Why aren't boards listening any more?

The now infamous arrogance displayed by the board of AMP over an extended period of time reflects a pervasive problem of culture across corporate Australia. And its overarching cause and symptom is the refusal of boards to seriously consider the views of their major shareholders until it is too late.

There are many lessons to be learnt from AMP’s self-inflicted wounds over the past month, but one takeaway message for shareholders is that they do have the power to bring about cultural change.

It wasn’t the staff revolt against culture inside AMP that finally forced the beleaguered board to act, it was the seven-day deadline imposed on it by the company’s largest shareholder, institutional investor Allan Gray.

AMP has form in this regard. Just two years ago, the AMP Board, led by David Murray, dismissed the legitimate concern of its shareholder Merlon Capital Partners, that the sale of its life business which resulted in a 22 per cent drop in the AMP share price should have been put to shareholders. The refusal to have any meaningful engagement with Merlon was a sign of things to come.

We are now watching this play out at Cromwell Property Group, whose board is leading a sustained campaign to disregard the concerns of the company’s largest shareholder, ARA Asset Management.

The Myer board under chairman Garry Hounsell spent an inordinate chunk of the past two years thwarting major shareholder Premier Investment’s quest for board representation to guide a turnaround strategy for the troubled department store.

Allan Gray’s Simon Mawhinney recently described QBE’s decision to keep shareholders in the dark about the specific rationale for ousting chief executive Pat Regan as “another example of poor corporate transparency”.

In a characteristically insightful analysis of a podcast released by ANZ chief Shayne Elliott, The Australian Financial Review’s James Frost described how the pandemic has accelerated a shift in the way companies need to balance their obligations to stakeholders.

There is a lazy, self-serving interpretation of the principle of director independence.

Elliott said in the podcast: “If my job was to run the bank for tomorrow, you know like from Saturday to Monday, as opposed to for next year or for five years or 10 years out, you would make different decisions.

"Your horizon has to be much longer because you need to see your way through and therefore things like reputation matter because in the long term that sense of purpose or reputation will sustain your company and the value that you create ... ."

The failure of Australian boards to listen respectfully to shareholders wanting to tell them things that they may well need to hear is too often explained away – publicly, among themselves and in their own minds — with a lazy, self-serving interpretation of the principle of director independence.

At what point did the critical importance of having directors who are independent of management morph into the notion that directors must be independent of shareholders – the very group they are supposed to represent? Since when does good corporate governance justify a defensive war at shareholders’ expense with a major shareholder seeking board representation?

Research undertaken by Monash Business School in 2018 found that 20 per cent of ‘independent directors’ are significantly distracted from the companies they oversee, attending fewer meetings, trading less frequently in the firm’s stock and resigning from boards more frequently.

The researchers surmised that the data indicated declining company-specific knowledge and reduced board commitment, greater reliance on management advice, and declines in company value and performance.

Last year, as part of its review of corporate governance principles and recommendations, ASIC sent an organisational psychologist into the boardrooms of some of the country’s largest financial services companies. She spoke to many non-executive directors who believed they should trust the judgement of management and minimise conduct that risked undermining management’s motivation. Yet many of these same directors refuse to listen to the legitimate concerns expressed by the owners of the business.

Among the ASX’s best performers are companies which have founders or major shareholders sitting on the board – people whose interests in the long-term growth of the business are aligned with their own personal interests. Our most recent Australian success stories — Zip, Afterpay, Kogan and Xero — all have founders or major shareholders sitting around the board table.

These people see the culture inside the business as a reflection of their own values and reputation. They are focussed on maximising shareholder value, in part because their interests are aligned with shareholders.

One of the many changes wrought by the pandemic is a structural shift in the economy and the way in which companies deal with risk. Perhaps what we need as we move beyond this once-in-a-generation upheaval is to consider whether an over emphasis on form rather than substance has contributed to the events we have seen play out at companies such as AMP, Cromwell and Myer.

Too often, our regulatory environment gives boards a licence to ignore the views of the very stakeholders they are meant to represent — shareholders.

Our regulatory regime should encourage boards to seek out directors who bleed when the stock price plummets, whose own interests rise and fall with the success or failure of the company and who have the courage to listen, even when they don’t much like what they hear, to the views of those who have the most to lose if a company loses its way.