Header
Home Philosophy Team Services Clients Testimonials Publications In the media Contact

CFO Magazine 2005

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

Welcome to the C-suite.

CGOs are a public sector governance initiative. But they may be missing the big picture.

Public-sector organisations are rising to the challenge of the findings, announced last year, of the Uhrig review of corporate governance among statutory authorities. One manifestation of their response has been the creation within some entities of positions designed specifically to manage governance-related issues.

The federal departments of finance and administration, tax and defence already employ staff responsible for managing the governance framework, but the role is being introduced into smaller and state-based public-sector organisations. Examples include RailCorp in NSW, the Australian Crime Commission, Integral Energy and the NSW Department of Environment and Conservation.

The creation of such chief governance officer positions appears to be positive, but the role of CGO is not well-defined.

According to former auditor-general of Australia Patrick Barrett, the approach runs the risk of ignoring implementation of an holistic approach to governance in favour of being focused solely on compliance to legal and regulatory requirements.

"Government agencies are having trouble grappling with the 'whole of concept' framework for governance and the governance framework," Barrett says. "Government can react quite well to the elements like the controlled environment and the risk management, ethical and reporting environments, because that is second nature to the public service.

"But it's the 'whole of agency' approach that I suspect a lot of agencies are grappling with. It's the integration of both the hard and soft skills and bringing them together in a cohesive way to improve performance that agencies are still trying to figure out how best to put into place."

In November 2002, John Uhrig - former chairman of Rio Tinto, Santos and Westpac Banking Corp - was appointed by the federal government to conduct a review of the corporate governance of commonwealth statutory authorities and office holders.

The objective of the review was to ­investigate existing governance frameworks and to develop a set of ­governance principles for statutory authorities that could also be applied to a wider range of public-sector bodies.

In his conclusions, Uhrig stated there was "a lack of effective governance" in the public sector due to several factors, including "unclear boundaries in delegation, a lack of clarity in relationships with ministers and portfolio departments, and a lack of accountability for the exercise of power.

"This lack of governance arises primarily due to a 'hands off' attitude assumed by many when dealing with statutory authorities," Uhrig continued.

"This situation is often further complicated by the presence of a board, particularly one where it is impractical for government to provide the full governing powers required to be effective.

"Statutory authorities develop an understanding of their purpose through both their legislative framework and interactions with the relevant minister. However, it is the assessment of the review that does not always provide sufficient clarity for all parties. Consequently, there is scope for improvement."

Barrett, who received an Order of Australia in recognition of his service to the promotion of good governance in the ­public sector, nominated the federal departments of finance and administration, tax and defence as three examples of public-sector organisations that have adopted ­governance frameworks that clearly determine responsibilities and accountabilities for the organisation as a whole.

"But I suspect in other cases it's just a means to ensure that at the lowest level 'the boxes are ticked'," he says. "Box-ticking is fine so long as it gives us assurance that we've got these particular frameworks and processes in place, but it's what we do with them that is important.

"I'm not confident enough that we've moved beyond a model of basic ticking off, and making sure that we're not found to be wrong or inadequate, rather than looking at this as a vehicle for developing a whole organisational way of operating though structure and culture, and much more of a focus on performance and the outcomes that we produce."

A recent advertisement by the Greater Southern Area Health Service of NSW Health for a director, corporate governance, said the key focus of the role was to "position the traditional 'back-burner' function of corporate governance squarely in front of the stove [by] challenging the status quo, raising the standards, elevating the profile and welcoming scrutiny".

However, the way these roles are defined - their purpose, scope and reporting lines - varies considerably. At Integral Energy, the role of manager, corporate governance, reports to the chief financial officer and company secretary Craig James, and is concerned with disclosure and compliance. At the NSW Department of Environment and Conservation, the equivalent officer, Dawn Easton, reports to the executive director of the strategy, communication and governance division, Sally Barnes.

At the NSW Health Service, the role of managing the governance framework runs parallel with the role of managing ­"clinical" governance.

"Corporate governance isn't something you can address monthly or quarterly or half-yearly," says James.

"The role of our manager of corporate governance is to support the board in ensuring that we are making timely, accurate disclosure on material matters; that we are in an adequate financial position; that we are maintaining our elements of triple bottom-line reporting; and that we are liaising with stakeholders.

"It's easy to do that on a monthly basis at a board meeting, but you have to live and breathe it. Every company is different and, therefore, what I've tried to do is ensure the elements of our framework are tailored to suit the elements of this business." James says his aim in elevating the role was to "incorporate integrity, efficiency as well as risk-management, disclosure, transparency and implementation of a strategy through agreed direction" within a system of processes and policies. "Rather than being a second order, process issue, I wanted it to be a leading front-foot issue."

By comparison, the governance position at the NSW Department of Environment and Conservation was established following a merger of the Environment Protection Authority and the National Parks and Wildlife Service.

The position was created to incorporate strategy, performance and compliance; and the role of the branch includes managing corporate planning, monitoring corporate performance and reporting, preparing the annual report and managing the audit program, probity standards, investigations, freedom of information requests and ­privacy legislation requirements.

"But governance isn't only about process - it's about shaping the direction for the organisation, thinking through the issues and providing input into good thinking and good decision-making," says Easton.

"Governance is about accountability. And in order to be accountable, you and others have to know what it is that you are trying to do - and you also have to agree on the way in which you are going to do it."

This is a view shared by the chief executive of the Greater Southern Area Health Service, Stuart Schneider, who has incorporated the management of risk - a key part of the corporate governance role - into two parts: corporate and clinical governance. It is believed to be a first for an Australian health organisation.

"Governance is about commitment to quality and to doing it right first time, every time, and not fixing it up when something goes wrong," says Schneider.

"Unfortunately, there are times when we don't get it right and, while that's only a small proportion of the total number of people we treat as inpatients and out-patients per year, the analysis of what went wrong inevitably shows that if the system and processes had been lined up differently it would have prevented that problem ­happening."

View this article on the CFO web site | Back to top

Lawmakers raise the stakes.

Boards are weighing the possibility of corporate social responsibility becoming a legal requirement.

The great Scots economist Adam Smith once proposed that a key problem facing public company directors was whether shareholders could expect them to exhibit the same "anxious vigilance" over other people's money as they would over their own.

Two centuries later, Smith's words remain fresh and relevant to contemporary corporate life - now perhaps even more so, with two key inquiries into whether matters of "corporate social responsibility" should be included as part of the law covering directors' duties.

One inquiry, by the Parliamentary Joint Committee on Corporations and Financial Services (PJC), is considering submissions into whether companies hold, or should have regard for, the interests of stakeholders other than shareholders, as well as to the broader community.

The PJC is investigating whether the existing legal framework governing directors' duties encourages or discourages board members from having regard to the broader interests of corporate social responsibility and triple-bottom-line reporting. And if so, whether there is a need for changes to the Corporations Act, in particular the section that concerns directors' duties.

In parallel, the Corporations and Markets Advisory Committee (CAMAC) has been given the task of examining the extent to which the duties of directors under the Corporations Act should include corporate social responsibilities or explicit obligations to take account of interests of certain classes of stakeholders other than shareholders.

Under both the Corporations Act and common law, directors have a duty to act in the best interests of the corporation. In this regard, directors are required to consider the interests of shareholders.

The CAMAC inquiry will consider whether the current legal framework in which board members make decisions allows for the appropriate account of the interests of persons other than shareholders. A related issue is whether to make it mandatory for large companies to include an annual report on the social and environment impact of the company's activities.

If the Corporations Act were to be amended to accommodate matters of corporate social responsibility, it would probably state something to the effect that directors and officers must take into consideration "interests other than shareholders as a whole". Such an amendment would be vague enough to require the courts to determine subsequently exactly what that means.

The problem faced first by both inquiries is determining the parameters of the investigation. Defining exactly what is meant by the terms "stakeholder" and "corporate social responsibility" alone is surely worth a slurp of government funding. Applying this in a legal context is a problem of even greater complexity.

A "stakeholder" is considered to include employees, suppliers and customers, as well as "broader community stakeholders" such as lobby groups and the media. The term "corporate social responsibility" is likewise difficult, encompassing a range of issues as diverse as environmental protection, political donations and corporate philanthropy.

But let us imagine for a moment that it is now part of a director's duty under law to have regard to broader community issues and stakeholders (as well as to shareholders and to maintaining shareholder value).

What might this mean for the boardrooms of publicly listed companies? It is unlikely that shareholders and stakeholders would have equal billing, and decisions would therefore need to be made with priority to the former, rather than the latter.

This means board members, in their deliberations about strategy and risk management, would require a broader outlook on the implications of their decisions. Will the "gene pool" of director candidates be widened to include, therefore, a "CSR expert"? Or perhaps a person with the capacity to think beyond their area of specialisation - say, a "boardroom maverick" or "designated dissenter"?

But this is all simply conjecture. Corporate lawyers told me, off the record, that the CAMAC report is nothing more than a "smoke and mirrors" exercise by the Federal Government to pay "lip service" to a "passing trend in corporate life".

Matters over and beyond protecting shareholder wealth - such as reporting on the social and environmental impact of a company's activities - will require no more of a director than to engage in the appropriate corporate jargon that implies that the company really does care about more than just making money.

For many public company directors, this would be relief indeed. It is one thing to wear community backlash and media coverage from being a "corporate bulldog", but quite another to go to jail for it.

As Smith wrote in his book The Wealth of Nations: "Like the stewards of a rich man, [company directors] are apt to consider attention to small matters as not for their master's honour and very easily give themselves a dispensation for not having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company".

View this article on the CFO web site | Back to top

All for one and one for all.

Steve Vizard's actions not only reflect badly on him, they also raise doubts about the Telstra board's ability to sense danger.

