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CFO Magazine 2003

CFO Magazine is Australia's leading business publication for chief financial officers and other senior executives in finance and related disciplines, including corporate governance. Ann-Maree Moodie is one of CFO's opinion columnists.

Contents

Corporate Governance Opinion Column

Cover Stories

NYSE: wait for the fallout.

The debacle at the New York Stock Exchange (NYSE) calls to mind a couple of precepts: "People in glass houses shouldn't throw stones", and "Don't do as I do, do as I say". Australian corporate regulators should take note.

Worldwide, listed company boards are managing the introduction of rules, regulations and protocols - enforced by governments and regulatory authorities - to improve corporate governance practices.

Understandably, the subjects of this reform process - company directors - expect regulators to be likewise accountable for the same prescriptions and voluntary frameworks.

It's one thing to talk about transparency, accountability and full disclosure; it's another to show shareholders that it's more than rhetoric. So what were the members of the board of the NYSE thinking when they allowed their chairman and CEO, Richard Grasso, to step down with a $US139.5 million payout?

The subsequent cleanout of the board is embarrassing, with a further three directors resigning in Grasso's wake, and market analysts predicting that few of the remaining directors will be present in 12 months' time.

It was inevitable that the silvertails would turn on one another, and predictably, the most obvious mode of attack was to wither the enemy. Goodbye, Grasso.

As the chairman of the Australian Stock Exchange (ASX), and therefore the man ultimately responsible for the organisation's best practice corporate governance framework, Maurice Newman is monitoring these events with great interest. He must clearly ensure that his board is the epitome of its own diagnosis and cure, lest it likewise fall foul of its constituency.

Fortunately, the ASX board is looking sharp compared with the board of the NYSE, which is reported to be soon the subject of "profound" US government reforms. The ASX board has 10 members, (unlike the NYSE's cumbersome 27 directors), and is a reasonable example of board diversity, if this attribute is limited to gender only. The ASX is one of the few listed company boards to have two female directors. The average age of the directors is 58, with half the board aged in their 60s, and four in their 50s. Jillian Segal, aged 47, is the youngest member of the board.

The ASX, through its web site, also informs shareholders of the standard of behavior expected of its board members, and publishes reasonably detailed profiles on each, including the reasons why they add value to the board, and to the organisation. (Sadly, its reference to reviewing the performance of the board is in the tradition of most listed companies' annual reports, and is therefore non-committal and ineffectual.) Where Newman has most to learn from the NYSE example, however, is to be cognisant of the changing corporate temperament.

Australian board members are increasingly vocal about their distaste of being told what to do. They are railing against the prevailing perception that they are, collectively, behaving inappropriately. And they are angry that the "if not, why not?" approach taken by the ASX in its best practice guidelines will hold them ransom to the media and market analysts in subsequent reporting periods.

Underscoring these issues is the growing business backlash over the disclosure requirements for executive remuneration contained in the Federal Government's CLERP 9 proposals.

As a result, board members and shareholders are on the brink of battle.

When an individual or group finds itself in an unrelenting defensive position, it can attack its allies in a misguided attempt to relieve frustration and tension. Corporate Australia is no exception.

The most stunning example of this is the Business Council of Australia's issuing of a code of conduct for shareholders at annual general meetings.,/p>

By placing the onus on the shareholder, the BCA has conveniently ignored the prevalent practices of those companies that employ unfair tactics at AGMs, such as placing chairs so tightly together that it is impossible for delegates to move between the rows to reach the microphone. Surely this is as abhorrent as the redneck shareholder who swears at the chairman?

Perhaps it is wise for the likes of David Gonski and John Schubert to take a more objective view of the impression they are leaving on the people to whom they have ultimate responsibility.

Many shareholders - the quintessential, "hard-working Aussies" - are losing patience with board members who seem to be spending an inordinate amount of time defending why they should be publicly accountable for their decisions.

Board members, like politicians, are elected representatives, and so they would do well to recall the price paid at the ballot box by Paul Keating and Jeff Kennett when they ignored the mood of the people. The difference to NYSE's Grasso, however, is that Australian board members won't enjoy such a large golden parachute.

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Role play the key to power play.

CFO Magazine

Published October 2003

Role-playing is a part of the behavior of all individuals. We act the role of parent, child, sibling, friend, colleague, boss.

As individuals, we define and act roles for ourselves, and we also play the roles imposed upon us by the social groups - families, peers and workplaces - in which we exist.

To be effective within these many different societies, we modify our behavior to be integrated in, and accepted by, the group to which we desire membership.

We are driven to do this because being a member of a group helps us define and understand ourselves. Individuals are social beings who discover themselves by their experiences with and reflections on others.

George Herbert Mead, the American pragmatist and social psychologist, argued that individuals do this by "taking the role of the other", meaning that we evolve socially, and only by comparing and contrasting ourselves to others.

In a boardroom, itself a form of society, the members of the board play different roles according to the way they perceive themselves and others, and how others perceive them.

Directors have roles that are given to them when they join a board - chairman, deputy chairman, CEO, non-executive director, independent director. They also play the role that they bring with them - lawyer, accountant, former CEO, "token woman", high-profile personality.

Finally, board members have roles that reflect their desire to evolve and develop in the corporate environment. In the boardroom, we see the emergence of leaders, technical experts or highly competent directors whose skills are desired by other boards.

A crucial role for the chairman, then, is to understand that all the members of the board behave in role-playing mode. They modify their behavior to maintain their membership of the group and, crucially, they will alternate between roles.

If a chairman recognises and appreciates the different and changing roles adopted by each member of the board, he or she has an opportunity to excel as the leader of the group, and to shape the board into a high-performing entity.

To do this, the chairman must firstly imagine being in the role (or roles) adopted by each board member - to walk in their shoes.

The chairman must also recognise that each board member has a public self and a private self, and that individuals are not bound by their public persona - they can rise above it, discover new roles and dispense with old identities.

Understanding the behavioral patterns of each board member, combined with a sound knowledge of group psychology, places the chairman in an extraordinary position of power and authority.

If a chairman appreciates the desirability of group membership, and that individuals modify their behavior to remain in the group, it is possible to change subtly the dynamics of the board to encourage board members to adopt new roles.

This framework has been useful in my mentoring work with chairmen. With one chairman in particular, we quickly effected a positive impact on the board by identifying the core skills of each board member and the drivers that motivated them to succeed. Then we aligned this information with the strategic intent of the organisation.

Within a month, the board members became more involved in board activities and were being rewarded for their participation with the satisfaction of being instrumental in the successes of the management team and the organisation.

The chairman has changed the rules of the game, and the board members have altered their behavior to stay in the play.

Understanding the complexities of group motivation can also, conversely, encourage such chairmen to take what might be perceived as a less constructive position - perhaps as a dictator or manipulator.

If this is the case, chairmen must realise that if they are able to place themselves in the various roles of board members, these same board members are able also to imagine the roles being adopted by the chairman.

It's the same in children's games. In hide-and-seek, for example, each child must be ready to take the attitude of everyone else in the game in order to influence the other players and to ultimately be the winner.

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Talk less, argue more.

CFO Magazine

Published September 2003

In 1918, Karl Buhler proposed that there were three functions of language: expressive, signalling and descriptive. Forty-five years later, another philosopher, Karl Popper, added a fourth function: argumentative.

Expressive language is used to explain the speaker's inner state - their thoughts and emotions. Signalling language aims to elicit a reaction from others. Descriptive language is a form of communication used to explain a particular situation.

Argumentative language combines all three functions, but is the only form of language which can be used to compose and express a viewpoint or perspective.

Popper showed that these four functions of language correspond to human values. To be expressive is to be revealing. To signal is to show concern with efficiency. Descriptions are either true or false, and argumentation is concerned with validity.

In the boardroom, defined here as a place in which a group of people meets to make decisions, descriptive language is important, but argument is needed to evaluate the accuracy of descriptions.

However, in Australian culture, where it is preferable to be friendly rather than confrontational, the most commonly used modes are expressive, signalling and descriptive. Feelings are valued more than the logic that supports the argument.

If board members use only expressive and signalling modes, the discussion is condemned to the tedious airing of personal views, and will not have a foundation in truth or validity. Feelings cannot be said to be true or false.

The ancient Greeks were the earliest proponents of argument and debate, and considered it to be an art form. Aristotle believed that the ability to persuade, convince or cajole an audience was one of the most useful skills in life, translatable from the court to the bedroom.

The science of persuasion rated second only to the glory of the heroic warrior, and consisted of various elements, including technique, demonstration, rhetoric, dialectic, emotion and psychology.

