independence of thought– group dynamics (social skills, collegiality, etc)– “denial” or other poor decision processes– quality of information being used– rigor of decision making

So are guidelines useful at all?

For boards – as guides to improve? to the degree that they provide ‘structural

support’ to some directors – a bit

to the extent they force a ‘one-size-fits-all’ solution – probably not

to the extent they distract boards from genuinely embracing continuous improvement – not at all

So are guidelines useful at all?

For shareholders – protect rights/assess risk Don’t account for differences between companies Too blunt to detect real issues emerging Not proven effective (see academic literature!) Not consistent (see heaps of failed co’s….) Generates lots of disclosure, but can we read it all? Doesn’t tell you which director to vote against

? Do you sell your shares for any breach of guidelines or accept a ‘please explain’

So where does that leave investors?

Governance risk is realGovernance risk is very complexAlmost impossible to genuinely assess from afar– But then you wouldn’t try that with credit risk

either!

Disclosure overload a real possibility

We need a commonly accepted, but effective risk assessment standard!

What are boards currently doing?

Assessing the suitability of applying the ASX guidelines in their context– A review already underway……

Assessing their performance– Chair, self-assess, independent assessment

Improving risk management systems

Improving disclosure of what they’re doing

A changing board paradigm

50’s +, diversity

Generational Change60’s +, monoculture

Point in Careerpeak earning yearsretired with

pension

still learning

Attitudeall seeing; all knowing

Board Rolehire/fire CEO Strategy/

Values

“From the standpoint of the community, the welfare of the community, and the welfare of the workers in the company, what is called the democratisation in the ownership through the distribution of stock is positively harmful. Such a wide distribution of the stock dissipates altogether the responsibility of the shareholders, particularly those with five shares, ten shares or fifty shares. They recognise that they have no influence in a corporation of hundreds of millions of dollars capital. Consequently they consider it immaterial whatever they do, or omit to do. The net result is that the men who are in control of it become almost impossible to dislodge, unless there should be such a scandal in the corporation as to make it clearly necessary for the people on the outside to combine for self-protection. Probably even then that necessity would not be sufficient to ensure a new management. That comes rarely except when those in control withdraw because they have been found guilty of reprehensible practices resulting in financial failure.

Minority stockholders rarely have the knowledge of the facts which is essential to an effective appeal, whether it be made to the directors, to the whole body of shareholders, or to the courts. Besides, the financial burden and the risks incident to any attempt of individual stockholders to interfere with an existing management is ordinarily prohibitive.”

Testimony of Supreme Court Justice Louis Brandeis Senate Committee on Interstate Commerce December 1911

A new era of accountability, openness & integrity……

or history repeating itself?

“In today’s competitive environment, good corporate governance is a key strategic

advantage.

Like almost any team, most boards, even those in charge of successful companies, can improve the quality and effectiveness of their performance.”

Alan Cameron, Chairman, Cameron Ralph Pty Ltd 2002

Thank you for your time!