With yet another example of malfeasance at board level in the spectacular fall from grace of former Telstra non-executive director Steve Vizard, shareholders are once again left wondering, "What were they thinking?"

Unfair as it may be to tar all the then-serving Telstra board members with the same brush, they must none the less share the blame for the damage done to the reputation of the board and the company by Vizard's behaviour.

The role of the board as a collective decision-making body means that all forms of individual conduct, both commendable and abhorrent, reflect upon the group as a whole. If a board is to take credit for a good decision collectively (even when the work involved was mostly done by a small proportion of board members), it must also be accountable and responsible for events that go wrong. Collegiality has two faces.

The dominating characteristic of board work is collective decision-making. Operating alone, individual directors have no power of their own to act on the corporation's behalf. The individual director's sphere of influence comes only from being a member of a body of directors acting as a board. In other words, it's a matter of all for one and one for all.

"The very existence of the board as an institution is rooted in the wise belief that the effective oversight of an organisation exceeds the capabilities of any individual," academics Daniel Forbes and Frances Milliken note. Collective knowledge and deliberation is the best approach to board work.

It is clearly not enough, however. As former French President Charles de Gaulle once said, deliberation is the work of many men, while action is the work of one alone.

This leads to the question of whether board members turn a blind eye to inappropriate - and even illegal - activities of a fellow board member in the belief that if something does go wrong, one can adopt the Lachlan Murdoch defence of being "profoundly misled".

Collectivity has always been the framework in which boards work, and it applies as much to the legal as to the fiduciary aspects of what they do. It requires board members to be able to trust one another.

Group dynamics research (which is highly applicable to the boardroom) demonstrates that groups develop a form of "collective memory", which consists of the sum of the individual memories of each member of the group as well as an awareness of who knows what. The legacy of history is that it teaches us to expect predictability.

This latter point is of most relevance to a board, and certainly to the Telstra board during Vizard's term. Vizard's decision to breach his director's duties by using inside information he gained as a result of being a member of the board was presumably his alone. But didn't anyone have even an inkling of Vizard's activities?

It has been widely reported that Vizard once arrived unprepared for an exam for his law degree and deliberately wrote an illegible paper in order to force examiners to have him read it to them days later, thus buying him valuable time to study.

This is the stuff of university lore and the shenanigans of a young buck making his way in life. But the boy in Vizard was still evident in the man. Surely, at least one member of the Telstra board might have thought something wasn't right?

The role of a board is one of oversight; the board's role is to give authoritative direction. But who watches the watchers?

In the public company arena, the regulator is a key player of this role, although the Australian Securities & Investments Commission is also a victim of the Vizard scandal. Its reputation, too, has suffered.

But the members of the Telstra board also have responsibility and accountability for monitoring the behaviour of their colleagues, and for calling people to account for conduct that is unbecoming - and even dangerous to the reputation of the board.

Behaviour is regulated by both law and social norms. Tipping the waiter in a restaurant is a social norm, but paying for the meal is a requirement of law.

Group pressure will check malingering with a series of responses in a rising degree of severity: cajoling, rational appeal, the withdrawal of social benefits, coercion, ostracism, rejection. The speed at which a defiant group member will be punished will depend on the values the group holds. If trust, integrity and reputation are paramount, then there will be few second chances.

Aside from social ostracism and legal punishment, Vizard's behaviour has also seen him fall victim to that peculiar Australian tradition known as "the tall poppy syndrome".

But he may take comfort in the old maxim that failure is only the opportunity to begin again more intelligently.

Vizard's downfall is a lesson to be learned by Vizard himself, as well as by all those who serve on our boards.

View this article on the CFO web site | Back to top

Check their credentials.

Boards may be reluctant to regard prospective members as possible resume fraudsters, but shareholders have no inhibitions.

The chief executive of a not-for-profit organisation recently sought my advice about developing his board portfolio. He had an enviable educational background, a solid record as a chief executive, and was already serving on three boards. But I detected something odd about his impressive curriculum vitae. When pressed, he admitted that he had also been a director of another company "which no longer existed".

This CEO had not lied in his resume, but he was certainly guilty of the sin of omission.

But then, why should he highlight an example that was little more than a pimple in an otherwise stellar career? The reasons for the company's demise well preceded his appointment to the board, so to mention it would only taint him unfairly.

Omitting "the dogs" from your director's resume is yet another sin a director can commit, according to the ever-vigilant investor community. Large institutional investors, in particular, are calling for companies to publish complete resumes of board members, including current and former directorships in the public, private and non-for-profit sectors.

"If a director conveniently leaves off a dog from his CV, investors have a right to be concerned because it implies that the director is trying to hide something," a large super funds investor told me. At a time when resume fraud is increasingly common, it may be harsh to punish a board member for failing to mention a directorship, particularly if that company was a start-up that didn't start.

But shareholders are less concerned about the omission than they are about the message the director sends by not being honest. According to the Australian Stock Exchange (ASX), all candidates nominated for re-election at an AGM should provide shareholders with:

  • Biographical details, including skills and qualifications, and enough information to allow an assessment of the independence of the candidate.
  • Details of the relationships between: (a) the candidate and the company; (b) the candidate and the directors of the company.
  • Directorships held.
  • Particulars of other positions that involve significant commitments of time.
  • The term of office served by directors subject to re-election.

On the matter of the disclosure of directorships, the ASX is ambiguous. Disclosure relates to those directorships "required to be disclosed by law and any other directorships relevant to an assessment of independence".

Where matters become complex is determining the independence of a candidate or board member.

The ASX's criteria for independence states that an independent director is a non-executive and "is free from any interest or business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act in the best interests of the company".

The tricky part is determining which "interests and other relationships" are relevant, and whether they should be mentioned.

It is a delicate area for the members of the board nominations committee, too. When looking for candidates, boards are less likely to rely on board recruiters than they are on their personal and business networks. And if the nominations committee knows the candidate, it is all the harder to conduct a thorough check of bona fides.

A police records check is standard practice, particularly for financial institutions, but challenging academic records and professional memberships and verifying address histories for the past five years will probably be considered insulting to a high-profile CEO.

But it is far better to check the veracity of a board candidate's resume before presenting it to the AGM than to face the embarrassment of being "outed" or, even worse, for shareholders to misinterpret the reasons a candidate failed to disclose certain information.

Even though resume fraud is on the rise (and by implication so, too, is the laziness or naivety of recruiters), boards must accept that the increasing activism of shareholders makes discovery inevitable. "There are organisations paid by wealthy investors to exercise vigilance over the system," says another institutional representative. "Besides, Google provides a pretty comprehensive history of a person's public life, and there are plenty of people willing to spend time trawling for information."

The biggest enemy for boards is their weakness for collegiality and their propensity to trust. If Bloggs knows a candidate as a "good bloke" - well, then, he must be, right? No doubt that is what many thought of Glen Oakley, who rose from a mortician's assistant to become the director-general of the NSW Department of Business and Regional Development, partly on the strength of his stellar academic background.

Oakley claimed to have three degrees, including a doctorate, but they were all fake - and he managed to continue the fraud undetected for 15 years.

View this article on the CFO web site | Back to top

Lie now, pay later.

Board members and company officers must ensure that their statements to the public, and particularly the media, are accurate.

Five years ago, Rodney Adler gave an interview that precipitated a chain of events leading to his being jailed for his part in Australia's largest corporate collapse. The interview concerned the purchase of HIH shares by Pacific Eagle Equities Pty Ltd. The subsequent newspaper article incorrectly reported that Adler had purchased shares on his own behalf.

Adler did not correct the inaccuracies in the article when it was published and, in a second interview with the same journalist, he made further statements that indicated he was the purchaser of the shares. He also made off-the-record statements.

At the sentencing hearing on April 14 this year, Justice John Dunford found Adler knew the information was false and that it was likely to induce other people to purchase shares in HIH, "many of whom, if not all, would have lost their money when HIH collapsed".

Adler contended that his misrepresentations were "stupid errors of judgement". Justice Dunford disagreed, saying they were "... deliberate lies, criminal and in breach of [Adler's] fiduciary duties to HIH as a director".

There are many lessons to be learned from the collapse of HIH Insurance, and one is that board members and company officers must ensure accuracy when making public statements (particularly to the media), as reports and transcriptions of interviews can be admitted as evidence in future legal proceedings.

The decision to speak to a journalist off-the-record must be made with the clear understanding of all the possible outcomes. Trust in a journalist offers no security against disclosure in future legal proceedings. The same is true for the contents of correspondence between the two parties to an interview, before or after the formal dialogue has occurred.

Earlier this year, Rodney Adler sent me a dense, two-page letter responding to comments I made in this column in the February issue of CFO. The column explored the arguments for introducing alternative punishments for corporate crime, such as the deprivation of the right to work, and/or suspension of academic qualifications.

Using the then yet-to-be-decided court cases concerning Ray Williams and Rodney Adler as an example, I had posed the question: "Would Adler be as chirpy if, in addition to a jail term and/or fine, he faced the possibility of being stripped of his hard-earned Masters degree in economics?"

In his letter, which he titled Without prejudice - without admissions (not for publication), Adler said he agreed with me that stripping him of his Masters and chartered accounting degrees would be another form of punishment.

But this comment comprised only a small part of the letter, which was devoted to detailing Adler's pre-sentencing reflections. It is a fascinating insight into the psychology of a man who was to become one of Australia's most colourful corporate criminals.

As tempting as it still is to report the contents of the letter in its entirety, I have chosen not to publish it. The decision is mine alone, even though the legal judgement against Adler concerning the very activities he outlines in the letter has been decided. Yet it shows that Adler never learned from the mistake that marked the beginning of his journey from being the son of one of the country's most-respected businessmen, to a common criminal.

Board members are generally cognisant of their obligations under disclosure requirements. Problems occur when comments made without the least intention of being taken seriously are interpreted otherwise. Or, in the case of Adler, telling lies to a journalist and attesting to the veracity of the information when challenged.

