Australian CPA
Australian CPA April 2004.
Writing on the wall.
Perfect directors are independent but loyal, discreet but transparent, specialised, but broad based: but where do you find them? Tom Ravlic goes in search.
Anybody with banking experience available to serve on the board of a bank that needs some? That's the question being asked by the board of the National Bank in its search for a person with just that background.
It is a search that received a fair public airing after the very public furore over the bank's foreign currency losses of $360 million and has led to a broader questioning by members of the press and others as to whether the National's board had an adequate skill base available in order to be able to ask the right questions about what the company's currency traders were doing.
What the National's circumstances and - indeed, those of corporations such as HIH and One.Tel - have also done is given further fuel to the debate on how companies can get the directors with appropriate qualifications and experience to act as the necessary check and balance.
Accountants are seen as being particularly useful in such a role because the discipline equips them to deal with the various aspects of a company's financial existence.
However, there are certain regulations covering accountants which may make it difficult for companies to source the relevant expertise.
Corporate governance expert Professor Ian Ramsay from the University of Melbourne says this is because the pool of talent that can be drawn upon may be smaller as a result of changes in laws already in existence in the US and also being contemplated here that restrict certain accountants from being members of the board of former audit clients, for example.
Cooling off periods for former partners, who might want to join company boards of an existing audit client have been created to combat the perception that an auditor is less independent if they jump directly from the professional accounting lilypad and straight onto a board of an external audit client.
There is also a proposal in the ninth installment of the Corporate Law Economic Reform Program that would limit the number of former partners that could serve on a board of directors or in the corporate management of a company.
This is something that is unique to the profession, Ramsay says, because clients expect auditors to be independent so their review of financial statements is viewed by the community as providing a high degree of assurance about the state of a company's numbers.
By comparison, he says legal professionals, for example, do not face the same issues as auditors and other members of the accounting profession.
'No one expects lawyers to be independent. The client does not want the lawyer to be independent. They wants the lawyer to be a hired gun,' says Ramsay.
The restrictions that apply to auditors and their fellow accountants have the effect of reducing to some degree the pool of obvious candidates for boards of directors from the accounting profession.
Organisations such as CPA Australia have sought to create a database of individuals that are suitable for and available to serve as directors on company boards.
These registers have been set up for the purpose of making it easier for companies searching for a certain set of skills - those of an accountant in particular - to identify an individual or individuals that might fit the requirements for a specific board.
CPA Australia's chief executive officer Greg Larsen says the directors' register was established by the country's largest accounting body for several reasons.
'We believe that with the new corporate governance guidelines and the expectations on directors that there will be a need for a wider range of candidates.
'That range of candidates will need to understand corporate governance standards and accounting.
'Professional accountants have a range of competencies that will be in demand as we go forward,' Larsen says.
'In many cases the accounting skills have been drawn from the auditing profession and the independence requirements mean that these skills will need to be sourced from areas other than experienced auditors.'
Larsen also notes that there are many members with experience who are prepared to put themselves forward for directorships in various entities.
'Some of those will be publicly listed companies but there are also many not-for-profit and government owned entities and voluntary organisations where the skills of members can be put to use, irrespective of whether it is a remunerated role. Remuneration is not necessarily an issue.'
While it is critical for a board of directors to have the right mix of skills for decision-making, the skill sets alone are not what will ensure the board functions effectively.
Having a well-qualified board of directors is a bit like having a backyard shed full of tools. The tools are not much use unless they are used in a way that achieves the optimal result.
A corporate governance adviser specialising in boardroom behaviour,
Ann-Maree Moodie, says board members need to engage fully in debate during board meetings to ensure that board members make the right decision.
'In order to do this each board member must be able to exercise good judgment and the ability to formulate and execute an argument,' says Moodie.
'They must be courageous in order to defend their position against a position put by their colleagues, especially where the board is one that promotes a collegiate environment.'
Moodie sees the role of the chairman of a board as managing the meeting and creating an environment during which vigorous discourse can take place. She says the chairman needs to be able to tap the potential of each member and get the best possible contribution out of them.
SAP chief financial officer Tim Ebbeck FCPA was recently appointed to the board of directors of a company called Skynetglobal and he, too, talks of the virtues of debating at the board table to ensure those managing a company get the widest possible range of perspectives to help them along the road.