Board members commonly tell me that they debate at the board table, but when asked how this is done, it is generally the case that "the chairman went around the table asking for contributions". To equate this to persuasive argument is laughable.

In a recent session with my corporate governance class at the Sydney Graduate School of Management, I conducted a boardroom simulation in which a prominent corporate adviser played the role of the former CEO of Southcorp, Keith Lambert.

The purpose of the "meeting" was for the CEO to put the half-yearly results to the "board" for approval for release to the Australian Stock Exchange.

These MBA students - some who acted as board members and others in the audience who suggested questions to their colleagues during the role play - experienced how a polished rhetorician can direct and stymie proceedings, pushing one line of argument while simultaneously avoiding another. In this case, the "CEO" was aided by a protective "chairman", also played by a student.

The class soon learned that the ability to compose and put forward questions, and to keep asking if the answer wasn't satisfactory in a logical as opposed to dogmatic or rude manner, was not a soft, but rather essential, skill for board members. Questions, as Bertrand Russell says, "enlarge our conception of what is possible, enrich our intellectual imagination and diminish the dogmatic assurance which closes the mind against speculation". Answers are a different matter.

Unfortunately, the propensity to use the language of feelings and not values is well entrenched in Australian boardroom culture, where the closed and clubby director community is loathe to admit someone who is not deemed to be a team player lest they disturb the collegiality of the boardroom.

And this is not confined to Australia. In a paper delivered to the Academy of Management's annual meeting in Seattle last month, US researchers concluded that board members who ask tough questions "often get the cold shoulder from the 'in' crowd, or are shunned by the ruling clique", and that "country-club cronyism" diminishes a board's ability to control a CEO's power and to advance shareholder rights.

But as Aristotle also said: "All are persuaded by what is to their advantage." Some board members, CEOs and senior executives prefer to have a compliant board.

However, board members who challenge the management team - and each other - are the only ones who truly fulfil their duties as directors by acting in the best interests of shareholders.

Collegiality may well be desirable, but it should not be based on cosy feelings. The give-and-take of constructive argument is more important.

* With acknowledgments to Aristotle's Art of Rhetoric and a 1997 academic paper by Professor Robert Spillane of the Macquarie Graduate School of Management.

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Think about it.

The nexus of private and public morality was at the centre of the most memorable line of the HIH Royal Commission Report, when Justice Neville Owen challenged whether HIH board members had ever asked themselves, 'Is this right?'

Ethics is a system of moral principles, by which human conduct is judged to be good or bad, right or wrong, courageous or cowardly, harmful or beneficial.

Unlike the rest of the philosophical canon, however, the study of ethics has not been undermined by secularisation, and therefore, moral philosophy is discussed in language based on the Judaeo-Christian tradition.

The pervading mood of the Australian boardroom post-HIH is one of struggling to find an appropriate response to accusations of widespread malfeasance or potential wrongdoing.

To protect the reputation of their boards and themselves, company directors are using words such as "transparency", "disclosure" and "integrity" and are exploring the meaning of this newly acquired lexicon in "ethics seminars" for audiences of company directors, senior executives and students of management.

Unfortunately, none of these events has been, to use the management jargon, "framed" (or more popularly "reframed") by a definition of ethics, and the discussion has predictably turned solely on the Judaeo-Christian ideal of "do unto others as you would have them do to you".

If Aristotle, Hegel or the Cambridge philosopher, GE Moore, were the chair, the discussion would offer more useful insights into ethical behavior in business.

Each of these thinkers would ask panel members to examine whether their actions mirrored their private and public selves. "Do you act as you should act?" would query Aristotle. "If you do not," would say Hegel, "you are empty and hollow." "Do you judge by fact or value?" would counter Moore.

Board members tell me that sound judgment is a critical attribute of directorship (and especially of chairmanship), yet even a man as erudite as Justice Owen does not distinguish between private and public judgment, and how this affects group decision-making.

A private ethic concerns decisions made in love, in friendship, for reasons of self-sacrifice, or motivations of hatred, vengeance, anger or shame. Such decisions, therefore, have the propensity to be seen as irrational.

Thus iconoclast Gore Vidal writes: "Each of us contains a private self and a public self. When the selves wrangle and neither is for long dominant, the host is more a man of conscience than of action. When the two are in total conflict, the host is a lunatic, or saint."

Public morality, by comparison, must be acknowledged as rational, principled and steady, and decisions shown to be made after the collation of all facts.

"In the sphere of public morality it is not enough to simply say, 'I feel I must do this or that', except in the case where the public and the private conflict," writes English philosopher Mary Warnock.

"A public figure who resigns over a conscience issue is entitled to say, 'I can do no other'. But public morality as such must be explained, and explained with reference to the common good."

Moral acts in the public domain require that all the facts have been gathered. Chairmen and other board members need to know whether they have all the information required to make a proper consideration. Are the board papers being delivered on time and in an appropriate manner? Is the chief executive withholding information? Do the non-executive directors understand the business and are they given an opportunity to do so?

The Corporations Act allows for any difficulties faced by board members in making decisions by permitting the board to seek independent advice. This is acknowledged in the corporate governance statement in annual reports but companies rarely say whether this option has been explored.

The onus is on board members to distinguish the difference between their public and private selves in forming conclusions, and how this difference is manifested in boardroom decision-making. The chairman's role is crucial in ensuring that board members do not conform to "group think" in these instances.

Board members, in considering the ethical considerations of their actions, must ask whether decisions are ethical in the context of employees, suppliers, stakeholders, and the shareholders to whom they have ultimate responsibility. Ideally, this should be done by a show of hands, not a secret ballot.

US management writer Peter Drucker famously related the story of Alfred P Sloan, who once asked whether General Motors board members were in agreement over a certain matter. The "corporate nod" (as coined by writer Susan Scott) was unanimous. "Then," said Sloan, "I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about."

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How to pick a mixed bunch.

Patrick Corporation chief executive Chris Corrigan has been criticised by superannuation fund heavyweights over the fact his board has no female members. The comments highlight a sleeper issue that threatens to derail the highly sensitive debate about board composition.

The Australian Council of Super Investors (ACSI) has compiled a list of 50 corporate governance 'contentious issues' against which it assesses listed entities.

Among its measurements, the ACSI considers whether the composition of a board is 'diverse and not just made up of accountants and lawyers so that society is properly reflected in the boardroom', executive director Phillip Spathis told CFO. However, the only sub-group in this category is 'female board members'.

The dictionary says diversity means 'difference, variety, unlikeness and multiformity'. The definition makes no reference to 'sex' or 'gender'.

To evaluate boards for diversity by the sole differentiator of sex, therefore, has caused the debate about board composition to take an erroneous, and potentially dangerous, turn.

Diversity in the boardroom does not equal sex, but it encompasses age, nationality and educational backgrounds of board members. The ACSI says these differences are too difficult to measure.

But for one of the most influential stakeholders in the corporate governance debate - the superannuation funds - to admit publicly that it would positively assess a company because its board is heterogeneous is wrong. Unfortunately, the view is widely held within and without the director community.

For example, take the chairman who recently hired me to conduct a review of his board. In his briefing, he said that he wanted more female board members. When I asked the reason for this, the chairman replied that his constituency was predominantly female and therefore he should have more female board members.

I countered that his approach was flawed and that it would be better to identify the skills set required by his board to match the strategic direction of the organisation and then hire accordingly. If the search was genuinely broad and fair, and it was ultimately determined that the best candidates were all men, so be it. The chairman's surprise was palpable.

An empirical study of board composition of the ASX top 100 conducted by Institutional Analysis in 2001 concluded that of the 591 individuals who held one or more top 100 board seats, 8 per cent were women, up from 7.2 per cent the previous year and 3.9 per cent in 1995.

For some, these figures imply that there must be unfair and discriminating factors at play in Australian boardrooms. The cliched arguments soon follow: the 'boys' club' is a 'glass ceiling' for 'ambitious career women' or for 'women who only see a directorship as a way of balancing career and family'.

The reason why there are so few female directors, it has been put to me, is because those who do 'break through the glass ceiling' then 'kick the ladder from under them' so that they won't have to compete with other females. For their efforts they are rewarded with the tag of being 'a token woman' whose 'marketing value' counters the upset she causes to the dynamics of the all-male group.

AMP's $13.2 million man, George Trumble, summed up these fallacious and factious arguments in a 1999 interview with ABC Radio's PM program: 'If you're the only woman on a board, lots of people think, 'Oh, she's saying that because she's a woman'. But if you've got three women on a board, people think she's saying it because she's a director.'