In his judgement, Justice Dunford commented insightfully that Adler "accepts his conduct was unacceptable to others, but does not really understand himself the full extent of its wrongfulness in the business sense".

This position was reflected in Adler's letter to me, in which he wrote: "When I completed my Masters degree (part-time) and my chartered accounting degree (part-time) you believe that stripping this away from me would be another form of punishment - agreed, (sic) but you forget that what I wanted to achieve was knowledge, and sure you can take the letters away from my name but I still have the knowledge."

With his off-the-cuff comment costing him years of freedom, Adler now has more than enough time to ponder the irony of this statement.

View this article on the CFO web site | Back to top

Give art the brush off.

Selling the boardroom art collection can say a great deal about how a company is governed.

The sale of Foster's Group's multi-million-dollar art collection signals a change of attitude in Australian boardrooms that proper business practice is about shareholder returns and not the aesthetic privileges of corporate offices.

Foster's decided to sell its collection because it was no longer seen as a "strategic fit" for a premium beverages company.

The Foster's auction, which follows similar divestitures of paintings by Axa Asia-Pacific, BHP Billiton, BP Australia, Coles Myer, John Fairfax and WMC, appears to be further evidence that board members and senior executives are starting to take seriously the issue of "social responsibility" and the related (but by no means less important) matters of transparency, disclosure and corporate citizenship.

"Art doesn't make any money," the non-executive chairman of mortgage broker Wizard, Mark Bouris, was recently quoted as saying. "Art costs money, and when a corporation starts collecting art to adorn its walls, it's a sign they're not concentrating on the business."

There may, of course, be exceptions - such as when a company prudently buys and sells art and, in doing so, makes a return to shareholders. These exceptions are few, however.

The sale of boardroom art, in terms of dollars and cents, may appear to be little more than a gesture in the direction of good governance, transparency and so on. But although business is indeed about money, any astute board member or senior executive understands that it is also about relationships and, by extension, reputation. As Warren Buffett famously quipped: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."

Selling the boardroom Boyd or Namatjira may look good, but looking good is important.

Maintaining a good reputation is fundamentally about the perception of behaviour. If a company says it stands for certain principles, such as honesty, integrity and fairness, then it must reflect this in its conduct - and the boardroom is the place it should start.

As directors wriggle uncomfortably in the spotlight of community outrage about the malfeasance of a few of their colleagues, notably convicted criminals Ray Williams and Rodney Adler and the late Rene Rivkin, there is no better moment to carpe diem.

Disclosure in the public sector is common practice, covered by legislation. In New South Wales, for example, there is the Public Disclosures Act and the Independent Commission Against Corruption (ICAC) Act. The spirit of these laws is to encourage and facilitate the disclosure, in the public interest, of corrupt conduct, mal-administration and serious and substantial waste in the public sector.

Under the ICAC Act, any relationship that develops or may appear to develop must be "appropriate" and not create the perception of a conflict of interest. ICAC also expects servants of the Crown not to accept any benefit or to seek or accept a bribe or any other "improper inducement".

Public servants must not take advantage of their position to influence improperly any other staff member in carrying out their duties in order to gain personal benefit. They should not use their position to acquire a personal profit or advantage, or to seek or accept a gift beyond a token value.

There is no equivalent for the private sector, the onus being on individual companies to formulate their own codes of conduct related to managing inducements dressed up as tickets to the rugby or opera, a weekend in the Hunter Valley with the missus or an upgraded airline seat.

The code of conduct of Insurance Australia Group (IAG) directs employees to show "great care" when accepting gifts or benefits as they may "create a sense of obligation to the donor". Any gift, favour or other benefit must be declared, and the gift will be returned, donated to charity or shared with colleagues. "Seek approval from your manager prior to accepting invitations to trade nights or social events related to your position," IAG says.

Contemporary corporate culture assumes that any business relationship and the way it is conducted is a "commercial opportunity". Therefore, the efficacy of a code of conduct is in the way it is policed. An easy way to monitor the giving or accepting of gifts is for companies to use a gratuities register.

The executive director of the St James Ethics Centre, Simon Longstaff, says: "The risks associated with gift-giving are ... greater than those that arise in the case of hospitality [because] gifts can be given and received in a form that is away from public scrutiny."

A gratuities register requires the recording of gifts above a nominal value. It has advantages both for employees and their supervisors. It provides employees with a polite excuse if they have to decline a gift and do not wish to cause offence.

A register, because it records activities such as hospitality, also provides evidence for or against employees who alter the company's contracts with customers or suppliers because they have decided that they have not been sufficiently smooched.

In their role as overseers of a company's reputation, and the risks that threaten it, board members are responsible for setting the tone for acceptable conduct. A picture paints a thousand words.

View this article on the CFO web site | Back to top

Trust me, I'm the boss.

Trust is directly and positively related to team performance, and executives who breach it should expect to pay the price.

When the board of Boeing fired chief executive Harry Stonecipher for breaching the company's code of conduct by having an affair with one of his female employees, the decision was not made for overtly moral reasons but rather for a breach of trust.

Boeing's code of conduct stated "employees will not engage in conduct or activity that may raise questions as to the company's honesty, impartiality, reputation or otherwise cause embarrassment to the company". In delicious irony, the code had been instigated by Stonecipher, who insisted that Boeing's 160,000 employees sign agreements committing them to report any lapse of ethics in the workplace.

The decision by the board to sack the CEO because of his affair with a female subordinate predictably raised questions from ethicists and pension fund representatives about whether the responsibilities of directors extended to making moral judgements about the personal behaviour of senior executives. It was not, however, the affair with a woman 20 years his junior that speared the married Stonecipher, but the reported exchange of salacious e-mails that, if made public, would have caused even redder faces.

The Boeing board justified its decision by arguing that its chief executive had jeopardised the reputation of its brand. This is a reasonable position, given that the reputation of a company - and therefore its brand - is linked to its ability to maintain financial viability. In adopting this argument, the board neatly showed that it was not acting for moral reasons, but rather in order to protect shareholder returns.

The motivation that lies behind this decision raises a particularly tricky issue for boards - the ability to trust.

Studies of organisations during the past decade have devoted more space to the topic of trust as conventional, hierarchical management styles have been replaced by more collaborative, inclusive and consensus-based models that emphasise the involvement of workers in the decision-making process. The criteria against which managers' performance is assessed include their ability to create and lead "effective" teams. It follows, therefore, that in establishing the "right" group dynamics, trust is a critical element.

Trust can be defined as the confidence to rely or depend on a particular person's integrity, ability and character. Academic researchers specialising in the study of trust in groups argue that the concept is more complex because it consists of distinct but related dimensions, such as the propensity to trust and the perception of trustworthiness.

Ana Costa, of the Delft University of Technology in the Netherlands, who conducts studies of trust in groups, says: "Trust is a psychological state that manifests itself in the behaviours towards others, is based on the expectations made upon the behaviour of others, and on the perceived motives and intentions [of others] in situations entailing risk for the relationship."

Her investigations consistently conclude that trust is positively related to team performance, team satisfaction and commitment to team relationships. Not surprisingly, trust is negatively related to stress among team members. "Teams where individuals feel tense, unsatisfied and less committed become extremely unproductive ... [leading] to a higher rate of absenteeism, which is detrimental to the team and for the whole organisation," Costa says.

Another consequence of a breakdown in trust is whistleblowing, when an employee eports unethical, fraudulent or illegal behaviour to authorities. Whistleblowing - which famously caused the demise of Enron - is increasingly seen as an appropriate and acceptable course of action. It is enshrined in a range of laws and regulations, including Clerp 9 and in the Sarbanes-Oxley Act in the United States.

When the Bank of Ireland outsourced its systems operations to Hewlett-Packard last year, a former employee, angered by being transferred to the computer giant, blew the whistle on chief executive Michael Soden for using the bank's computer to access internet sites advertising escort services in Las Vegas, where he regularly attended business meetings. Soden was sacked because he had breached the company's code of conduct - which he had instigated - that banned bank employees from viewing adult web sites at work. In another case, Rupert Pennant-Rea was sacked as deputy governor of the Bank of England because he evaded security to smuggle his mistress into his office after hours.

Although a common theme of these cases is sex, the boards of Boeing, the Bank of Ireland and the Bank of England stressed that their decision to sack their chief executives was not related to sex, which was, after all, consensual. It was more the threat of being seen to "don't do as I do, do as I say".

The appeal of an illicit affair is said to be as much about the excitement that arises from the risk of being caught as it is about the attraction between the people involved. One wonders whether these corporate leaders either did not think they would be found out or believed that, if they were, they would be treated differently because they were the boss. Sorry, honey.

View this article on the CFO web site | Back to top

Defend yourself.

Our growing cultural dislike of argument creates risks for the quality of debate between boards and management.

Arguments are disputes in which a series of reasons are presented and defended in order to support or oppose a position. Simply put, an argument is a discussion that tries to prove a point.

This has been the definition and practice of argument from the time of Aristotle through the centuries until its demise in modern times under the ignominious influence of the two most popular philosophical movements of the 20th century: relativism and post-modernism.

Today, argument is popularly regarded as adversarial and damaging. It is deemed to invalidate the subjective position. To argue means to risk negating the feelings of the individual, thus causing hurt or offence.

To defend a position, or to form an opposing view, is to be overtly and unnecessarily critical. Argument is seen to be a personal attack - a form of bullying, an act of intolerance. There is no distinction between the person and the argument.

The decline of the pure practices of argument and of debate is broadly attributed to three causes. First, we lack the verbal and logical tools to engage in debate objectively. There is a general lack of understanding of the art of debate as defined by Aristotle. Second, the power of the word is under attack from rampant illiteracy, the overuse of "politically correct" language, the predominance of workplace jargon and a tendency of media commentators to describe "rhetoric" as a negative form of communication. Third, we do not argue because we are worried about the consequences of our views causing offence.

