Since then this former farm accountant from Taumarunui has served on countless boards at both director and chairman level. Paterson has served as full-time director on numerou s public sector and private organisation boards, including eight years on the board of the Reserve Bank and 10 years on the Wrightson board. She also currently chairs, among others, Landcorp Farming, the Elec-tricity Complaints Commission and the Waitemata District Health Board.
Sitting around boardroom tables for 27 years has taught her many things but, she offers, while market dynamics and governance standards have changed dramatically, the skills required by directors are the same as they ever were. To be effective, directors must have sufficient intellectual horsepower, good strategic vision, solid grasp of underlying risks, and clear comprehension of what’s needed to build shareholder value.
Honing Skills
Directors should understand the industry environment in which the business they are directing operates and they should think strategically about current issues. “Directors must understand how organisations work, and recognise that it’s the individuals who work for an organisation who will ultimately drive its culture,” says Paterson.
It may have been different once, but it is no longer acceptable for directors to rely on the advice of board experts without doing their own homework on an issue. Directors must now carry their own weight, whether it’s on complex financial or legal matters, and so it’s important to have well-rounded individuals serving on boards. That’s why she believes it’s important for directors to satisfy themselves that they understand the information provided by management.
Board Preparation
But what makes good director and should senior executives prepare themselves for board positions?
Paterson is generally supportive of the concept of director certification and the Institute of Directors’ (IOD) moves to issue formal qualifications. But, she cautions, all the formal training in the world won’t necessarily make good director – especially if CEO is more interested and effective at management than governance. The roles are very different.
Nevertheless, exposure to the governance perspective can enhance CEO’s understanding of their management responsibilities. “Encouraging senior managers to attend IOD or other governance courses is an obvious starting point. Managers who regularly attend board meetings learn lot about governance through observation,” says Paterson.
The Transition
In Paterson’s experience boards generally encourage their CEOs to seek directorships. But the usual appointment is via the managing director route. “Since executive appointments now tend to be more short-term, [exposing them to board thinking] helps position the CEO for the next stage in their career,” says Paterson.
“CEOs are sometimes allowed to accept an external directorship. It can enhance their skill-set or industry knowledge,” she adds. “This is useful incentive where the CEO role, within government-owned organisations for instance, can’t evolve into an MD position.”
Differing Priorities
Developing CEOs to become directors doesn’t always work however. The priorities of the roles are quite different. Management is hands-on, corporate governance is monitoring, and directors, especially newly appointed ones, must be careful not to muddle the two.
Cliche perhaps, but conventional wisdom holds that the board’s most important task is to select the CEO. He or she, together with the management team, develops strategy and the business plan, in consultation with the board. The focus of that exercise, says Paterson, is growing shareholder value and managing associated risks. From her perspective, it’s the CEO and management team who identify and manage the business risks responsible for delivering the planned result. “The board selects the CEO and delegates [operational] responsibility. But as the pivot point within the organisation, it is the CEO’s responsibility to do the implementation. The board monitors management’s performance towards stated goals and intervenes when performance is not on target.”
Paterson warns directors, especially new ones, not to fall into the trap of getting too close to management activity. Directors who do, risk losing their independence and perspective and those, she says, are critical factors for directors to maintain.
Promoting senior managers to board level requires personal ‘sea-change’ in thinking. For that reason she believes it’s critical for new board members to understand the boundaries.
In addition to doing all the IOD courses on offer, and learning from experienced directors, Paterson believes new directors should look to the chairman for guidance. “It’s important for new board members to listen and learn. They should be prepared to breathe through their nose for while, read lot and soak up everything they can.”
A Good Chairman
According to Paterson, good chairman can make all the difference to board’s effectiveness and performance. And how management interacts with the board has lot to do with the relationship that exists between the chairman and the CEO. “It is important that the chairman complements the skills CEO brings to the table. Communication between the board and management – unless otherwise stated – flows through the chair and the CEO,” says Paterson. “The hallmarks of good chairmanship include strong leadership, the ability to think strategically about the company, and good collaboration with the CEO.”
The chairman’s job is to have his or her board working as team and to drive an annual work plan. This plan should ensure urgent matters don’t always override the important issues, like strategy review, business planning, risk management, balance sheet and capital adequacy reviews, succession planning and HR issues, customer satisfaction evaluation and competition assessment.
Stand-out Boards
Paterson is reluctant to identify the outstanding directors she has worked with. But the best boards exhibit common qualities including strong teamwork, complementary skills, collaborative listening, high intellectual input, supported by superb CEO and good management.
“It’s important to remember that no single board member can destroy shareholder value. It’s the collective action that counts,” says Paterson. “Business is risky, the [shareholder] value is created by taking the bigger risk and managing it better. Boards have to be prepared to make mistakes while remaining accountable to shareholders.”
Corporate Governance
Alison Paterson is generally supportive of the new corporate governance regime. However, she warns, there is danger in making guidelines “too prescriptive”. Based on her association with good boards, new corporate governance guidelines tend to mirror existing practice.
If there is any nemesis for boards within the changing world of corporate governance, it is the difficulty of deciding how often and how much to tell the market under the new continuous disclosure requirements. “The huge amount of time spent by boards debating this issue distracts from the business of adding value,” says Paterson.
Given the demand for full disclosure, boards may have to prepare for greater share price volatility. constant drip-feeding of information to the market has, she adds, impacted companies like Wrightson, delivering them double-whammy share price hit – once following profit warning and then again after releasing the actual result. But Paterson is optimistic and believes the teething problems will disappear as directors find the appropriate disclosure balance. “The objective is to ensure equity among all shareholders in terms of concurrent share market advice and achieving fair market perception of the current state of the business.”
The Triple Bottom Line
How about triple-bottom-line reporting and the increasing pressure on boards to take sustainability into greater account? Paterson agrees w