The feminisation of the Australian boardroom is a poorly argued issue that is fuelled by a lack of understanding about how the sex homogeneity or heterogeneity of a group affects the way the members of the group interact, perform and make decisions.

Academic research on group dynamics shows that individuals conform more in mixed-sex than in same-sex groups, and that this result applies to both men and women.

Members of mixed-sex groups are more concerned with social-emotional activity and with a desire to conform to the expectations of the group, according to author Marvin E Shaw. The majority opinion thus becomes more important than objective information, and greater conformity occurs.

This raises an interesting consideration for those chairmen and CEOs who believe that admitting a woman to the hallowed confines of the traditional Australian boardroom means that the board will become dysfunctional.

A mix of sexes in the boardroom, according to group dynamics research, will mean that the board will behave in a more uniform manner.

Conformity (otherwise known as collegiality) in Australian boardrooms is a highly valued characteristic because it means that board members can make decisions by consensus rather than having to take a vote.

It follows, therefore, that more female directors will enhance, rather that disrupt, decision-making at the board table.

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Sometimes evil triumphs.

Good corporate governance ultimately requires people of integrity. [But] personal integrity cannot be regulated.

ASX Best Practice Recommendations, Principle 3

Some 2000 years ago, a shepherd in Ancient Greece discovered a magic, golden ring. The shepherd, whose name was Gyges, found that when he turned the bezel inwards he became invisible, and when he turned it outwards, he became visible again.

Gyges decided to use the ring to his advantage. He joined a party that was to report to the King of Lydia, and once admitted to Court, seduced the Queen, murdered the King and assumed the throne.

In relating this story, the ancient Greek philosopher, Plato, then turned it from a myth to a parable, by asking what would have happened if two such rings existed, and one was worn by a just man; the other by an unjust man?

From time to time, as I listened to the evidence about specific transactions or decisions, I found myself asking rhetorically: did anyone stand back and ask themselves the simple question, 'is this right?' (HIH Royal Commissioner, Justice Neville Owen)

Plato's contention was that it would make very little difference. It would take an "iron strength of will" to ignore the potentiality of such power, and to resist the temptation to "steal from the market without fear of detection, to go to any man's house and seduce anyone he liked, to murder or release from prison anyone he felt inclined".

Right and wrong are moral concepts and morality does not exist in a vacuum. (Owen)

Plato argued that no man is just of his own free will, but only when he is compelled to be. No man thinks justice pays him personally, since he will always do wrong when he gets the chance.

Justice brings man no advantage, only trouble and loss. But if man is unjust, he can contrive a reputation for justice, and have "a marvellous time".

All those who participate in the direction and management of public companies, as well as their professional advisers, need to identify and examine what they regard as the basic moral underpinning of their system of values. (Owen)

If power is bestowed upon any man, he will be the first to use it fully. It would be stupid to do otherwise; and it would likewise be stupid to get caught.

HIH was not a case where wholesale fraud or embezzlement abounded. Most of the instances of possible malfeasance were borne out of a misconceived desire to paper over the ever-widening cracks that were appearing in the edifice that was HIH. (Owen)

The just man wants to be, and not to seem to be, good. The unjust man is of an entirely different character. And there are more of the latter, than the former.

The unjust man "deals with realities and does not live by appearances". He devises "schemes which bring him respectability and office? and to pick his partners in business transactions". He has no scruples about committing injustice.

There was blind faith in leadership that was ill-equipped for the task. There was insufficient ability and independence of mind and associated with the organisation to what had to be done and what had to be stopped or avoided. (Owen)

"In all kinds of competition, public or private, he always comes off best, and does down his rivals, and so becomes rich and can do good to his friends, and harm his enemies," said Plato. "And so, a better life provided for the unjust man than for the just."

Risks were not properly identified and managed. Unpleasant information was hidden, filtered or sanitised. And there was a lack of sceptical questioning when and where it mattered. (Owen)

What advantage is there to being just, when injustice, as long as it goes undetected and unpunished, reaps greater rewards; rewards that are bestowed by society?

"To help us avoid being found out, we shall form clubs and secret societies, and there are always those who will teach us the art of persuasion, political or forensic," said Plato. "And so, we shall get our way by persuasion or force, and avoid the penalty of doing our neighbor down."

In an ideal world, the protagonist would begin the process by asking: is this right (rather than) how far can the prescriptive dictates be stretched. (Owen)

And so, it wouldn't matter if there were two shepherds and two rings. Justice is what is good for someone else, the interest of the stronger party, while injustice is what is to one's own interest and advantage, and pursued at the expense of the weaker party.

"Evil can men attain easily, and in companies," said Plato, while virtue is gained by taking a long, hard and steep road.

The education system - particularly at tertiary level - should take seriously the responsibility it has to inculcate in students a sense of ethical method. (Owen)

With acknowledgments to the HIH Royal Commission Report, the ASX Principles of Good Corporate Governance and Best Practice Recommendations and Plato's The Republic.

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Rules alone won't work.

By the middle of this year, there will be three different codes of conduct against which the members of boards in the private and public sectors will be judged.

They have been produced as a direct reaction to several high-profile examples of failed or poor corporate governance practices in Australia and the United States.

The most contentious of these are the Principles of Good Corporate Governance and Best Practice Guidelines, published by the Australian Stock Exchange's Corporate Governance Council in March. Standards Australia has also produced corporate governance guidelines, and former Rio Tinto and Westpac chairman John Uhrig will soon report on his inquiry into the accountability of regulatory agencies.

The underlying agenda of these documents is that they will cause a change of behavior in Australian boardrooms. But don't assume that rules necessarily change the way people act and think.

There are many examples in history of people who have overcome the most brutal of regimes, simply because they possessed the will to do so. At the other extreme, there are those who join a mass suicide under the influence of a cult figure or leader. The difference between obeying or defying rules is the extent to which the oppressor or leader can influence, and the degree of self-determination displayed by the oppressed individual or group.

In the case of Australian boardrooms, the subjects of this imposition - board members - are already demonstrating their resistance to the ASX document, citing displeasure about the content, especially with regard to the definition of independence as well as the process by which the document was created. But it doesn't matter whether these publications are embraced or rejected because they will have no influence on whether a board operates effectively, or whether it is dysfunctional.

Those who expect a new era in Australian corporate governance practice will therefore be disappointed. And both sides of the debate - board members as well as the Federal Government, the ASX and Standards Australia - will be the losers.

Academic research has shown that some of the most high-profile collapses in American corporate history were not caused by a lack of good corporate governance. To use boardroom parlance, "all the boxes were ticked". When problems occur with a board that is compliance-focused, the reason is usually due to the way in which the members of that board behave. Words such as "ethics", "integrity" and "courage" follow.

Rules do have a place in Australian boardrooms, but they should come from within, and not be imposed, if corporate governance reform is to be achieved.

If each individual board established its own document that defined its role, and that of each of its members established a set of rules by which it operates, and identified the rewards for the delivery of set outcomes, the board would immediately function better because the members would know what is expected of them.

A clear set of rules, roles and rewards can also be altered or scrapped where necessary.

The results of the Uhrig inquiry will complete a triad of documents that are well-intended, but will not cause the change required. Reform must come from within. How else, for example, can the prevalent practice of the "grace and favor" appointments to government boards be quashed?

The person responsible for board appointments should be the chairman of the board, not some government minister who acts solely from political motivation.

The practice of partisan political appointments does not allow a chairman to select and appoint members to reflect the nature of the business, and the skills and experience required around the board table to effectively guide the organisation.

It should not be the responsibility of a progressive government board chairman to try to work around this dilemma.

Peter Willcox, AMP's new chairman, recently said (no doubt with a wry smile) that he favored directors who had made tough decisions in their careers and lived by the consequences.

Commonwealth Scientific and Industrial Research Organisation chair and former Cochlear CEO, Catherine Livingstone, has also publicly stated that an effective board operates "within a framework of freedom, accountability and responsibility".

Don Argus, the chairman of the boards of BHP Billiton and Brambles, says that the only way corporate governance will improve in Australia is by having directors with "courage and conviction".

It would be a brave and principled chairman who would even consider adopting such a culture on his or her board.

Nonetheless, these are stirring words, and ideas worth considering. But don't go looking for them in a set of imposed guidelines.

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Demystify the board.

When a newly minted non-executive director of a listed company is admitted to the boardroom for the first time, he or she encounters the last great paradox of company life.

The new board member assumes a role of work, but it isn't called a job, and joins a workplace that is not traditionally subject to the laws and regulations of an office environment.