It follows that robust debate is actively avoided in our universities and in public forums and, as a result, we have created a society of mediocrity, where the exchange of ideas is regarded as the domain of the "elite". Unlike the politically inflamed era of the 1960s and 1970s, university students are loath to put a counter-argument. When students do interject, it is commonly with remarks such as "whatever", "don't go there", "that's how I feel" or "what's the relevance?"

In his latest book Where have all the intellectuals gone? Frank Furedi says we have created a "cult of the banal" in our "celebration of ordinariness".

Social cliches such as "political correctness", "social inclusion or exclusion" and "policies of affirmation" have infected our cultural and educational institutions to the point that it is considered wrong to disagree, lest fragile sensibilities are damaged. In a recent workshop on teaching debate and argument, a student requested that instead of saying "defend your argument", I should say "support your argument with evidence". The latter was less "aggressive and violent", she said, poignantly ignorant of the fact that she had succinctly defined the verb "to defend" in this context.

Politicians who personally attack their opponents in order to win a debate perpetuate the popular view that argument is to be avoided. The former Federal Opposition Leader, Mark Latham, describing the Prime Minister as an "arselicker" certainly does little to encourage sophisticated, witty, robust engagement.

Robin Smith, an Aristotle scholar from the United States, says argument was originally central to the education of future leaders who were taught the skills of logic in order to evaluate an argument and to detect the consequences of a given proposition.

"The capacity for forceful and cogent self-expression was from the very first enshrined as a central social value," Smith says, "and enormous importance was attached to it by those who sought to achieve pre-eminence in these early societies." To put an argument - in the Aristotelian sense - is to use "reasoned elaboration" mixed with a dash of persuasion, compelling evidence and the ability to tell a good yarn.

In most jobs we are required to direct subordinates, persuade others of the power of our ideas, and influence a variety of others. A return to the principles of argument in our social, cultural and educational institutions, in politics, in the boardroom, in the workplace and in our homes promotes the healthy exchange of ideas, the ability to evaluate an argument, the expectation that assumptions should be challenged, and the eager exploration of alternative perspectives and disparate views.

A recent McKinsey Quarterly article reported that US board members want more involvement in their companies' long-term viability, short-term financial performance, risk assessment and strategic direction. In order to achieve this, board members need to use their time in meetings more effectively and to develop a new understanding of their roles and responsibilities, the article's authors argue.

But the best method of achieving a more robust engagement with the firm would be for board members to learn to evaluate the information they receive from management through the proper techniques of argument and debate.

View this article on the CFO web site | Back to top

Hit them where it hurts.

Jail sentences evidently do not deter corporate wrongdoers. Other forms of punishment may be necessary.

In a recent issues paper about sentencing corporate offenders, the New South Wales Law Reform Commission queried whether sanctions should be limited to jail terms, equity fines, publicity orders, corporate probation, community service orders, disqualification and dissolution.

As the courts begin to decide upon the ramifications of the corporate scandals - and the actions of board members and senior executives - of the past four years, the Commission's question is interesting. Is a jail term or a fine a sufficient deterrent for corporate offenders?

Another reason for giving serious thought to the proposition is that corporate offenders regularly and successfully negotiate for lesser sentences in return for turning witness against colleagues.

Brad Keeling was banned from being a company director for 10 years for his involvement with the $92-million collapse of One.Tel after agreeing with the Australian Securities & Investments Commission (Asic) to testify against Jodee Rich, Mark Silbermann and John Greaves.

He achieved a swift settlement with his creditors, and is said to have returned to a "near-normal" life while others take the fall for the collapse of the company.

Another option for the accused is to plead guilty in order to avoid a lengthy and expensive trial and in the hope that the judge will, as a result, prove more lenient.

After testifying to the HIH Royal Commission that he had done nothing wrong, former HIH managing director, Ray Williams, pleaded guilty to criminal charges of misleading and deceptive conduct and of breaching director's duties for his part in the $5.3-billion collapse of the global insurance company. The charges carry a total maximum 12-year jail term and/or a $53,000 fine.

Given the actions of Keeling and Williams, and other appalling corporate behaviour during the past few years, it is reasonable to consider whether sanctions, as currently determined, are sufficient to ensure corporate offenders take full responsibility for their actions.

The NSW District Court sent a clear message that the stakes should be raised when it sentenced Robert Geoffrey Walker to one of the severest jail terms in recent times.

Walker had been found guilty of making misleading statements about investment returns to investors while he was the managing director of Financial Options Group Inc. He will serve seven years, with a minimum of four-and-a-half years.

These matters closed a year of corporate scandals involving some of Australia's biggest company icons, including the National Australia Bank, James Hardie Industries and Amcor.

And if these examples create a poor impression of corporate behaviour, a survey of the latest 50 annual reports shows that the chief executives of Australia's largest listed entities are entitled to $100 million of termination payments.

When these issues are combined, questions arise about whether the reforms of corporate governance practice have - or will have - a long-term impact on corporate behaviour and whether other forms of deterrents for corporate crime and misdemeanours should be considered.

Researchers Mirko Bagaric and Jean du Plessis proposed in the Company and Securities Law Journal that the range of criminal sanctions for corporate crimes should be expanded to include the deprivation of the right to work and the annulment and/or suspension of academic qualifications.

"Fines are an appropriate sanction for dealing with most corporate crime, [but] some offences are too serious to be dealt with in such a manner," the researchers argue. "In cases of serious corporate wrongdoing, the individuals behind the corporation should be held personally liable."

One of the most effective forms of sentencing in the context of corporate crime is to focus on the individuals who committed the crime on behalf of the corporation.

"Given that most corporate officers have a strong desire to attain material wealth and have educational qualifications which they highly value, these interests should be the subject of criminal sanctions," the researchers said.

The benefits of these sanctions are that they are inexpensive and they provide a sentencing option for offences that are too serious to be dealt with by fine, yet are not serious enough to warrant imprisonment.

The closest example of this type of punishment is to ban a corporate offender from being a company director. But is this truly effective?

Banned company director Rodney Adler will be back in court this year after the High Court refused his application for leave to appeal for a stay in his criminal trial on charges relating to alleged stockmarket manipulation.

None the less, Adler is defiantly optimistic, telling The Weekend Australian that he will return to corporate stewardship: "There are a few more profits in the old dog."

Bagaric and du Plessis would ponder whether Adler would be as chirpy if, in addition to a jail term and/or a fine, he faced the possibility of being stripped of his hard-earned masters degree in economics.

View this article on the CFO web site | Back to top

Stop the abuse.

The stance of Australia's peak body for board members on new Occupational Health and Safety legislation is at odds with its professed support for the reporting of unethical behaviour

An apprentice is wrapped from head-to-toe in plastic cling wrap by his colleagues, suspended upside-down from a forklift and covered with sawdust. His co-workers then squirt wood glue in his mouth and douse him with water from a fire hose. A contract worker arrives to witness the brutality and rescues the young man amid protests from his tormentors.

When this case, WorkCover Authority of NSW v Coleman Joineries, was heard last year, the company was found to have "unsafe systems of work", and was fined under the NSW Occupational Health and Safety (OH&S) Act.

This act (all states and territories have individual occupational health and safety acts) requires employers to ensure the health and safety of:

  • Employees while at workplaces.
  • Employees while engaged in work (which may be at another workplace).
  • Contractors, visitors and even trespassers to their workplaces.

Breaches of the act are criminal offences and penalties include fines and jail sentences.

Under section 26 of the NSW act, when an employer is prosecuted for breaches of its OH&S obligations, each director and senior manager can also be individually prosecuted.

Two executive directors of Coleman Joineries were successfully prosecuted and fined. As they both now have criminal records, it will be difficult for them to travel to the United States and to many overseas destinations.

The Coleman Joineries case serves as a stark reminder to board members of their obligations to the health and safety of their employees. Many board members mistakenly believe they have no responsibility if they are not directly involved in unsafe work practices.

Yet as this case shows, board members can be found liable and the subsequent damage to their reputations can be lasting, especially for those with overseas board commitments who may have to explain why they can no longer travel.

The Coleman Joineries case will no doubt be referred to often, as the NSW Government proposes to introduce its Occupational Health and Safety Legislation Amendment (Workplace Fatalities) Bill 2004 into law.

The proposed law has met with opposition from the peak professional body for board members, the Australian Institute of Company Directors (AICD).

The AICD's chief executive, Ralph Evans, has called on members to challenge the new law on the basis that it punishes board members for workplace abuse for which they are not directly responsible.

In a letter to AICD members, Evans says the amended legislation applies only to "rogue" managers, those who "recklessly and negligently ignore their OH&S obligations", and by doing so, should "be subject to severe penalties".

But the "vast majority of managers and directors who take their obligations to provide a safe workplace seriously" were unfairly included in the new law.

"The bill not only applies to rogue employers, but could be used to prosecute any manager or director who has the misfortune of experiencing a workplace fatality," Evans says. "This will increasingly require them to do the impossible - display predictive capabilities regarding workplace risks and outcomes. It also distracts from the mutuality of [an] employee's and employer's joint responsibility to ensure a safe working environment."

The AICD called on its membership to sign a letter calling for the following five amendments to the legislation:

  1. Provide that prosecutions can only be launched against managers or directors who act recklessly and endanger the life of another.
  2. Give the right of prosecution only to the Crown and the WorkCover Authority.
  3. Require the burden of proof for criminal proceedings to be borne by the prosecution.
  4. Ensure a right of appeal when custodial sentences are applied.
  5. Remove incentives for trade unions to bring prosecutions.

Clearly, the position taken by the AICD is not intended to diminish the pain and anguish caused to the Coleman Joineries apprentice, even though the executive directors of that company were found liable for the abuse he endured.