He believes the value he adds as a non-executive director in the Skynetglobal scenario is the ability to look at the business in the wider context - something managements of companies across the board may be guilty of not doing because they inevitably get too close to the business to see some of the issues unfold.
Why would a CFO of a company that is a US registrant, with all the compliance bells and whistles that accompany such positions, want to join the board of a fairly young company? 'I don't see myself as someone that just wants to sit in one corporation.
'I think there's value I can bring to my existing company by getting a broader perspective,' Ebbeck explains.
'There's certainly value for my career in sitting on boards, which I have done in the past as well, while having a full-time job.
'There are obvious issues I have to address with SAP and time devotion to the non-executive director role. We've covered those issues off satisfactorily,' he says.
Company boards cannot just rely on their own skill sets to see them through specific issues.
Boards of directors will often need to seek the best available advice to navigate their way through the specific transactions such as mergers and acquisitions or new regulations such as international financial reporting standards or the governance guidelines that have been promulgated by the Australian Stock Exchange.
The way boards have to choose their advisers going forward has a very direct effect on the profession after many of the corporate governance reforms that have been proposed by the federal government in CLERP 9.
Peter Ickeringill, the chairman of the legislative review board of the Australian Accounting Research Foundation, says there has also been a heightened level of scrutiny from investors that is adding to the pressure on directors.
'Politicians and the shareholder public seem to expect a lot more from directors today than they did a century ago. We have seen the acceptance of genuine mistakes replaced by a zero tolerance for mistakes. We have seen a conservative media replaced by a sensation-seeking media,' Ickeringill says.
'We have seen ambivalence towards the corporate sector replaced by keen interest and scrutiny.'
Debates over auditor independence in recent years has caused a shift in the behaviour of some company boards as it relates to seeking advice on accounting matters and similar items.
There was a time when the external audit firm may have been called upon to deliver a wider range of advisory or consulting services.
John Shanahan, a partner at specialist financial reporting firm Robertson Shanahan, says the present situation could result in some companies buying what is perceived as independent advice, but it may not be the best possible advice in some situations.
'Independence is now something at the forefront of everybody's mind. One classic example is the move to international accounting standards. Who do you go to?
'Do we go with our auditor who tells us what to do, follow their instructions, and then have them come back and audit how well we have followed their advice?
'When you put it in those terms it is a clear independence-impairing situation,' says Shanahan.
'The resolution is somewhat harder. Who else can you get advice from?
Let's go to another one of the Big Four competitors which doesn't know much about us and which has been trying to get into us, whereas the external auditor would have more knowledge and be able to help better but that would be a classic independence-impairing situation.'
Independent financial reporting expert Colin Parker suggests another reason why company boards have begun to seek out other advice related to financial reporting and governance.
'What we are seeing is that because of the pressures on corporate governance, issues arising out of CLERP 9 and the move to international financial reporting standards some boards and audit committees are saying, 'We've heard this from our auditors, but we would like to hear it from another perspective.'
'So you are really getting two voices going to the board or audit committee.'
Where are directors coming from?
Of the FCPAs who have signed up for CPA Australia's Directors Register to date, 36 per cent come from Victoria and 28 per cent from New South Wales. The majority of applicants (45 per cent ) are from commerce and industry; 17 per cent are public practitioners; and the rest are a mixture of academics, public sector, not-profits and contractors. One quarter are managing directors or CEOs, 19 per cent are CFOs and another 19 per cent are general managers.
'We have many members who have got tremendous experience who are willing to put themselves forward for a directorship role'
Greg Larsen FCPA, CPA Australia's CEO
'No one expects lawyers to be independent. The client does not want the lawyer to be independent. He wants the lawyer to be a hired gun'
Professor Ian Ramsay, corporate governance expert
'They must be courageous in order to defend their position against a position put by their colleagues, especially where the board is one that promotes a collegiate environment'
Ann-Maree Moodie, corporate governance adviser
'I don't see myself as someone that just wants to sit in one corporation. I think there's value I can bring to my existing company by getting a broader perspective'
Tim Ebbeck FCPA CFO of SAP Australia and board director of Skynetglobal