The lack of transparency in the recruitment process will be the candidate's first inkling of the size of the chasm between the two worlds of corporate and board life.

The vacancy on the board will not have been advertised, and it is unlikely that an executive search consultant will have been involved in the selection of candidates.

A letter of offer will be made, but there will not be a thorough induction process, and the appointee won't receive an explanation of what he or she is expected to do (otherwise known as a "job description").

From this point, the new board member will be part of a team, but not like the teams in which they were involved as executives. In the case of larger boards, it may take them months to get to know their colleagues.

In the meantime, if the board is highly traditional, the new recruit will be seated at the furthest point away from the chairman, and will be allowed up to two years to become a fully contributing member of the board.

It will be during this period that he or she may be given what the director community facetiously calls a "performance review". This will vary in delivery (a conversation with the chairman or filling out a questionnaire), but never in the intent for genuine improvement.

There will not be, for example, a discussion about ongoing education or training options aimed at improving the director's knowledge or capabilities to make a continuing and valuable contribution to the board.

Finally, if the board is dysfunctional, there will be no process for complaint or redress, as there is in any other workplace that is subject to laws concerning equal opportunity, occupational health and safety or discrimination - of any variety.

These matters, as shown by the dramas of the NRMA boardroom, are usually the domain of lawyers.

Thankfully, there are exceptions to every rule. Among the Australian Stock Exchange (ASX) Top 100 companies, there are boards that are challenging these outdated processes. The chairmen - and sometimes the chief executives - are creating innovative ways to improve how companies are governed.

The examples I have collected are common sense, but not necessarily widely practised activities. Commissioning a review of the capabilities, skills and knowledge on the board to align with the future strategic direction of the company and then hiring for these needs is a case in point.

Other examples are more progressive: limiting directors' terms, introducing new board committees to deal with issues specific to the company or the industry, and rotating board members on committees to provide a variety of experience, including as a chairman.

A chairman or a CEO who has the intent of improving how the board operates, while remaining within rigid regulatory frameworks, is to be applauded.

But it's not enough. This information should be shared to the benefit of all stakeholders in the corporate governance debate, so that other companies can be encouraged, rather than forced, to examine best practice activities for their own boards.

The members of the A-list director community often defend such arguments with the line that "there isn't a cookie-cutter or vanilla solution" to best practice corporate governance.

This may be so, but accepting that "this is the way we've always done it around here" isn't the best way forward, either.

Nor is it enough for this information to be only shared in a "Chatham House Rules" roundtable environment hosted by a large accounting or law firm for the benefit of their most high-profile clients.

If a board has a good story to tell, it should publish it. The chairman, the CEO, or one of the non-executive directors responsible should be encouraged to talk about it publicly, be it in the general media or in a public forum.

I recently facilitated a discussion about the relationship between the chairman and the CEO at the Australian Graduate School of Management, at which Perpetual Trustees' Charles Curran and Graham Bradley participated enthusiastically. The benefit to the audience, which consisted of predominantly past and present MBA students, was invaluable.

Most members of boards have had long executive experience. They know what it means to be a manager, to motivate staff, and maybe even to be a leader. They are familiar with transparent recruitment practices, professional development processes, and how to operate in a team.

The question to be asked is why this body of knowledge is checked at the boardroom door when these managers become company directors.

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A hard word from the ASX.

The Australian Stock Exchange's (ASX) Corporate Governance Council, established in August last year to agree on corporate governance standards for Australian listed companies, took a break over the holiday period to muse on the issue of independence. At that time, the council was split between two recommendations on the make-up of a board: one from a majority of independent directors, and one from a majority of non-executive directors (with one-third independent).

But numbers were the least of the problems of the council, which consists of all key industry and stakeholder groups in the corporate governance debate. The biggest issue was defining "independence".

In a late draft of its Principles of Good Corporate Governance and Best Practice Recommendations, the council determined: "The board should include a balance of executive and non-executive directors (including independent non-executives) such as that no individual or small group of individuals can dominate the board's decision-making."

Perhaps the council was having its own problems with dominating members, and maybe Karen Hamilton should have exercised her obligations and authority as chair to illustrate the obvious: the council was confusing independence with influence.

An independent director is no more likely to dominate proceedings than a non-executive director. An influential director is another matter.

The key role of a board member is to argue and debate, and the chairman must allow discussion to occur during board meetings.

But, assuming that well-argued and expressed views are common in Australia's boardrooms, let's move on to the other aspect of the council's deliberations on independent directors versus non-executive directors.

According to the same draft document, "a majority of the board should be independent of management and free of any business or other relationship which could materially interfere with the exercise of their unfettered and independent judgment".

Independence is certain if a director:

  1. Is not a substantial shareholder of the company or an officer of, or otherwise associated directly with, a substantial shareholder of the company.
  2. Has not, within the past three years, been employed in an executive capacity by the company or another group member, or been a director after ceasing to hold such employment.
  3. Has not within the past three years been a principal or employee of a material professional adviser or a material consultant to the company or another group member.
  4. Is not a material supplier or customer of the company or other group member or an officer or otherwise associated directly or indirectly with a significant supplier or customer.
  5. Has no material contractual relationship with the company or another group member, other than as a director of the company.
  6. Is free from any interest or any business or other relationship that could, or could reasonably be perceived to, materially interfere with the director's ability to act in the best interests of the company.

The Australian Stock Exchange listing rules and guidance notes are a serious matter, so if this checklist is to be considered inflexible, Domenic Martino (who relinquished his position as chief executive of Deloitte Touche Tohmatsu over his membership of the board of the failed telco New Tel), will not be alone in the wilderness for long.

In one swift move, the ASX will have demolished the boys' club and assured board search consultants of an uninterrupted cashflow for many years hence. But will the boardrooms of Australia be better off as a result?

Take, for example, the former partner and national chairman of KPMG, David Crawford. He worked for KPMG or its predecessor firms for 30 years before retiring in 2001 to take up a portfolio of influential directorships: BHP Billiton, Foster's Group, National Foods, Westpac Banking Corporation and The Australian Ballet.

Crawford's associations could run him foul of most of the points the ASX wants ticked off to be assured that a board member is independent.

But by doing so, Australian business would lose someone of authority, experience and wisdom.

Independence has been a theme of the recent release of corporate governance guidelines in Australia, as well as by the Sarbanes-Oxley Act in the US and the Higgs Report in Britain.

But those involved with advising boards, as well as board members themselves, should be careful not to confuse integrity, experience and influence with independence. After all, if the ASX had trouble with the definition, how can it expect Australian boards not to?

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You have boardroom eyes.

In Australia, if you are a male chief executive officer of a leading commercial enterprise that is adored by the investment community, you will be regularly courted by potential suitors - mainly chairmen and heads of board search companies - with the passion of Lothario.

There is nothing more potent to the members of a prominent commercial board than to be seen to have beaten the competition to win over a star CEO.

Like a woman being wooed by several men, it is the unexpected manoeuvre that will inevitably turn the play. The ultimate coup is not a promise of commitment in the future, but rather to win a heart while it still belongs to another.

And so, BHP Billiton holds out a seat at the boardroom table for Wesfarmers' Michael Chaney. The board of John Fairfax Holdings welcomes Woolworths' chief executive, Roger Corbett. Telstra nets Catherine Livingstone on the crest of her Cochlear fame.

But it is debatable, now, whether this time-honored board recruitment model of hiring an ex-CEO is sustainable. The variation of this theme - to recruit a serving CEO (as long as there are no conflicts of interest) - is also spurious.

Traditions such as these are little more than self-serving mechanisms used by members of the director community who want to protect the homogeneity of the boardroom, colloquially referred to as 'the boys' club'.

The most common argument used by chairmen who prefer to recruit former CEOs is that such people have commercial acumen.

History, however, attests that not all CEOs exhibit such attributes. Indeed, some former CEOs have done the opposite and sent a company into decline.

Or take the example of boards that recruit former CEOs who, while fulfilling their CEO roles, have served on other boards as non-executive directors. The argument put by boards in favor of this strategy is that such recruits have the experience to better understand 'the frustrations of being a NED'.

Let's not be seduced into believing such waffle. Serving CEOs join other commercial boards for one reason - to enhance their prospects for a portfolio of quality directorships after their executive career has ended.

If there is to be another reason, it is for the incumbent CEO to gain an insight into what it is like to be an independent director, in order to have greater control over his board.

As a former CEO told me: 'Before I had experience as a non-executive director on another board while I was an executive director on my own, I'd often consider myself and my executive team as the experts, and the NEDs as nothing more than a pesky hindrance.