Nor is it the AICD's intention to add to the emotional and physical pain caused to any other victim of workplace abuse, those who have witnessed such abuse, or those who believe they have no protection from such abuse.

But in making its argument, the AICD looks to be distancing itself from the responsibility that all board members collectively take for the provision of a safe workplace.

After all, the AICD - as one of the members of the Australian Stock Exchange Corporate Governance Council, which produced the Principles of Good Corporate Governance and Best Practice Recommendations - promotes the idea of a code of conduct for boards that "encourages the reporting of unlawful/unethical behaviour".

The board should additionally display leadership by ensuring, through the setting of an appropriate organisational culture, that employees know that workplace abuse in any form will not be tolerated.

View this article on the CFO web site | Back to top

ASX rules are bloodless.

Corporate governance reform will stall unless the standard of debate about director independence improves

If you reckon I should piss off [as executive chairman of retailer Harvey Norman] and get someone who knows nothing about my business, well, I don't think my shareholders will be very impressed.

Gerry Harvey - The Australian Financial Review, April 2003

When the Australian Stock Exchange (ASX) allowed an "if not, why not" approach to its Principles of Good Corporate Governance and Best Practice Recommendations, it created a culture of corporate opportunism for Australian listed entities to shirk their responsibility to support the governance reform movement.

Within months of the guidelines' publication, companies of all sizes and flavors outdid one another in arguments as to why they should be excused from full compliance with new disclosure requirements.

The small to medium-size enterprise sector claimed the principles were too onerous. Corporations argued that their governance practices already largely adhered to expectations.

Within 12 months, the ASX formed a group to review the guidelines. Among its conclusions it said that the principles were "aspirational statements, but will not represent best practice for all companies in all situations".

"Best practice evolves over time," the ASX said. "It will require different approaches by different companies at different times and according to different sets of variables. Even larger companies may consider that the interests of the company and its shareholders are best served by a governance structure which differs from the recommendations."

March 2005 will mark the second anniversary of the publication of the principles. Within this short time, it seems the ASX Corporate Governance Council has created a culture of "hierarchies of governance".

Gerry Harvey, the executive chairman of retailer Harvey Norman, predicted this two years ago, arguing in his inimitable style, that the expectation of "independence" in the boardroom was unworkable.

To counter adverse publicity from his company's being rated one of the worst performers in an annual corporate governance survey, Harvey met the requirements for a greater number of "independent" directors on his board. Harvey Norman was consequently named the "most-improved" company for 2004. But Harvey continues to undermine the lack of theoretical underpinnings to the principles, telling The Sydney Morning Herald last September that independent board member Kenneth Gunderson-Briggs was appointed simply "because I get all this bad publicity".

Asked if his company needed even more independent directors, he replied: "The best thing would be to get rid of me. I think that would be a very good start, because then they'd have an independent chairman. I would have thought my head should be on the block". And pigs might fly, Gerry.

It was highly predictable that the asx's prescriptive approach to boardroom independence would run foul of the "big end of town".

After all, Australia's four most influential business leaders - Rupert Murdoch, Kerry Packer, Frank Lowy and Gerry Harvey - are pivotal figures on the boards of the companies they, or their fathers, founded.

It was laughable to expect these four men to step down simply because the ASX deemed them not "independent".

Murdoch bowed to these expectations only when his bid to move News Corporation to the United States was potentially stalled by the demands of its two Australian proxy advisers, Corporate Governance International (CGI) and the Australian Council of Superannuation Investors.

CGI, which rates Australian listed companies on corporate governance practices, found five of nine non-executive directors at News did not meet Australian standards for independence.

The company has since agreed to review its board committee structure to reflect these requirements.

Encouraging boards to judge a matter of human behavior without providing an adequate framework was short-sighted. Intent by the ASX to encourage greater corporate transparency and disclosure should be applauded. But the past two years have sadly seen a slow erosion of the foundations of this philosophy.

As the principles enter the "terrible twos", the corporate governance reform movement risks being stalled if the quality of the debate is not elevated.

Let us extend the prescriptive definition of independence as proposed by the ASX beyond the number of years a director has been a member of the board, or whether they have acted as an adviser or supplier in the past.

Independence needs to be viewed in the context of human relationships and interaction. As such, alternative frameworks should be tested. Psychology and philosophy have much to offer in this regard. By engaging with alternative perspectives, the debate will be enriched.

As knockabout philosopher Gerry Harvey says: "You can have all the corporate governance in the world, but it's nothing like spilling blood".

COVER STORY: Loud and clear.

The ability to communicate is no longer an asset for CFOs, but an absolute necessity.

A diversified finance group seeks a chief financial officer who is "an effective communicator with excellent interpersonal skills". A publicly listed company wants a CFO with "highly developed numerical and analytical skills" but emphasises the need for the candidate "to influence and to stimulate debate at senior executive level". Other senior finance roles typically ask for "strong leadership capability, communications and risk management skills".

Welcome to the era of CFO-as-communicator. The new and increasing emphasis on the need for CFOs to possess good communication skills is a logical outcome of the changes that have occurred in the CFO role during the past four years. Previously, CFOs had already made the transition from "bean counters" to "strategic partner of the chief executive". Changes in the corporate governance environment following the collapse of Enron and others pushed the emphasis back on the need for CFOs to balance the roles of "steward" and "strategist".

More recently, the volume of compliance obligations created by the Sarbanes-Oxley Act in the United States, international financial reporting standards and, in Australia, the latest stage of the Corporate Law Economic Reform Programme (CLERP 9), has forced CFOs to become better at managing their time and delegating responsibility. It has also made them more accountable to their boards, to shareholders and to the public at large.

CFOs, in other words, are now expected to be little different from chief executive officers in their range of skills and style of working. It is accepted that the personality type traditionally associated with the CEO role loves the limelight and can talk, but what hope is there for the traditional CFO personality type, as he or she stumbles, blinking, from the shadows of the back office to take up position centre stage ("Unaccustomed as I am to public speaking ...")?

In fact, there is hope, as the number of CFOs who have successfully made the transition to CEO and beyond can testify. With the departure of Michael Chaney, Wesfarmers again elevated its CFO (Richard Goyder) to the role of CEO, for the third successive time. Chip Goodyear was appointed CEO of BHP Billiton after four years as CFO. Once the company's CFO, Trevor O'Hoy is now the CEO of Foster's. For Chaney, a portfolio of seats on the boards of some of the country's most influential companies and business organisations is not only possible, but is an obvious next step.

For most CFOs, however, the prospect of selling the company's "story" to a roomful of Hong Kong fund managers or US insurers remains a daunting prospect. The expectation that they should do so runs counter to the idea that those who earn their living by working with numbers are poor at "soft skills" such as writing; and that, conversely, someone who can recite poetry or understand the finer points of Tudor history is unlikely to be able to understand basic accounting.

Reality has already begun to subvert such stereotypes, and CFOs who fail to understand this are simply uncompetitive. "You are unlikely to be a major corporation CFO if you can't communicate effectively," says John Stanhope, CFO of Telstra and immediate past president of the CFO lobby group, Group of 100.

"I don't think you can be a CFO without being a good communicator, internally and externally, to the business. The CFO has to be able to communicate to the board and to the people in the community as well as to all the external stakeholders. If you're not a good communicator and you're aspiring to be a CFO, you had better do something about it." Although many people believe other-wise, being able to communicate well means much more than standing at a podium before a conference audience with a backdrop of Power Point slides. The secret to communicating well is to know and to be confident with your material and to be able to explain it in such a way that the "message" of a piece of communication is readily understood at several different levels. An effective communicator will be able to "read" an audience and adjust the "message" accordingly. For a CFO, this means being what Stanhope describes as a "number explainer" rather than a "number cruncher".

"It's the ability to take sometimes very complex situations and break them down into something that's understandable by someone whom I might call a reasonably intelligent man-off-the-street," says Suncorp Metway CFO Chris Skilton. "Good financial controllers are very good at analysing the numbers and controlling the books, whereas the CFO must understand the business and understand the strategic implications."

Says Rio Tinto's CFO, Guy Elliott: "My view is that a good communicator has a good grasp of his subject - a real breadth of knowledge of the business. Not just the intricacies of the financial statements but actually what lies behind the numbers."

"A good communicator," says Heidi Mason, head of the chief financial officer practice at executive search firm Russell Reynolds, "conveys a message that is truly understood by the recipients, and therefore a good communicator understands the recipients as well as the message. Good communication is founded on being able to understand people."

An effective communicator is best judged by his or her audience. For a CFO, this means the board, the executive management team, their direct reports and subordinates, the buy and sell sides of the market and the media. "I'd describe a CFO as a good communicator if they can talk about the business with some authority - that they have a sense of the business and aren't just trotting out the numbers," says John Sevior, head of Australian equities at Perpetual Investments. "Often when you don't get to see the managing director, you see the CFO - and therefore you want someone with a sense of authority and understanding of the business and not just the numbers.

"The CFOs who stand out are those who understand the business, as opposed to those who simply rehash the company line. As a former journalist, I am attuned to language and I hate jargon, so I am looking for someone who comes from a broader perspective and has excitement and passion for the business, rather than someone who is talking drolly about the numbers, the cashflow and the cap ex."

This view is reflected in a recent survey by the Australasian Investor Relations Association (AIRA), Communication by Australian Listed Entities: a Survey of Buy-side and Sell-side Analysts. One of the areas investigated was the impact of communication styles of CFOs. Analysts identified five factors that gave them confidence in a CFO: track record, financial detail, business acumen, openness and consistency. But communication, says the survey, underpins most, if not all, of these "confidence-builders". A sell-side analyst is quoted as saying: "I look upon communication skills as a lead indicator of how an executive is running the business". Says another: "If [a CFO] can't communicate clear messages ... [then] they are sure to be buried in day-to-day management."

