Misunderstood directors tempted to quit: Survey

Two days after the dramatic collective resignation of five directors from struggling media company, APN, an annual survey of director sentiment has found that directors of listed company boardS are nearing the end of their tolerance for regulation and compliance tasks.

The survey of 180 directors by legal firm, King & Wood Mallesons, found that 17% of respondents had refused a board role or resigned a directorship due to one or more concerns over compliance and regulation. Another 12% had seriously considered resigning, and another 14% are still considering it.

The directors of APN did not cite regulatory concerns as influencing their decision to resign. However, one of the two authors of the report, partner Nicola Charlston, told LeadingCompany today that it is rare for directors to complain about the issue in public. “To be fair, it is something that doesn’t appear in the public domain. Directors do not say, I will resign due to these issues. It happens behind closed doors.”

Elizabeth Proust, a director of Perpetual, says: “I think what this, and many similar surveys, is saying is that directors – in particular of listed companies – feel the weight of regulatory compliance more and more, and in the end, it becomes a straightjacket.”

Proust says this sets up a pattern of board thinking that is hard to break. “It is hard to imagine a different state. I can do that because I am on a couple of boards where the companies are not listed, or are subsidiaries of overseas companies. While we still consider regulatory issues, it is really very liberating. You still worry about occupational health and safety and the audit, but the primary focus in on growing the business, on the customer, the strategy, the market and the industry.”

Proust cites the food company Nestle as an example, where the parent company is the only shareholder of the local subsidiary. “The balance of the items to discuss is different and the discussion is freer,” she says.

KWM began conducting the survey three years ago, and say that the concerns have come to a head in the most recent one. Partner and co-author, Meredith Paynter, says: “Coming clearly through our survey is a confluence of events: the tough business and economic conditions, the many years of legal and regulatory reform, the high-profile court decisions, the focus of the media and the impact of social media. There is a lot of pressure on directors.”

The KWM report quotes from a Australian Institute of Company Directors’ white paper on the gap between what the community and regulators think directors should do, and what directors themselves believe. Author of the report and former president of AICD WA, Steven Cole, wrote: “[It] has led to unrealistic expectations about what directors should be doing in areas that are the responsibility of corporate managers.”

What directors want

Directors want to spend more time on growth and strategy rather than checking whether their executives are complying with corporate regulations across all areas, such as occupational health and safety and the carbon tax.

Proust says that directors are invited onto boards because of the talents, skills and experience they bring.

But such attributes have little opportunity to flourish amid the tasks of assessing the implications of court decisions on directors’ duties, handling conflict with shareholders over executive remuneration, managing complex continuous disclosure practices, which directors cited among regulatory issues that dominated their attention in the past 12 months.

Proust says companies in many sectors are struggling with structural, social and economic change. “It is always important for directors to scan the environment. They need to understand the industry their company is in, and the wider societal changes taking place. There is no company that isn’t impacted by social expectations and changes to technology and the structure of the economy.”

The report’s authors say that at least part of the fix is for the directors’ role to be better understood. Some public critics see the payments received by board members – from $100,000 to over $1 million – for attending a dozen meetings a year as excessive, and commentators have criticised it as being a semi-retirement for the “old boys” of corporate life.

Proust refutes this: “It is not a retirement job, and not a reward for long service. I can’t remember the last time wine was served at a boardroom lunch, and it is mostly sandwiches – unless there is a guest – because the focus of the meeting is conversation.”

The authors found that the public perception of corporate governance is that corporate boards should be “so closely involved in the affairs of the corporation that they can ensure nothing can go wrong”.

Charlston tells LeadingCompany that directors play a different role: “Their role is to engage with management, and provide a sounding board for ideas, to ensure there are checks and balances on governance. It is not to go through and be responsible at a granular level for audit and risk and compliance. They want to be free to focus on business and growth.”

The executive and non-executive mix-up

Directors believe that much of what they are expected to do in the current circumstance is actually the role of (highly) paid executives, who work full-time in the business and have specialist knowledge in the relevant areas, such as finance, corporate governance and law.

The report found, for example, the 37.9% of respondents spent 30 hours dealing with just three of their top regulatory concerns. The report did not analyse the proportion of time this represented. However, if a typical ASX100 company is having 10 one-day board meetings a year, this represents nearly 40% of the time spent on the top issues alone (with as many as six other issues to impinge on the rest of their time).

The fix

Paynter says there is no simple fix for the problems facing directors. However, she says the fact that directors now face “strict liability” for corporate faults, regardless of what the director has or has not done, and putting the burden on directors to make their defence is widely seen as a bridge too far.

The federal government is meant to have an internal process, called the Regulatory Impact Analysis designed to anticipate unintended consequences from new regulations. However, a review of the effectiveness of the RIA process last year was damning, finding that there was a “vast gap” between what was the RIA process was intended to achieve, and what actually happened in practice.

The federal government has promised to take these finding into account, but the authors say it is too early to tell if that intention will lead to any changes.

Last year, the government introduced the Personal Liability for Corporate Fault Reform Act, which supported the reduction of the number of offences that impose criminal liability on directors for corporate fault across all jurisdictions, and is intended to unify the rules around the various states.

Charlston says the situation may ease with better global economic pressures, and as political uncertainty is resolved with the federal election in September this year. “It is a little bit of a chicken and egg situation,” she says. “When there is increasing investor confidence, and a more stable political environment, those factors will take away some of the impetus for regulations we have seen in the last few years, and that will shift things somewhat naturally.”

Proust says the unsettled director’s ranks provide an opportunity for women to ascend to directorships – “provided they go in with their eyes open”.