'After I joined another board I learned what it's like to be an external director, and I'd go out of my way to make sure that the NEDs on my board were always happy with the answers we gave to their questions. I don't think I would have done that in the absence of my experience as an independent director.'

If such blatant arrogance is a common trait of CEOs then it is no wonder that, in another discussion, it was put to me that 'it takes an ex-CEO two years to learn to be a non-executive director, to get used to being a member of a team, to take their hands off the wheel'.

This is clearly too long a honeymoon period for a former CEO with itchy fingers to be carried by a board. And as for learning to be a member of a team, surely that is an inescapable fact of being a manager?

If a board consists of the average number of members - eight people - then it will be broken into these parts: a chairman, a CEO, a lawyer, an accountant and four other people. Hiring a former CEO is a valid option but it shouldn't mean that every non-executive member on the board has been a CEO.

Board search consultants tell me that there is an oversupply of potential board recruits, but that these people never make it to a short list of names. The reasons for this include the candidates' sex, age and seniority in the business community.

Thus the management consultant, the academic and the expert in stakeholder relations never make the final cut, and boards once again (with some notable exceptions) look the same.

One adage says familiarity breeds contempt, while another promises that variety is the spice of life. Chairmen would do well, then, to look further afield for the objects of their affection, to avoid problems associated with having too many former CEOs on the board.

Otherwise, one day the board members may look at each other and see nothing but their own reflections. And, as Lothario's creator, Nicholas Rowe, writes, 'At length the morn, and cold indifference came.'

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COVER STORY - Public spirit, private profit.

Value systems in Australian are at a crisis point. No commercial entity can afford to make decisions that lead to an erosion of profit. But it is equally unacceptable for the board and senior management team to ignore the social and moral implications of an organisation's strategic imperative.

The accumulating influence of ethical and social investment registers is one example of the more powerful voice of shareholders, employees and other stakeholders who want more from a business than only to deliver a healthy dividend, a monthly salary or ongoing business relationships.

Post-HIH, the climate of Australian business is one of public spirit versus private profit and the chief financial officer, as the financial steward of an organisation, is caught fast in the nexus.

"The values that compete within a corporation are between profit and the values of, for example, trust and honesty," says Dr Simon Longstaff, executive director of the St James Ethics Centre, in Sydney.

"Therefore, for a CFO who's making these decisions, who's playing a role of a kind of navigator across these choppy waters, there are many more considerations to be made than simply the single bottom line.

"This person is going to have to be skilled at assisting their colleagues to work through these tensions and to recognise where the balances lie."

Within the decision-making framework used by a CFO, there will be some non-negotiable issues such as not acting in a way that destroys the financial integrity of the entity.

"But equally there will be other forms of integrity to do with the nature of a company which will provide some non-negotiable boundaries for where decisions have to be made, and CFOs not only have to navigate within that, but also make sure they keep an idea on where those boundaries lie," says Longstaff.

"To continue the naval analogy, it's a bit like charting a course where you have a series of reefs which limit the room to move, and you're adjusting to the changing wind and so on, but that's the CFO's responsibility in systems where they operate."

When a CFO is expected to balance the financial and strategic, as well as the ethical, dilemmas of financial stewardship, the risk profile of a decision may be one of financial risk as much as moral risk.

"For the sake of maintaining a higher level of integrity, a CFO might argue that they're prepared to take a bit of a hit in terms of the costs of doing business or the profits they're likely to get," says Longstaff. "But, they do so because they have a belief in what they stand for and they can reasonably rely on the evidence that the more they do this, the more sustainable they will become."

Regular readers of this magazine's corporate governance opinion column will be familiar with my ongoing research into the changing language of corporate Australia, with the use of words and phrases such as "integrity", "transparency" and "having the courage of your convictions". If such language is to be determined as more than rhetoric, then action must be seen to be taken, and the CFO will not be able to escape implication.

Longstaff says there are several reasons for the new business parlance: a response to the reality and the threat of increased regulation and surveillance as an alternative to getting their own house in order; an element of "joining the rest of the pack" by being seen to be meeting community expectations; and the belief that it is now permissible to talk publicly about ethical issues because of the failure of previous business models, as evidenced by the sagas of HIH and AMP.

Finally, there is growing acceptance of the possibilities of grounding the pursuit of profit within an ethical business framework, (and there are a variety of foundations from which to choose), to better reflect the complexities of the world in which we live.

The former headmaster of Sydney Grammar School, Dr Ralph Townsend, predicted this prevailing mood in a speech he delivered more than 10 years ago (and which was recently reproduced in Living Ethics , the newsletter of the St James Ethics Centre).

"The traditional Machiavellian attitudes of business - always looking for ultimate profit, seeking the highest possible return for the shareholder, abdicating moral and social responsibility to the state - are being rather more vocally opposed than in the recent past by leaders within the business community itself," Dr Townsend said.

"[Business leaders are] putting more stress on the soft, human values of management, calling, partly in a reaction to city scandals, for codes of conduct, and endeavoring to establish or confirm moral principles for corporate behavior."

In a bid to stem a system of behavior in business that is deemed unacceptable, professional organisations representing company directors and senior executives, such as CFOs, have produced a series of documents this year outlining ways in which organisational behavior can be improved.

The Group of 100's code of professional conduct is one such example. The Australian Stock Exchange has also produced voluntary best practice guidelines promoting the principles of good corporate governance.

The Australian Institute of Company Directors (AICD) is addressing some of the "soft" skills (as opposed to a working knowledge of accounting, commercial finance and corporate law), necessary for effective performance at the board table: the capacity to ask questions, to listen and to act in a courageous manner when necessary.

Its new advanced course for company directors, which was held for the first time in July, embeds these fundamental skills in its curricula. If this approach is successful, it therefore follows that CFOs can expect that company directors will be asking more challenging questions of them in the near future.

"We're in a new era which I call 'post- capitalism'," says Margot Cairnes, a management consultant and academic, who was one of the presenters in the first AICD advanced company directors' course.

"But most companies and boards are suffering from cultural lag. We are operating in a thought system and a relationship system that was appropriate in the industrial age, and it's no longer appropriate for the level of robust discussion we now need. I don't think most boards have that social system.

"Most people in positions of power today were raised in the old era. They've got where they are by being very good at what they do and they haven't been taught to look at the social system. Nor have they been taught necessarily to develop the skills to create a great [social system], because in the industrial era it wasn't necessary.

"So it's not anyone's fault. It's just that they haven't been trained. We're in a time of rapid discontinuous change; a virtual age, and therefore the skills required of people on boards and in executive [teams] are much greater, more subtle and more about people and relationships than they've ever been before."

The G100 recently commissioned Cairnes to research how board members and senior executives can recognise and respond to the emerging nuances of trouble in the boardroom. Called The Tell Tale Signs, and based on discussions with focus groups organised by AICD and the G100, the research contains common remarks made in the boardroom, which indicate potential problems when board members, says Cairnes, are "not able to question or to ask for clarification on an issue without fear of being made to feel stupid in front of their peers or managers".

"The paper focuses on subtle issues that make board members feel uncomfortable and lets them know that maybe they should be looking at things slightly differently," she says. "Comments like: 'The audit committee looks after that', 'Don't you trust the CEO?' and 'You can't keep interrupting our managers - they have a business to run'. It's all subtle. None of this is in-your-face stuff."

Rather than seen to be overly meddling, Cairnes predicts that CFOs will welcome tougher questioning at the board table. "CFOs understand that unless they can communicate what they need to - and it's not just about numbers, it's about relationships and getting people to get their head around, and face, difficult issues - their job is too hard and they are too exposed," she says.

"My experience has been that CFOs embrace doing it differently because they see that they can easily be blocked, unable to do their job.

"If they are doing their job well, they will value being questioned. If the board is well-informed, the CFO will be less exposed."

G100's national president, John Stanhope, says the group wants to assist CFOs to develop better relationships with the board and within the management team, in order to balance more successfully the sometimes competing demands of their role as both steward and strategist.

It plans to produce a booklet based on Cairnes' research to supplement its suite of guidelines, which already includes a publication on triple bottom line reporting.

"The only conflict, if you can call it a conflict, in the role of the CFO is to get the balance right - to make sure the controls are in place with the strategic direction," says Stanhope, who is also the finance director of Telstra. "One role suggests that perhaps you should be taking more risks, and the other suggests you should be risk-adverse. So getting a balance right is important.

