COVER STORY : Spotlight on Directors – New survey reveals hard truths

When survey of New Zealand directors was launched earlier this year, it aimed to reveal the true nature of the state of organisational governance in New Zealand. Boldly broadcast as the largest and most authoritative nationwide survey of its kind to date, among other things it wanted to know whether New Zealand companies and other organisations have easy access to high-quality directors. Are our boards populated by directors with sufficient competence to do the job, it asked? And, do Kiwi directors believe they are effective?
Jens Mueller, associate professor for entrepreneurship and strategy at Waikato Business School, and company director Sandy Maier are the mainstays behind the survey. They’ve also got the public support of raft of organisations. Coordinated by Waikato University’s Management School, Mueller and Maier’s work is backed by corporate and professional heavyweights that include Simpson Grierson, KPMG, Sheffield, the Bank of New Zealand, the New Zealand Shareholders Association, the Institute of Chartered Accountants, the Government’s Crown Company Monitoring Advisory Unit (CCMAU), the New Zealand Venture Capital Association, Brook Asset Management and The Director.
Findings so far paint fascinating picture of the stresses and struggles inside our nation’s boardrooms. While the Directions 2006: Understanding Governance survey remains open to new respondents (see box story “Still filling the knowledge pool”) its proponents say the data to date is sufficiently robust to demonstrate some key underlying trends.
“If we had to say in 10 words or less what the survey is all about,” says Mueller, “it’s that we want to stimulate discussion.” Add to that desire to provide factual underpinning to such debate. “All too often,” adds Maier, “discussion takes place with raised voices and no facts.” This “battle of assertions”, as he calls it, could, in his opinion, be about to end.
Take, for instance, the revelation that in the next five years these respondent companies alone will need to find another 1960 new independent directors. Extrapolate that out across the nation’s business community and alarm bells start to ring. That’s especially so among small and medium sized enterprises – which represent whopping 96 percent lion’s share of New Zealand’s businesses and which lack the market magnetism of big corporates when it comes to attracting talent at the top.
Able to offer heady mix of more dollars, media headlines and stock market attention, big business exerts stronger pull and will doubtless remain at the sexy end of the directorship scale. Smaller businesses, in no less need for good corporate governance, struggle to attract talent. Indeed, Maier reckons they are already fast approaching crunch point.
The Directions 2006 survey shows that, across the board, in 40 percent of cases directors themselves find incoming directors. They are the single largest source of new blood. Management follows in the number two slot in providing the link to the next generation of board members. This raises the significant issue of where tomorrow’s directors will come from and how business as whole can reframe its search processes.
Directors are currently selected in way that most likely will not allow future directors to emerge, says Maier. “Because if Tom, Dick and Harry all go golfing and Tom recommends Dick, and Dick recommends Harry we’re not going to have room for anybody new from the outside.”
It’s pretty clear, he says, that this old “informal, incestuous” way of selecting directors will not work in the future. In any case, he says, when it comes to SMEs, common sense dictates that they cannot afford to source directors through search firms. “They don’t pay enough to begin with… so new tools have to come into being.”
There is “virginity conundrum” here too. “Most people say that they want person with track record of directorships,” notes Maier. “The problem is that not everybody springs forth from the brow of Zeus having had directorships before. The choice is you either start totally unprepared or you say that preparation in range of subjects – such as law, finance or sociology, for example – is good starting point and competencies can be built up…. People have to start somewhere and they might as well be intellectually and academically prepared.”
Mueller says the survey results highlight the current lack of “an open, easily accessible unbiased format” by which directors and organisations can find each other and through which individual directors can find out what other directors are currently doing.
Add to that, the finding that 41 percent of the respondents to date say their organisations have no independent directors. This, as Mueller points out, appears to lag behind the global trend of requiring some (if not most or all) directors to be independent and raises questions of the quality of some decisions being made.
“We’re not saying that dependent directors are necessarily bad,” says Mueller, “but they must be schizophrenic so that they can disassociate their personal lives at the firm as pay cheque recipient from their lives as directors.”
In any case, why would supposedly accomplished businessperson want to be director? Directions 2006 shows that top of the list lie the desire and ability to “do some good”. For this bunch of people, at least, dollars are not the key driver. Given New Zealand’s relatively harsh risk profile for directors when it comes to personal liabilities, it comes as no surprise that this bunch of respondents say they want to work for firm that has good reputation.
The learning from this, says Mueller, is that some organisations may need to make themselves more attractive to the kinds of prospective directors that they want.
More revealing still, when current directors were asked about their own competence, the only area they rated as excellent was their commitment to the business. As group, respondents gave the next best marks to their ability to be team player.
In other areas of factual expertise such as their grasp of legal, regulatory and corporate governance issues they ranked themselves as significantly less competent.
More alarming still, they reckoned their fellow directors were even worse than they were. “That means we have number of directors who come on board because they feel that it is great thing to do and they will give it their best,” says Mueller. “But their light is out in the harbour at night, there’s no-one at home and we’re ending up with people who don’t have the right skill set.”
In this sorry state of affairs, New Zealand is not alone. Latest research on board governance in the United States is distressingly similar. When management consulting company McKinsey wanted to probe governance changes in the United States, it went out to 50 US directors and 44 institutional investors with more than US$3 trillion in assets under management. Feedback showed that nearly one third of those directors considered their peers to be “barely adequate or worse” as board directors.
In New Zealand, only 40 percent of investors indicate that they are well informed about the corporate governance policies of the firms in which they invest: highlighting, as Mueller points out, need for help in formulating such policies and raising disclosure issues.
“Only 38 percent of investors,” he goes on to say, “confirm that they receive sufficient information about CEO pay and performance. This indicates an area where companies probably need to improve their shareholder disclosure policies.”
When it comes to attributes and qualities enshrined in individual directors what’s on the collective wishlist? This bunch of respondents reckons directors should have track record of business success, good reputation in the market and – logically enough – be capable of forming their own opinions. The least important qualities? Holding certificate from the Institute of Directors, being an employee and sitting on many boards.
Alm