DIRECTOR COVER STORY: Directors Need More Competence Than Commitment

Kiwi directors are committed to their task. They are not, however, as well skilled as they should be. And they weigh the personal risk before they consider their contribution to boardroom discussions.
These three themes are clearly evident in the findings of this year’s “Directions – Understanding Governance” survey. The survey now has cumulated data from 4000 participants and is painting graphic picture of New Zealand directors and governance trends that need to be considered. The researchers question shareholders, managers and directors from entities of all sizes and in all sectors of the economy.
While women comprise more than 24 percent of the survey’s contributors, only eight percent of them hold governance positions in New Zealand’s largest enterprises. From our perspective, we are glad to see women’s increasing interest in discussing good governance.
But what do the three themes we have identified mean for New Zealand and its governance structures?

Commitment
New Zealand directors, and those who aspire to seat at the board table, consistently rank their commitment to the task highly. And staggering 93 percent of sitting directors say they find their role rewarding.
This is not, perhaps, astonishing given that most directorships are voluntary because of the large number of family-run entities in New Zealand, where board membership is more obligatory than voluntary. Nevertheless, the finding suggests directors can generate personal satisfaction from their work. And given that 47 percent of directors report they are not adequately rewarded, there must be another non-financial driver behind their motivation to join board.
The evidence suggests few directors seek board membership for the baubles of office. Only 21 percent of them list fees and benefits as strong motivator and only 19 percent of them see it as tool to become better known.
Career advancement, presumably the experience gained by helping other firms to develop in the face of strong competition, ranks as higher motivator with 44 percent of the directors surveyed. But the main motivator for several years now remains “doing good”, with 46 percent of them reporting this as their main objective. This should ring rather loud bell in the ears of shareholders and incumbent board members, signalling the willingness of directors to forego market-rate compensation in return for the chance to do good and influence an organisation’s progress. And while this might sound like bargain, it bestows duty on the entity to make the opportunity to contribute and influence truly available.
And although 68 percent of firms report plans to recruit independent directors in the future, our experience of many board meetings is more framed by the absolution of management recommendation followed by hearty lunch, rather than by robust discussion of issues. In those environments, directors who join boards with the notion of earnestly contributing quickly see their enthusiasm blunted and the opportunity to harness the energy and contribution of competent external director lost.
The number of directors who have heard of board vacancies from insiders (management and directors) has risen sharply to 83 percent over the past few years. This, alarmingly, suggests that most directorships are filled by candidates who are “known”, rather than others who might have the same or better skill sets.
There is not yet widely established “TradeMe” for directors, database where interested parties can seek and find future board members. While the Ministry of Women’s Affairs maintains list of, presumably, women only, and www.finddirectors.com” operates an open-to-everyone-listing, neither seem to break the preference of insiders to recruit from their existing circle of friends.
There is nothing intrinsically wrong with directors looking around their existing network of skilled contacts, but what about the even-better-skilled ones in the next valley, or the one with tailored specialist industry experience who lives few cities away? The survey suggests the need for better distribution system for directors to match skills with needs nationally.

Governance skills
New Zealand directors are still reluctant to rate the functional skills of their boards as collectively “excellent”, particularly in areas such as corporate strategic planning, leadership and legal or financial governance. Only 20 percent of those surveyed are willing to rank their performance in these areas that highly. However, 55 percent of respondents rank their board members’ “commitment” as excellent. This seems odd. How can directors be superbly committed to not do an excellent job?
The problem seems to lie in the training and support directors receive when they assume their seat at the board table. In more than 55 percent of reported responses new directors receive either no training or informal advice when they join board. Interestingly, directors on boards of small companies more often receive some formal external training – such as university course – than their counterparts in large firms.
No question, Kiwi directors receive less compensation than most organisations pay consultant for the same contribution. It would seem sensible to invest money and time into formal and serious training programme for new directors, rather than invite them aboard and then throw them into the tide to sink or swim. When invited to serve as director and the entity doesn’t offer serious training for the role, consider how serious they are about your expected contribution.

Risks
More than 50 percent of New Zealand’s aspiring directors are concerned about their personal risk. That might not be surprising given our convention for attributing personal liability to directors when entities trade while insolvent. There should be no absolution for directors who ram their companies into the ground and hope to be excused by the creditors and shareholders they hurt in the process, but the personal liability attribution does seem to trigger early closures of firms that might have traded through patch of rough commercial weather.
A solid 78 percent of survey respondees say their organisation is facing strong local or global competition. But directors facing tough times ahead need the opportunity to correct corporate strategies with the appropriate lag time course change takes. If half of New Zealand’s directors are constantly looking over their shoulders in fear of personal liability, how visionary will their leadership be?
Even more alarming, 55 percent of directors are concerned about their reliance on management for information. Interestingly, the highest percentage of concern resides in government organisations and lowest in publicly listed companies. Non-profit organisations and privately held firms rank in the 40-55 percent bracket.
So, is management information factual or tainted by self-interest? Directors that are not sufficiently well trained to flush out inconsistencies and ask the right questions are simply not equipped to know when.
Finally, what do shareholders, managers and existing board members believe makes an ideal director? There is no gender or professional degree preference, but there is desire for specific accomplishments. large 73 percent of respondents want directors with industry and work experience, 85 percent are looking for individuals with global experience and 78 percent want candidates with successful business track record. Holding multiple directorships turns 67 percent of respondents off and 74 percent believe the new director should not be an employee of the enterprise. This is good start to set the scene for the many more independent directors New Zealand organisations are looking for.
The survey again shows that the New Zealand governance scene is vibrant and alive. Many individuals want to become directors, and healthy number of organisa