"CFOs are dealing with this dichotomy by stepping back and taking an independent, objective view of a strategic direction. They're asking themselves, 'If it was my money, would I invest it in this direction?'. Or if you'd like to put it in company terms: 'This is the shareholders' money - would they be happy with this sort of investment?'. That's the role the CFO has to play. I'm not suggesting it's easy. It's a very difficult role."

Stanhope argues that these dual expectations are further complicated by the ability of board members to probe the management team.

"If you've got a good operating board, or if the board is operating in a good governance way, they will ask the right questions of a CFO," he says.

"They will be able to tell by behavioral responses, and what they say, whether the person is acting with integrity or is giving an independent, objective view. That's about the only way you can do it, by the way."

Peter Morgan, the investment manager of new boutique investment firm, 452 Capital, who is noted for his strong views on corporate governance, says that a better-trained board will improve the success of strategic initiatives such as mergers and acquisitions, especially those which involve overseas expansion.

"A lot of board members understand the Australian marketplace very well. They talk to each other and there's that sort of network which does provides some protection," says Morgan, who left Perpetual Trustees late last year. "It goes wrong when companies start going overseas, because those natural protection mechanisms - what a lot of the gut feeling has been based upon - just aren't there, and board members are susceptible to being 'legged over'."

The other immediate challenge for CFOs is the pressure being brought to bear upon them to ensure the integrity of financial data being presented to the board, and ultimately to shareholders.

"Markets trade on transparency and accuracy, but confidence is also very important throughout the system, and I think the CFO has an important role to play in that," says Morgan.

"The hardest role that CFOs play is avoiding producing numbers to get over one hurdle if the company is going bad, only to see the company collapse in the next three reporting hurdles."

If a company is facing a financial dilemma, says Morgan, who litters his conversation with sporting analogies drawn from cricket, rugby and racing, the CFO should "fall at the first hurdle".

"Don't keep knocking the hurdles on for the rest of the race, because you've got to finish the race," he says. "Aristocrat is a case in point. The company was an example of constant disappointment and a total lack of confidence with regard to the numbers that were coming out. Southcorp is another example where a lot of confidence was lost. It's very hard to replace confidence and reputations.

"Good companies trade on premiums for confidence amongst other things, and companies will be punished and tarnished with a discount if there's a lack of confidence in the numbers or in what's being transposed to the marketplace.

"If you're honest with the marketplace when things go wrong, don't underestimate the power that honesty has in going forward."

A survey conducted by Deloitte Consulting in late 2002, in which 500 CFOs in Australia and New Zealand were asked about whether their role was one of steward or strategist, uncovered the deep concern of CFOs about their capabilities to be a strategist, even though most want their role to expand in this way.

The respondents rated themselves in the 80-90 per cent range for effectiveness as stewards, which is historically the strength of CFOs, but self-scored at only 50 per cent for their work as strategists.

"Rather than increasing their emphasis on the stewardship aspects of their role, our survey results indicated a clear trend toward a more balanced role over time. The proportion of stewardship versus strategist moved from 65:35 in the 1980s and 1990s to closer to a 50:50 split in the near future," the survey, called CFO - Steward or Strategist?, concluded.

"This significant shift appears to be driven by the CFOs' assessment of the importance of the role as defined by their main stakeholders - the board, the CEO, the audit committee, business unit management and business unit finance.

"The survey shows that there are distinct differences in the role that CFOs feel they need to satisfy for each stakeholder. The CFO perceives the CEO to want the CFO to play a great role as strategist. The board is anticipated to require a more balanced role between that of steward and strategist."

But Geoff Bell, principal of Deloitte Consulting's Melbourne office, disagreed that the role of the CFO as strategist also needs to encompass the CFO considering the moral and ethical matters in risk-taking decisions. This was, instead, the domain of the CEO.

"A company can only be successful if it is a good corporate citizen," Bell says. "But I believe the CFO has a role that the shareholders expect such an executive to fill, which is to provide sound financial advice to the business and to the shareholders, and approach all the decision-making from a financial standpoint.

"So to the extent that there is a moral or ethical question - and this is where there may be a bit of a conflict - they need to look longer-term at what is in the interests of the shareholder from a financial perspective.

"If a particular moral decision over the longer term has a sound financial impact, then that's the right decision. If it doesn't, then I would suggest that if they are doing something simply to appease a lobby group or a non-shareholder or non-stakeholder group, they may not be serving the owners to the right extent.

"It's more the role of the CEO to guide the business to a goal, and that may be something slightly different to earning a profit. I'm not convinced that's the role of the CFO."

Woolworths' finance director, Tom Pockett, says the focus of the CFO should be overall risk management, but that non- financial risks, while needing to be identified, can be managed by other experts.

"The CFO is primarily driven by the economics, but is also the driver of making sure that each of the key elements of a financial transaction are dealt with by the company, as a risk manager should be," he says. "So if there is an environmental issue, for example, in a particular deal, the CFO has to make sure with the CEO that it's being dealt with properly."

If one accepts that the CFO's role combines both stewardship and strategist, and that in this way the role requires wider and deeper knowledge of leadership skills beyond financial acumen, then one of the key difficulties for a CFO is the narrow nature of their educational background.

The Australian education system is based on vocational learning, streaming students from an early age into a science or arts speciality. This is the antithesis of the education systems in Europe or the United States, which ground students in liberal arts before graduate school.

"In Europe, you're just as likely to find a person with a fine arts degree in Romanesque architecture being the CFO or running an oil company, and in the US, there is this general introduction through the liberal arts degree when you first go to college," says Longstaff.

"We don't have that depth or breadth of thinking in Australia. Nevertheless, it's absolutely critical for people to perform the role of CFO. If the formal system of our education isn't going to do the trick by providing this necessary breadth, anybody who aspires to the role of the CFO needs to take responsibility for broadening their education. In this way, they'll be better able to cope with the multiple requirements of the role."

Justice Neville Owen, in his personal perspective on the HIH Royal Commission, advised that one way this could be done was to ensure that tertiary students were "inculcated in the ethical method".

But training is one thing; execution is another thing entirely. It is common for companies to express this in a code of conduct (a set of rules which may or may not have an ethical foundation), or a code of ethics (which defines the core values and principles for making practical decisions), but they regularly confuse the difference between the two.

In many cases, with the exceptions of BHP Billiton, Leighton Holdings and Westpac, most companies talk the talk but don't walk the walk. "We've had some pretty high-profile examples where ethics have failed, and I'm still yet to see the penalties from those codes of ethics being transposed, or any sort of comment from those organisations with regard to the failure," says Morgan.

"Whether it's HIH or AMP, there's been no comment from those organisations where their codes of ethics have been broken, or any stand taken, and that's disappointing."

Morgan argues that there is no backbone to most of these documents, and that they go against the self-regulation model. "There's no use having self-regulation if you don't have penalties on the other side, or are not seen to be taking strong action where those codes have been broken," he says.

"I think the codes are put up there when everything is going right, but it's like balsawood - it gives way when a bit of pressure is put to it."

Unless Australian companies illustrate that codes of ethics are taken seriously, and that breaches will be dealt with appropriately, black letter law, such as that introduced in the US, will not be far away.

Says Morgan: "Australia is very lucky that it's not going through what's happening in the US, where there's a wholesale cleanout of the system going on. There will come a time when it will happen here, but I'd rather see people being proactive and making sure it doesn't happen, rather than being reactive after the event."

In putting this view to the architect of the G100 Code of Conduct, Tom Pockett, Morgan's answer serves as a warning to CFOs, regardless of whether they are steward or strategist or a combination of both, that unless they "discharge their duties at the level of honesty and integrity", as the G100 Code of Ethics requires, they will suffer the consequences.

"We are asking our members to either implement the code directly, or through their existing code of ethics," says Pockett.

"Within those companies, most of the things we talk about are either highly actionable items or dismissible. So if you don't have integrity in dealing with the board, for example, then it's a dismissible offence.

"Although the G100 is not a policing body, we have said that if there was clearly a breach of the code from one of the G100 members, we would terminate their membership.

"It may not have a major impact, but it will be a big public statement, [because] we will issue a media release about it."

The only conflict in the role of the CFO is to get the balance right - to make sure the controls are in place with the strategic direction.

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COVER STORY - Long way to the top.

In December 2001, Woolworths' CEO, Roger Corbett, appeared in these pages photographed with his CFO, Bill Wavish.

The photo was part of a cover story exploring the growing trend for the CEOs and CFOs to work more closely together in a marriage of strategic and financial direction for their companies. Similar partnerships featured in the story were Steve Jones and Chris Skilton, of Suncorp Metway, and Wesfarmers' Michael Chaney and Erich Fraunschiel.