The underlying elements of confidence, trust and reputation in the way a CFO communicates to a varied audience, but particularly to the market, was the impetus for a recent Westpac Banking Corp executive program to broaden the experience of senior finance executives. The idea behind the programme was that management skills beyond core finance, accounting and control disciplines would enhance a CFO's career prospects, and his or her ability to communicate the Westpac message internally and externally. The programme encouraged finance executives to work in other areas of the bank in order to gain experience and skills in large group management, managing a major change initiative and working in businesses with customers.

"The investment market is looking for somebody who can help them understand what the numbers mean," says Westpac CFO Phil Chronican, who is soon to take over as head of Westpac's institutional bank. "A set of financials of a major listed company in today's age is a complex set of numbers. The various selections that are able to be made under various accounting standards means that there are different ways in which those numbers reflect the business reality. It's very easy for analysts to feel lost in a morass of numbers, and they may well feel, in fact, that the management of the companies could get lost in that morass of numbers, too.

"The role that an effective CFO can play is to help both explain and interpret what the numbers mean and how those numbers reflect the business activity that's gone on, in order for their audience to see the linkages. If this activity goes up in scale, what does it mean? If this activity goes down, what does it mean?"

It is the "intuitive linkage" between what people can see and feel in the marketplace that should be reflected in an explanation of the financial statements, says Chronican. "And the investment community is looking for somebody who can help provide that clarity." If the first task of a CFO who aspires to be an effective communicator is to explain the financial statements, the second is to convey a sense of confidence that they know what they're talking about. "The second issue the investment community likes is the confidence that somebody at a senior level in the organisation is across that picture," says Chronican. This view is again supported by the AIRA survey, which quoted a buy-side analyst: "When we invest, we buy this year's earnings multiplied by future earnings and discounted for risk. Our perceptions of risk rise and fall in accordance with our levels of trust in a leader's ability to execute."

Adds Chronican: "The corporate collapses through the early part of this decade highlighted that sometimes some very senior executives of some very large companies, both here and in the United States, were so remote from their own businesses that they weren't enough across the emerging issues that were evident in their own financials. Effective communication is, therefore, a twofold issue of the interpretive side but also giving the market confidence that there's somebody inside the shop who actually knows what they're doing."

Suncorp Metway's Skilton goes a step further in estimating that 50% of investors make their decision about a company on whether they can trust the management team with their investment dollars. "Ultimately, I think 50% of a decision to invest in a company is whether or not the management team is confident, capable and is going to optimise the value of the company.

"Generally [investors] get that from those brief periods when they see you on the podium and when you have one-on-one meetings with them. It's about creating a perception through explaining your business succinctly and confidently that they feel you know what you're talking about, that you're in control and that you can be trusted."

Says Peter Gregg, CFO of Qantas: "I've always tried to be very honest [when I'm engaging with] the equity market and very frank. I feel comfortable at the end of the day if people say, 'You can believe what Peter Gregg has to say' rather than 'We'll go along to hear what he has to say and disbelieve half of it'. Your reputation is all that you've got left at the end of the day."

Although the market would prefer to have access to the CEO over the CFO, the two roles are seen in partnership, with the CFO as the able, competent understudy. "The CEO and CFO are very much seen by the market as a partnership," says Skilton. "Ideally, the market would like to see both the CEO and the CFO at the same time. A lot of companies find, as we have, that that's just too much resource time tied up, so the CEO and CFO almost have to be interchangeable. Both have to be able to talk the total story, and that's exactly what [Suncorp Metway CEO John Mulcahy] and I do.

"We normally do a three-day domestic roadshow after our results announcement. That's quite useful, because we then pick up each other's nuances - and when we go overseas we split it up so we can spend half the time that we would otherwise spend when we go overseas. But the CFO definitely needs to talk the total strategic corporate position. I've often said that the way John and I work is more like a junior and senior partner. He's clearly the boss. On the board, you still have the same vote and you still have the right to voice an opinion. The ideal combination is where you have complementary skill sets."

The board of directors is one of the key audiences to which a CFO communicates. According to Stanhope, the main point of difference between an address to a boardroom and more public pronouncements is that the detail disclosed in the former will be more intimate. "Otherwise, it's a very similar discussion. But it's also important that the communication creates understanding with the board as to what's going on in the company, because board members often only touch the company every six weeks. So you need to communicate in a way that they have a good understanding of the company and that they can perform their obligations as directors.

"A director once said to me years ago: 'I don't mind what you tell me. It's what you don't tell me that I worry about. So make sure you communicate everything to me'. The logic behind that is that board members have duties and responsibilities as directors of the company, and part of a CFO's responsibility is to make sure they're fully informed." According to an informal poll of the investment community conducted by CFO, there are at least eight high-profile CFOs in corporate Australia who share the ability to communicate clearly and persuasively (see box, page 30).

Clearly, the CFOs nominated by the market as being effective communicators are both numerate and literate; the cliché that an accountant is boring and dry, whereas an arts graduate is interesting but mathematically remedial, is dispensed quickly as a myth in these circles.

"I certainly know numerate people who are not good communicators, and I know people who are very good at expression but who are hopeless at numbers, but I don't think it can be classified as a general rule that the two are totally different sorts of creatures," says Guy Elliott, who holds an MA from Oxford and an MBA from France's INSEAD business school. "My liberal arts background has helped with communication and with synthesis. I think it gives perspective.

"The training, in particular, is about getting large amounts of information, analysing it and reaching a conclusion, which then has to be expressed.

"All of that is a bit different from a technical qualification. But I've certainly never regretted that part of my education. An MBA supplemented it, and I think it's important to have some technical qualifications as well."

But even with a discipline, there are variations in communication styles. "People with a technical and accounting background stick very much to the numbers but don't talk in what the numbers mean, whereas an economist talks in what the numbers mean," says Qantas's Gregg. "It's just a different approach to training."

Elliott singles out the international exposure he acquired at INSEAD as another valuable experience for a CFO who, in a global economy, must be able to communicate effectively to a foreign audience. Often this is a tricky situation, particuarly when a joke falls flat, as Peter Gregg discovered on a stage in Hong Kong.

"I thought it was pretty funny, but no one else did," he says. Stanhope describes cross-cultural audiences as being some of the more challenging situations in a CFO's repertoire. "You have to understand the audience to whom you are speaking; any idiosyncrasies or ethical differences have to be taken into account.

"It can never be quite the same presentation that you'd make here. You have to speak more slowly, because [the audience's] absorption of the English language takes time. You also have to choose your jokes carefully."

Westpac's Chronican, too, has learned to speak more slowly and to always check the intention of a question that often loses its meaning in translation. "The difficult moments are usually where the language barrier is real," he says.

But isn't the language of numbers universal? "The numbers are, but the questions are never about numbers - they're always about 'why?'" says Chronican. "'Why do the numbers look this way?' 'What's driving them?' 'Where are they headed?' It's very rare you'd go to a meeting and have a factual question about a number."

Australia's top CFO communicators

An informal poll among buy-side and sell-side analysts of CFOs regarded as exceptional communicators repeatedly saw these names emerge (in no particular order):

Chris Skilton, Suncorp Metway: "The key to effective communication is to present the information in layman's terms without being superficial or misleading in any way. The only way you can do that, though, is to actually understand the underlying drivers of the business. The confidence to do that only comes from thorough preparation."

John Stanhope, Telstra: "The feedback about my communication to an audience from the most recent announcement we made was that it was straight to the point. My confidence about what I was saying gave the market confidence about what they were hearing. As a CFO you want to establish the sense that you know what you're talking about."

Guy Elliott, Rio Tinto: "You have to make an appropriate crafting of your message to meet the needs of the audience. It's got to be a two-way process; it's very important to be able to listen and to hear. You have to be able to hear what people want and what their reaction is. I think that's particularly important with the owners of the company."

Phil Chronican, Westpac: "Our audiences are discerning and unforgiving. They're unforgiving of spin and they are unforgiving of people who don't know their material and display a lack of depth. They're quite forgiving of style issues because they are actually looking for substance."

Peter Gregg, Qantas: "I'd say my communication style is developing. Being an economist by training, I use a lot of words because I'm used to presenting all sides of an argument before I reach a conclusion. I think my style is direct and I try to be engaging in the process. By comparison, [Qantas CEO] Geoff Dixon is very clear in what he says, he says it with a limited number of words and he does it in a style that's quintessentially Australian."

Michael Ullmer, NAB: The man of whom his former Commonwealth Bank of Australia peers said "could count it but not make it". The market's opinion of the former auditor's communication skills echoes the sentiment. "He's dry, clinical and numerate," says one analyst. "He's an effective communicator, but he's more comfortable talking about improving returns than he is about the fruitier, strategic matters."

Geoff Kleeman, PBL: Described variously as relaxed, chatty and garrulous, Kleeman is perceived as being an all-rounder who can talk about the numbers as well as the meaning behind them. "He's pretty numerate, but he's also prepared to step into the broader areas of the business," is one evaluation.

Steve McKerihan, St George Bank: He's been 2IC to several St George Bank CEOs, and the market has learned to expect a high level of consistency from the man they describe as being an amiable, likeable and capable CFO who likes talking about the broader business strategy.

View this article on the CFO web site | Back to top

COVER STORY: Mahogany ceiling.

Five of Australia's top directors tell Ann-Maree Moodie how the new governance era will affect boards, and why CFOs who aspire to a seat at the table are 'dangerous'

Now that the legal and regulatory frameworks for the post-Enron era of corporate governance are in place, the time is right to assess the effect they are likely to have on boardroom conduct and dynamics in Australia.

CFO invited five of the country's most distinguished and high-profile company directors to discuss their views on the subject in a roundtable discussion.