At the time, Wavish was considered by financial analysts - and especially by the media - to be Corbett's anointed successor. Indeed, he was being groomed for the role.

Speculation of a transfer of power in the company was rife when Wavish was appointed director of the company's supermarkets division in August 2002. The promotion was seen as a way for Wavish to broaden his management experience in a final step before assuming Corbett's mantle.

But it was not to be. Corbett decided to extend his term with Woolworths, and Wavish must have felt just like Federal Treasurer Peter Costello did when he learnt that Prime Minister Howard would not, as previously indicated, "retire at 64". Wavish now describes himself as a "consultant" to Woolworths, and will remain with the company for another 12 months.

The other CEO/CFO pairs featured in the same cover story have also separated. Steve Jones resigned from Suncorp Metway in September last year, and Erich Fraunschiel is no longer with Wesfarmers, having launched a career as a professional director.

Does this mean that a CFO can get close to the throne but never wear the crown? Is a CFO only a vehicle of empowerment for the CEO - someone to provide the financial foundation to underpin the strategic direction of the CEO and the board?

Politics offers a useful analogy in the partnership of the Prime Minister and the Treasurer. Domestic political history attests that number-crunchers may sometimes move into the top job after being part of a well-established team: Howard/Peacock, Hawke/Keating and (pending) Howard/ Costello.

Changes to the local business scene have created opportunities for CFOs with ambitions for the top job or a seat on the board. After a four-year term as CFO, 45-year-old Wharton MBA Chip Goodyear was promoted to CEO of BHP Billiton. The new head of Tabcorp, Matthew Slatter, was previously CFO and director of Axa Asia Pacific. Pat Handley, formerly CFO at Westpac, is one of the AMP's new directors. Michael Chaney was Wesfarmers' former CFO before becoming chief executive.

With this history, it is no wonder that long-term Foster's employee Trevor O'Hoy is seen to be a possible successor to CEO Ted Kunkel, following his move from CFO to the head of the organisation's brewing division, CUB.

"We are seeing CFOs burst into the top ranks, and all of them have got there in the present context that good financial experience and acumen is needed in the CEO role," says executive search consultant, Andrew Horsley, of Horsley & Company.

"Given the nature of institutional investors, the increased focus on returns and the poor management decisions made in the past two years that led to corporate misadventures in Australia and offshore, financial savvy is considered essential for the CEO role," Horsley says.

"In order to be considered for the top role, therefore, CFOs must get general management experience so they have a sound understanding of operations, marketing and the overall strategic direction of the business and are able to persuade and impress the market."

The catalyst for change was the collapse of HIH. The findings of HIH Royal Commissioner Justice Neville Owen, who cited the role of the board and the audit committee as being key issues behind the insolvency of the general insurer, set the scene for a change in recruitment attitudes in favor of CFOs.

Other local and overseas corporate collapses around the same time - One.Tel, Ansett, Enron and WorldCom - only served to emphasise the need for greater financial acumen and independence in board processes and in the executive management team.

The Australian Stock Exchange paper Principles of good corporate governance and best practice recommendations cemented this. The ASX recommended that the audit committee "should be of sufficient size, independence and technical expertise to discharge its mandate effectively".

The ASX also recommended that the audit committee comprise:

  • Members who are all financially literate (able to read and understand financial statements).
  • At least one member who has financial expertise, (a qualified accountant or other financial professional with experience of financial and accounting matters).
  • Some members who have an understanding of the industry in which the entity operates.

But the recommendation for a majority of independent directors on the board (the independence principle is presently being reviewed by the ASX after pressure from the director community) has complicated matters, again in favor of the CFO.

Domenic Martino's resignation as CEO of Deloitte Touche Tohmatsu in January this year, following his former involvement as a director of the telecommunications company New Tel, is an apt illustration. The incident prompted Deloitte - and other big accounting firms - to revise its policies about partners taking directorships.

"I had noticed in recent years the tendency for CFOs to become CEOs, and had first thought it was, if anything, a little odd, because it tended to give the financial part of the business a very significant stake," says Alan Cameron, lawyer and former ASIC chairman, and now chairman of a new board assessment consultancy, Cameron Ralph.

"[Finance] is undoubtedly extraordinarily important. But for so many companies, the financial aspects would not be, you might have thought, necessarily dominant over operational matters or strategic matters.

"These days, however, CFOs have a significant advantage in that they will be qualified to serve on the audit committee and probably even be qualified to be the chairman of the audit committee. And since otherwise the gene pool for that group will be retired audit partners of major accounting firms, to have some diversity is probably a very good idea."

Finally, the increasingly shortened tenure of CEOs, coupled with corporate Australia's poor track record in employing foreign CEOs, has made the gene pool of new CEOs and non-executive directors shallower than ever before.

"In Australia, ritual executive sacrifice has caught on with a vengeance: the average CEO now lasts about four years," writes Gideon Haigh in Bad Company: The Cult of the CEO (Quarterly Essay 10) .

"A quarter of our top 100 companies have turned over their bosses in the last two years. Retailer Gerry Harvey has likened the Business Council of Australia to Alzheimer's disease: you're always making new friends."

Enter the CFO. Brian Kruger, the 41-year-old CFO of BHP Steel, is an up-and-coming star who has been recognised by his peers and by recruiters as having the potential to be a chief executive. Kruger has spent much of his career with either BHP Billiton (before the merger) or BHP Steel.

Before becoming CFO, he was the global practice leader in corporate finance at BHP Billiton. In this role he led the demerger of OneSteel for BHP Billiton, and was involved in the early stages of the merger of BHP and Billiton. He also conducted a number of divestment transactions for BHP.

"Given the expanding nature of their role, CFOs have certainly been given the opportunity to be better positioned to move into the CEO role," he says.

"The role of the CFO has changed a lot over the past five years. It's gone from being a financial control and stewardship type of role to one that focuses on a whole range of more general management issues.

"But my assessment would be that, in the past 12 months to two years, [and] as a result of a number of very high-profile corporate collapses, the pendulum is swinging back to making sure that the balance is right between the f

nancial control and stewardship role to the other more general management-type of roles.

"The market will have lost some faith in commercial acumen of companies in general, [and] that's why people in the past few years have become much more focused on corporate governance-type issues."

Kruger sees his job as being a partner to the CEO, as well as to his fellow colleagues on the BHP Steel executive management team, in a relationship he sees as extending beyond a strictly financial role. "I have a role to play in the development and implementation of our strategy," he says.

"I am involved in risk management, and that goes beyond more than just financial risk management. And I also have a very significant role in terms of communicating with external stakeholders in the company."

Kruger emphasises the need for a CFO with ambitions for success, either in the current role or higher, to understand the business thoroughly, as well as to appreciate the external factors affecting the company. "You need to get the balance right," he says.

"If you don't have a good understanding of the external factors - what's going on in your industry, with your competitors, the issues your customers are facing - then it's very difficult to play a role in developing the strategy beyond just the financial side," says Kruger.

But additional management experience doesn't necessarily mean CFOs are the best candidates for the CEO role. "There are a whole range of other skills, besides pure typical financial-type skills, that you need to have to be a successful CEO."

David Pumphrey, a senior partner with the international executive search firm Heidrick & Struggles, disagrees that there is a trend for CFOs to become CEOs.

"I don't think necessarily that CFOs will be any more preferred for a CEO role," says Pumphrey. "Certainly there have been a few CFOs who have made it to the top - Chip Goodyear being the most high-profile - but I don't think that's because they're CFOs. I think it's because they had the broad range of skills the board was looking for at that particular time." Pumphrey argues that chief executive assignments are specifically worded to include a broad range of leadership and strategic skills, as well as skills specific to the needs of the company.

"If it's a turnaround situation, financial application may be required. But sometimes a change-management project is as much to do with rejigging the distribution of the company, developing a new product line or turning a factory around, which doesn't necessarily have to be done by an accountant," he says.

"It would be much better done by somebody who has experience in marketing or production or whatever."

Pumphrey is more sanguine about opportunities for non-executive board appointments for CFOs, however. The ASX recommendations for a board to exhibit financial skills (but not necessarily accounting skills) within its membership, particularly for those board members serving on the audit committee, means that executive recruiters such as Heidrick & Struggles are being asked to identify candidates with accounting backgrounds.

Boards are also preferring candidates in the 45- to 50-year-old age bracket due to the impact of the baby boomer demographic, causing recruiters to search within executive management ranks for new talent. "I think most professional firms now have taken the draconian view that partners just can't serve on boards, period," says Pumphrey.

"The pool of accountants, lawyers and management consultants is therefore smaller than it was before, but there are lots of people with accounting backgrounds and financial backgrounds who are not conflicted in any way and who are currently working in a variety of areas.

"If you take that as a bit of a push, then the logical place to look is in the executive ranks of the mid-40-year-olds who might be CFOs, or who might have accounting backgrounds, but who aren't necessarily tied up with accounting firms.

"Until now, the generation of people in their 50s and 60s has been more in vogue, but boards want to push back down into the ranks of people in their 40s. Boards looking for the next generation certainly widens the gene pool, but it doesn't mean that all CFOs are ready to become non-executive directors."

One outcome from the HIH Royal Commission and the ASX principles appears certain - companies will have to get serious about succession planning.

Boards are expected to show a degree of transparency in the process of selecting and hiring directors - as well as senior executives - in order to convey to the market the confidence that the company will not be rudderless.

"Succession planning is an aspect of corporate governance that our superannuation fund clients have asked us to examine as part of a broad review of human capital management by the companies in which they invest," says Erik Mather of BT's Governance Advisory Service. "The investment market reacts to succession announcement, so our 'null hypothesis' is that the discipline of succession planning is a business asset."

Mather says that succession planning is acknowledged as a sensitive issue that needs to be handled carefully and is becoming a crucial element in the analysis of a company's ability to perform.

"It's hard to imagine that a mature and considered approach to succession would detract from shareholder value," he says. "On the contrary, recent observations have suggested that CEO tenure has fallen below four years.

"Succession at this level alone is therefore reasonably foreseeable, and worthy of at least some forward consideration."

In his new book, international corporate governance doyen Adrian Cadbury advocates a formal succession planning process in order to avoid the adverse impact on a company by the lack of contingencies for the departure of key executives.

"Succession planning is an understandably sensitive matter and only too easy to put off or to leave to furtive discussions in corridors," Cadbury writes in Corporate Governance and Chairmanship: A Personal View , (Oxford University Press, 2002).

"The advantage of involving the nomination committee is that succession plans for the top posts in the company become a regular, perhaps half-yearly, item on the agenda.

"At least the discussion then takes place, rather than being postponed through embarrassment and uncertainty."

Today's CFO may not necessarily be ready to be a non-executive director, but any 45-year-old CFO with ambitions for the top job has got to be thinking that the time is ripe to make a run for it.

CFOs today CEOs tomorrow?

Ann-Maree Moodie speculates on which CFOs are best positioned to become CEOs

1. George Venardos CFO, IAG

Education: BCom, FCA, FCIS, FTIA, MAICD.

Career summary: Former executive director and general manager, finance and corporate services with the Legal and General Group. Venardos joined IAG in 1998.

His responsibilities include group finances as well as the legal, company secretarial, investor relations and corporate services areas of the business. He serves on most NRMA Insurance boards. He is the chairman of the Finance and Accounting Standing Committee for the Insurance Council of Australia.

Form: Able to deal well with complexity in a highly politicised environment. He is considered worthy CEO material but perhaps not for an organisation as large as IAG. "His style may mitigate against him," according to one observer.

2. Trevor O'Hoy managing director, Carlton and United (CUB)

Career summary: Twenty-seven years' experience in the Australian brewing industry, after joining Foster's as a cadet executive in 1976. Before becoming CFO in 1997, his experience in Foster's included various finance and accounting roles, hotel and property management, business planning, strategy, investments and change management. He was appointed CUB managing director late last year.

Form: O'Hoy is highly regarded by the market, but is regarded as a dark horse because of his low profile.

3. Peter Gregg CFO, Qantas

Education: FF&TA, MAICD

Career summary: Appointed to the Qantas board in September, 2000, he is a director of a number of controlled entities of Qantas and also a director of Air Pacific Limited.

Form: He is part of the Qantas inner circle and, observers say, is being mentored by the CEO (in the way former Qantas chairman James Strong mentored present CEO Geoff Dixon). Admired for the way in which he handles a complex position with global responsibilities. His fast responses to any strategic or competitive play made by Virgin Airlines have also been noted. "He may get the top job at Qantas, but he'll have to wait a while," is the word from the market.

4. David Moffatt group managing director, finance & administration, Telstra

Education: BBus (Mgt), FCPA

Career summary: When recruited to Telstra in February 2001, he was CEO of GE Australia and New Zealand. His portfolio includes corporate and strategic functions, such as corporate finance, treasury, risk management and assurance, acquisitions, investments and strategic development, productivity, investor relations, corporate services and information technology. Prior to GE, Moffat was CEO of GE Capital Australia and New Zealand.

Form: The long shadows of CEO Ziggy Switkowski and some other Telstra luminaries make it hard to gauge Moffatt's chances of being the next CEO of Telstra. "It's horses for courses in this game," says one observer, "and whether the course will be right for Moffatt when Ziggy departs is anyone's guess." Says another: "Moffatt has the ability to come up with the business models. He was especially recruited to Telstra and is well thought of by the board." The betting is on Moffatt becoming a CEO of a medium-sized operation of $150 million-plus. "He's been a chief executive before, so he can do it again," the punters say.

5. Tom Pockett CFO, Woolworths

Career summary: Joined Woolworths from the Commonwealth Bank Group, where he was the deputy CFO with responsibilities for business planning and investment, reporting, capital attribution, information management and decision support, capital management, tax and the corporate centre. He was also the general manager, finance, for the Lead Lease Corporation, and until recently headed up the Group of 100.

Form: A reputation as an analytical, lateral, strategic thinker with "good people skills". "He's very impressive," according to one observer. "He is an applied performer who has earned his stripes." The word on the street is that Pockett will be a CEO eventually, but not with Woolworths, whose board will want a grocer.

6. Brian Kruger CFO, BHP Steel

Education: BEc, ASCPA

Career summary: Joined BHP Billiton in 1983, and appointed CFO of BHP Steel in 2001, responsible for finance, treasury, taxation, supply, investor relations, investments, audit and insurance. His previous positions with BHP Billiton include practice leader, corporate finance, and vice-president finance, North Star BHP Steel

Form: The precedent established by BHP Billiton to appoint a numbers man to the top job means recruiters and analysts are closely watching Kruger's next move. Seen to have strong financial credentials, he is well regarded for his business acumen, and for being a strategic thinker. "He's up to the challenge of a CEO role," says one observer, "but is unlikely to move out of the heavy industry or manufacturing sectors."

7. Jamie Tomlinson CFO, Lion Nathan

Career summary: Having worked for brewer and winemaker Lion Nathan for 20 years, he assumed the position of CFO in May this year following the resignation of Paul Lockey. He was previously the finance director of the Australian operations.

Form: "Tomlinson is a new appointment - so it's difficult to determine how he'll shape up - but he looks good" is the word.

8. Doug Bailey CFO, Woodside Petroleum

Education: BBus, Harvard Advanced Management Program, CPA, ACIS.

Career summary: Appointed Woodside CFO in 2002 with responsibilities including managing the company's financial position, its internal and external reporting and financial risk management. Also involved in the development and implementation of the company's growth strategy. Before joining Woodside, Bailey was the chief executive and managing director of Ashton Mining Limited until its takeover in 2001 by Rio Tinto. He previously served for eight years as Ashton's executive director, finance & administration.

Form: Bailey's earlier chief executive experience makes him a strong contender for another CEO role, but it isn't expected to happen, at least at Woodside, in the short term. "Changes at the top means Bailey may well have to wait until things settle down," is one prediction.

9. Neil Chatfield CFO, Toll Holdings

Education: Masters of Business in Finance and Accounting, FCPA.

Career summary: Joined Toll in 1997 as CFO and was appointed to the board the following year. Previously, Chatfield worked for the Australian coal industry as the CFO of the Cyprus Australia Coal Group and the American Metals and Coal International Group.

Form: "Paul Little will be looking for a successor," observes one pundit, "and Chatfield is well-positioned to be considered for the top job."

10. Peter Wasow executive general manager, finance and accounting, Santos

Education: BComm, Grad Dip (Mgt), FCPA

Career summary: Before assuming his current role, Wasow was vice-president of finance at BHP, where he spent much of his working life in various finance roles. Positions included CFO and strategist at BHP Services, and vice-president global business services. Wasow also worked for the company in the United States and is also the director of the School of Petroleum Engineering and Management at Adelaide University.

Form: "The current MD has seen Santos back on track, but if he misses some hurdles, our man Wasow will be there," is the word on the street.

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