They are David Gonski, chairman of Coca-Cola Amatil and a director of John Fairfax Holdings (publisher of this magazine); Catherine Livingstone, chairman of the Commonwealth Scientific and Industrial Research Organisation; Alan Castleman, chairman of Australian Unity; professional director Anne Keating; and Stephen Chapman, executive chairman of investment bank Baron Partners.

CFO's corporate governance writer, Ann-Maree Moodie, led the discussion, and CFO managing editor Roger Hogan was also present.

The participants' comments covered many aspects of board activities and the relationships between boards and stakeholders, all of which are of interest to chief financial officers, whose own roles - largely as a result of new corporate governance initiatives - are becoming increasingly fiduciary in nature. The roundtable participants' views on CFOs' relationships with boards - and on whether or not CFOs should aspire to sit on their companies' boards - make for particularly interesting reading, and have been separated from the main text for ease of reference.

Boardroom behaviour

CFO: How has boardroom behaviour changed since the introduction of regulations and guidelines such as the Australian Stock Exchange Principles?

Anne Keating: I think there's a much higher engagement now with the whole community, the whole investment community, retail and institutions - the main difference is a reflection of the greater sophistication and demands of the shareholder. This manifests itself in many ways, such as in the sheer numbers of the participants in AGMs. I think the institutions are also being more active, not necessarily publicly so, but they are, I think, more responsible, and holding companies more accountable.

Alan Castleman: The regulators in particular are taking a stance these days that is quite contrary to that which used to be the case.

At Australian Unity, where we have a health fund subsidiary, we have had the strange situation where this year the regulator required two non-executive directors to sign off on the application for the price rise. Increasingly we're finding regulators, including the Australian Prudential Regulation Authority, saying that board minutes aren't specific enough. That's arising from an excessive position, in my view, from regulators who try to impose on boards how they should go about their activities.

Catherine Livingstone: I think boards, and the role of the board, are being caught up in this move towards reduced tolerance for risk, almost a zero tolerance, and boards have become a very convenient safety net for many constituencies as the last resort for risk. Boards actually can't lay off the risk to anywhere else, but everyone can move the risk to the board. So the institutions, the retail investors, the regulators, they all are putting pressure on the boards to carry more and more of the risk and to minimise - if not eliminate - the risk, which is something that boards can't do.

David Gonski: There has been a failing to remember that companies are involved in risk. That's what they were started for. Quite frankly, people have to realise - and I believe, by the way, that with good education, financial literacy, people will understand - that investing in companies is risky, and that you have your good years and your bad years.

Alan Castleman: The cult of the [chief executive officer] 20 years ago ... lingers even today. There is still the sense that if you have the right person as CEO everything will be all right, and if you get the wrong person it will be a disaster.

That has led to the levels of income that we've seen - this sense that you've just got to pay whatever it takes to get the best person. That has changed, and I think it's a good thing, because the CEO is one very important person, but not the only person. It's a great mistake to assume that any single person is, or should be, all-powerful.

CFO: Boards make decisions as a collective body, which is why the term collegiality occurs so often in boardroom parlance. How are boards dealing with the collective decision-making and the collective responsibility and accountability for the decisions they make?

Catherine Livingstone: The sense is that boards now feel more empowered and more responsible. It's hard to put your finger on it, and it's wrong to say there is more energy, but there is a greater degree of animation and engagement. The CEO and the board are now more working in partnership.

Anne Keating: Well, I've never put collegiality at the top of my list. I still believe boards are made up of individual directors, and I'd say probably most boards are able to reach agreement. However, where you get to situations where there are differing opinions, particularly on matters of principle or on significant business transactions, then you have an obligation to make those differences known, and certainly record them in minutes.

I think we are all far too tolerant of directors who have presided over companies that have failed, or over major decisions that have been demonstrably wrong or have gone against the advice of the chief executive, and I think the accountability just has to be there.

Boards are not training grounds. I don't think you should get a second chance.

If you show bad judgement once, that should be enough, and I think the institutions need to hold directors as finally accountable for poor judgement. As a country, we are too tolerant of failure.

David Gonski: I can understand what you're saying, but I don't agree with it. I think the first thing I would say is that I'm not totally convinced that any one director makes the decision.

I sat down a few months ago and worked out, in relation to a particular transaction we were doing, how had I contributed to this as a director. It was actually quite hard to work out which was my bit.

I played my part and I was proud of it, but it was a group-think exercise, and that's as it should be. Now let's assume that we made a mistake there. If that was a mistake, firstly I think it's too much, too high a hurdle, that if you make a mistake once, you're out. The sign of a good director is how you deal with your mistakes.

Anne Keating: I'm talking about the mistakes that really seriously affect shareholder wealth. Everybody has made the odd business error of judgement, but if a mistake is made that will completely destroy the shareholder wealth, then I'm not sure you should be given another opportunity.

David Gonski: Let me test you. Let's assume I'm on the board of a computer company and I decide that no one is going to go to personal computers, so basically we should continue making big boxes and let Microsoft and those people die as time goes on, and I got it wrong.

Now I didn't do that for my own advancement; it was my ability or inability to see the future. It was a mistake. But business is about risk, about reward, about the future.

I'm worried that if you're going to say, "David, if you make a mistake you're finished", my response would be that I'm not going to do anything other than tick boxes, because what's the reward for me to take a bold step? The bold steps are what make business.

Anne Keating: But you've prevented a bold step, so in that example I would hold you accountable for that. The cost to the community [and the company] would have been significant.

David Gonski: So I should be out?

Anne Keating: Yes.

David Gonski: Out of that company? Or out of all corporations?

Anne Keating: I don't say you should be out, but I don't think you should be offered a similar scale of company.

Alan Castleman: I disagree with Anne. If you were on the board of a petroleum company and made a call that oil prices were going to stay high, and all the economists, or 90% of the economists in the world, agreed with you and all the consultants agreed and the competitors agreed, and you made some investments as a consequence of that judgement and then the oil price collapsed, you made a bad judgement and damaged your company because you were caught with a heavy investment at that point of time.

I would have thought that directors who have been through some of those experiences are probably seasoned in the consequence of it.

Anne Keating: But would you agree that we are too tolerant of errors and failures?

Alan Castleman: Well, I think we're too tolerant of people neglecting their duties and responsibilities.

Boards and corporate culture

Anne Keating: I think the example of the National Australia Bank highlights what I'm saying. We're not just going to rubber-stamp directors being re-signed when they have presided over major failures.

Alan Castleman: The bigger issue to me with the NAB [last year's $360-million foreign exchange options loss] was that they had allowed a culture to develop in the bank over quite a period, which the directors should have been aware of. Now, if they had only ever sat there and read the board papers they wouldn't know about that, but if they had listened to what others were telling them, and directors were being told that there were features of their culture that weren't good, then they should do something about it.

I always get very suspicious if I hear funny things going on in a company. I like to check into it and find out, because it is these cultural problems which you can do something about, and if you fail to do that then I think that's the serious error of judgement.

CFO: Is this because directors are not required to delve into the machinations of the business to understand what really might be happening?

Catherine Livingstone: I think that's probably true, but quite tough to do, and it can be counter-productive if you have directors coming back with a great deal of anecdotal evidence. That can be very distracting.

I just wonder whether perhaps it isn't an issue of directors not standing back far enough and understanding the fundamental business model underpinning the business of which they are a director.

The key question to ask is: how does this business make money? That would have flushed out some of the issues with NAB in terms of some risky areas. It would have flushed out One-Tel. It would have very clearly identified HIH, because the business model wasn't a sustainable one.

If you can't describe a business model on one page, in very high-level terms, and if you as a director can't see where this business makes its money, then you probably don't understand enough about the business.

CFO: Do you think the board is responsible for setting the culture of the company, for perhaps understanding - and I'm using the jargon deliberately - the "soul" of the company?

Anne Keating: Yes. I think if directors are really doing their job they become engaged with the executives, and I believe I have learnt far more from casual conversations with executives about the business than I ever learn from the board papers.

David Gonski: I don't mind the concept that the board is responsible for the culture of the organisation in terms of what they can see. I think one should be involved and talk to the senior executives, and if they have a culture that is foreign either to the business model or the way business should be done, I can see a responsibility to do that.

What worries me is that if you are talking about the culture that pertains in the business of a particular company - say, in India - where the company is run in Sydney, there is not a lot that I believe as a director I can do. If my responsibility is to make sure that the culture is right there, all I can do is do as you said, and that is to talk to the person who indirectly is in charge of India and get a feeling for what sort of person that is, choose the right chief executive, and have an open culture within the board. There's not much more I can do.

CFO: What would you do, Anne, if you found the chief executive was instructing executives not to talk to you?

Anne Keating: That would immediately raise a flag for me that there was something he was trying to hide. So that would actually be a positive. If I picked that up, that would tell me an awful lot about the person who was selected to be chief executive.

If directors think they can just come into a boardroom and be isolated from executives and only see the presentations, they will never feel the pulse of a company.

Director recruitment

CFO: During this period of boardroom reform, how have boards changed their attitudes towards board recruitment?

Stephen Chapman: I actually think personal characteristics have become more relevant. You can have a check list that tells you're independent, but independence of mind is a different thing.

David Gonski: I remember 25 years ago, when I was advising boards, they all looked very much the same. They looked very old to me because I was young, but they were 60-year-old-plus men, who generally wined and dined together and worked together. Today that's not the case, and I think that's great.

Alan Castleman: I think independence is a quality you add on top of something else, but in the small companies you simply can't afford to go paying a level of directors' fees to someone who is merely independent. You need real input from them, or you're wasting the company's opportunity and its money.

I like to think that every director is independent of mind, whether formally independent under the listing rules or not.

You need people who are independent, but at the same time understand and are responsive to the importance of collegiality.

That is, you don't want a bunch of people, all of whom want to fight each other all the time. As has often been said, you can be more independent if you actually know what you are talking about than if you don't.

Director independence

CFO: How do you judge the board to be collectively of independent mind? How do you define a breach of independence, and what can you do about it?

Catherine Livingstone: I think you can sense when someone is speaking whether they do have independence of mind. It's important to get to know your fellow board members, and I think time spent together is important, just as time spent with the management team is important.

I think it is helpful to have, for example, dinners before board meetings, not to talk about board issues necessarily but just to get to know people. So getting to know your fellow directors is very important, and then that helps you make judgements about their approach to topics.

CFO: Is there a difference between "independence" and a "conflict of interest"?

Catherine Livingstone: I think boards are being very careful about conflict of interest and declarations of conflict of interest. I think that every board I'm on has a very key process for that, and you do have directors coming in just to avoid any suggestion that there's a conflict of interest.

Alan Castleman: I've had, in one of my companies, a director who frequently had conflicts of interest, but it didn't stop him being an extremely valuable director. He always declared his conflicts. His conflicts actually meant that he had a lot of information and knowledge that was very valuable to us. I don't mind conflicts of interest. I think they have to be disclosed and they have to be managed, and you have to act appropriately with them, but indeed I feel it is often excessive to ask people to step out of the room because of some minor level of conflict. I think as long as their colleagues know about it, as long as they respect the fact that they have a conflict on board and may be steering the debate to their interest, you should be able to manage around it. Of course there are extreme situations, and you also have to be sensitive to public opinion and the appearance of these things.

CFO: Anne, do you think it is possible to exercise "unfettered judgement" as the ASX Principles state?

Anne Keating: Yes, I do. The conflicts of interest, I think, are fairly easily dealt with provided they are declared. It's the ones that aren't declared that exercise the independence of the other directors, and they are the ones that really put the independence to the test.

The greatest conflict of interest, as far as I'm concerned, is the way in which people come on to boards, and sometimes I've been conscious of the misplaced loyalty towards a chairman who has invited someone on the board. That can be a real issue and I think it is really terribly important there be a process adhered to that somebody who comes on to a board at the invitation of somebody else, the relationship is declared.

I've seen a board member come on to the board and be introduced to every board member as brand new - the first time they meet them is at the board table. The new member has been introduced by one person, and I think that's very unhealthy.

Stephen Chapman: The nomination process is something that has changed from 25 years ago, where they were not only 60-year-old men but they probably went to the same school together. That has really changed and is really refreshing. What's really dangerous is when CEOs claim credit for appointing non-executive directors around the place, saying, "I'm really happy because I managed to appoint that person". It's dangerous if a chairman or CEO appoints a non-executive director because they think they might be sympathetic.

David Gonski: I'd like to return to the question about independence, because I'm not sure that independence of mind is what you necessarily want on a board. All right, we've discussed that you should be independent, but that's different from independence of mind.

Ann-Maree and I have talked in the past about how good boards are like orchestras, that everybody is playing their part in hopefully a wonderful sound that makes a great success of the orchestral performance. But the fact of the matter is that we have to work together and ... we must be able to have our say and not just go along with the flow. You cannot allow the first violinist to dominate the whole orchestra, or the orchestra in the end will lose its place and go off in a terrible thing.

Anne Keating: At IAG I was very much the dissident director, with every other director disagreeing with me, and because I would not give a vote of confidence in the chairman I was asked to leave.

I thought that was not the right thing to do, and came to the conclusion myself that the only way that I would make change was to actually stay and tough it out. By maintaining that independence and effectively forcing change, it was in the best interest of the company.

Whether it was in my best interest remains to be seen, and I didn't do it out of self-interest. But I do say it was in the best interest of the company.

Another thing I will say is that had I not had the relationship that I described earlier with the executives, I couldn't have done it either, and I knew I had their support.

David Gonski: If you feel something is wrong you must speak up, and the thing you talked about - us trying to get rid of dissidents - wasn't to try to get rid of dissidents, it was to get rid of poor performance. We want to be able to have the dissidence when it is required, but what we don't want is six people all arguing because they think they should dominate the thing.

CFO: In group dynamics theory, this is known as the black sheep phenomenon, and the person is a dissident or maverick.

Alan Castleman: I occasionally have a director who disagrees with the point of view. They record the fact that they didn't agree and you just go on, there's no ill-feeling, you respect their point of view, but you just get on with it. You don't carry personal animosity as a result of a difference of view.

I'd like to think, even as chairman, I have gone down on the odd issue with my board, but it's not over an issue of confidence in me.

David Gonski: I may be hoisted on this, but I would be very upset if there was a major dissidence situation on a board of which I was chairman. That would be a failure on my part because the dissident is entitled to say things, and obviously it can get out of control. But having said that, I think a good chairman gets the views, but the directors have to understand that if there is a majority against you, you move on. I've lost on resolutions many times. I accept it. I don't think there is anything Machiavellian or malevolent in people disagreeing with me because maybe I'm wrong, and I think people have to accept that.

Roundtable

Anne Keating Professional director

Alan Castleman Chairman, Australian Unity

Catherine Livingstone Chairman, CSIRO

David Gonski Chairman, Coca-Cola Amatil

Stephen Chapman Exec. chairman, Baron Partners

Ann-Maree Moodie CFO columnist

Roger Hogan CFO managing editor

Dangerous aspirations - Boards and CFOs

What sort of performance and information is required by the board from the CFO?

Stephen Chapman: So many boards are wanting their CFO to be a visionary person who understands, which is a real problem. The CFO, depending on their personality, wants to play a strategic role as well as one in which they delegate the numbers to some financial controller or accountant. I think the idea of a generic CFO is a real danger.

CFO: So what determines what the CFO role should be?

Stephen Chapman: For a start, when you are appointing a CFO, either internally or externally, so many people hire based on what a CFO looks like rather than designing what is needed.

CFO recruitment needs to go back to the basics - what does this company actually need in its current circumstances, and what should be driving it?

Catherine Livingstone: It also depends on the skills of the CEO, because the CFO is very valuable in terms of complementarity to the CEO. CFO and CEO is the closest relationship in the management team. It's almost one, but a CEO and a CFO have to fit.

Anne Keating: The CFO plays an absolutely critical role in the success of the company. Boards depend on the judgement of a CFO, particularly where you're balancing risk on one side and have somebody who's the chief risk officer, who will always want to minimise the risk and squirrel away more money, as opposed to the CFO, whose interest is keeping money on the balance sheet.

So there is a natural tension there, and you very much want to believe that you have a CFO of high moral integrity and ability, but also someone who can hold their own in an argument and who is prepared to have that argument in front of a board. Natural tension is a healthy thing. You don't want someone who is just going to give you a party line where the executives have all agreed. I have always said, if there is an argument, I want to hear what the argument is, and I think that's a good thing.

CFO: Should the CFO fit the mould of the company rather than shaping the company?

Alan Castleman: The CFO should fit the type of company and the condition of the company at that particular time.

David Gonski: The CFO must be the board's assistant in understanding the financial performance of the company - they've got to be able to deliver bad news. That would be the test of a good CFO, because delivering good news is easy.

Catherine Livingstone: The CFO has to be independent. A board relies on the CFO to deliver the bad news and also, coming back to my earlier point on the business model, to help the board come to grips with the business model and the financial consequences when that model changes.

CFO: Should the CFO be a member of the board?

Catherine Livingstone: Either way, I don't think it increases or diminishes the responsibility of the role of the CFO.

David Gonski: The question is not whether they're on the board or not, but whether they should attend or not. I strongly believe the CFO should attend. Obviously there will be periods where they shouldn't, where you're talking about them or something that is among the board, but for the CFO not to be there, coming back to what you were saying about information, basically is ridiculous. They are the lifeline.

Anne Keating: I think once somebody is a board member there is a definite change in the relationship.

I think it's much easier to have a more supervisory relationship with them, as I believe you should have with a CFO, if they are not a board member. It also may make it difficult for a CEO as well to have the CFO there.

Alan Castleman: Well, CEOs tend not to like to have the CFO there ...

Stephen Chapman: What concerns me is the number of CFOs wanting to be on the board, which I think is dangerous.

They are thinking they are much more important than they should be, and I have seen many examples of CFOs basically holding you to ransom and saying, "Well, it's either a board seat or I leave".

CFO: What about a CFO of the company you are governing taking a seat on another non-competitive industry board as a non-executive director, in order to get board experience?

Catherine Livingstone: I think it's positive.

Stephen Chapman: The ones I've seen that have worked is when they take a board seat on an industry body or community-related thing, and are exposed there.

Alan Castleman: I had a CEO who took an outside board position and subsequently observed to me that he could see things from another perspective. He could understand better why the directors sometimes hung on to certain things.

David Gonski: The CEO and CFO have an enormous danger of becoming very narrow in their thinking.

But you must keep people broad, because if they become narrow they don't understand what's going on outside and, secondly, they could become bored, which is probably even more worrying.

Catherine Livingstone: I think it really does help whether it is the CFO or CEO or both, for them to be able to be in a situation where they are on the receiving end of board papers, board information and board presentations, because I think perhaps one thing we need to spend more time on is the conversation between the board and the management team about what information, how, what are we trying to achieve here, and sort of refresh that conversation quite frequently.

You can have situations where there is frustration building up in board members and the management team with more and more information, and not addressing the questions that are in board members' minds.

So I think that, as well as the broadening of experience, it is just the practical side of understanding what it's like to be on the receiving end of a board paper presentation. And people do make the time to do this. You get significant benefit from that.

View this article on the CFO web site | Back to top

SHORTCUTS

CFO Magazine The Boardroom Balancing Act Taking the Step to Board Level Keeping Good Companies Managerial Language The Meaning of Independence Individuality, Liberty & Absolute Freedom What Makes a Good Board? CCH The Twenty-First Century Board Local Heroes Small Poppies breakout