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Boards & Governance

Improvement needed: The investor view of Australian boards

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Businesses globally have responded to recent waves of disruption with tried-and-true methods: moving to protect core operations, experimenting with new models, cutting costs, and changing the top team lineup.

Australian businesses have followed suit, some successfully and some not so.

Macquarie Group, true to its innovation DNA, placed a new CEO at the helm as the global financial crisis struck and turned on a dime to wind back on high-risk, high-reward instruments and snap up more conservative assets that have delivered a steady cash flow.1

Unsuccessful foreign forays have seen other financial services businesses retreat from offshore expansion, while many Australian mining and energy companies are still in the throes of adjusting to new global pricing paradigms for their products

Through it all, in a market where products tend to be undifferentiated and the competitive advantage delivered through technology episodic, Australian boards sought bolder leaders when looking for talent.

Some chief executives were chosen for their knowledge of the industry sector, and others for their diverse background in other industries, their understanding of all things digital, and their willingness to try something different.

Then the scandals hit the headlines: massive write-downs from failed foreign adventures, allegations of bribery in offshore markets, multimillion dollar fines for interest-rate rigging, and even money-laundering governance failures by a major bank. The Australian government finally gave in to calls for a royal commission into misconduct in the banking, superannuation, and financial services industry.2

Executive heads have rolled, with early chief executive retirements and top team reshuffles. The spotlight has also inevitably turned toward boards and their role.

What the market saw: Patronage and opacity

In an effort to identify the extent to which boards can be seen as positive, sustainable contributors to competitive advantage, Heidrick & Struggles spoke with more than 50 executives from the investment community. The conversations, conducted over the past year, included a mix of analysts, chief investment officers, responsible investment officers, and proxy advisors, as well as a handful of chairmen and corporate directors. Taken together, the conversations offer perspectives on current board performance, expectations of the role, and views on the performance of boards in the future.

We were surprised at the recurring theme of patronage that ran through our interviews—a perception that boards are still inviting people they know to the board rather than employing the same rigor in selection that the company applies to executive appointments.

The strongest criticisms in relation to financial scandals and corporate underperformance centered on two factors:

  • A lack of relevant business knowledge at the board and chief executive level. Many investors cited poor understanding of the company’s business as the root cause of governance failures and operational missteps. In the words of one fund manager, “Simply saying, ‘We didn’t know,’ doesn’t cut it. We need more chairs and directors who understand the business. And appointing consultants to the CEO position is an experiment that has demonstrably failed.”

    Examples of strategic failures cited by interviewees included a bank board underweight in industry knowledge, a consumer products company board led by a chair lacking in retail experience, and a media business board with no knowledge of the sector.

    Publicity generated by recent scandals has turned the spotlight toward boardrooms. One investor told us that she usually places the risk weighting relating to board performance at 10% in terms of evaluating a company, but following the recent scandals, she now places the weighting at 15%.

  • Poor information flows. One chair was quoted as saying that he was told by his legal advisor, “If you didn’t know what was going on, it means you weren’t involved, and under the law you can’t be held responsible.”3 Meanwhile, in New Zealand, Sir Ralph Norris stepped down as chair of the country’s biggest construction company, saying, “Critical information was . . . not brought to the board’s attention. A board can only ever do what it can do from the point of view of knowledge and information. It’s very hard to be a mind reader.”4

The investors we spoke with rejected this explanation, with one commenting, “We are not even remotely sympathetic to this perspective. We know board members cannot be mind readers, but we expect the board’s knowledge and involvement in the business to go way beyond the monthly board and associated committee meetings. Directors need to get out into the business, speak to management, meet with staff, talk to suppliers and customers, and only when they do this will they acquire some understanding of how the business operates. Of course, this is particularly important when their own executive background is not in the same domain.”

Another interviewee described the claim by some board members that digging deeper into the operational side of the business would leave them open to accusations of interfering in the management of the company as “a poor excuse.” This investor said, “Board members represent the owners of the company, and we expect them to do whatever is necessary for them to understand the business. This is not involvement in management decision making.”

And one investment manager we interviewed went further, saying, “We don’t care if board members ‘interfere’ if it results in better performance and stronger governance.”

Making boards “fit for purpose”

As a result of our interviews, and in line with our experience globally, we believe a new approach is needed that elevates the strategic role of the board.

Boards perform at their best when they reflect the nature of the business, and this is especially important when the business is growth-oriented and forward-looking. Since boards hire the chief executive, and the CEO shapes and sharpens the leadership team to either enhance or renew the strategy, the board and senior management clearly need to be aligned with the business purpose.

The board makeup is all-important. If the mix of directors is based on “mateship” and not matrix—in other words, personal relationships rather than a skill and capability analysis—the machinery of governance and strategic oversight can slowly, sometimes imperceptibly, get out of sync.

While the composition of a board will depend on geography, sector, life cycle, and life stage of the business and the company’s ownership structure, we have identified three types of boards—from the process-driven foundational board to the more flexible and forward-looking advanced board and, finally, the fit-for-purpose board that strives to ensure success in good times and bad times alike.

Foundational board

Boards that clearly know the foundations on which the company was built, but have not shifted much in their thinking since the foundation stone was laid, tend to be keepers of the status quo rather than innovators. Such boards may be overweight with lawyers, accountants, and governance experts. They are compliance-focused, carefully hoarding what very well may be an outdated storehouse of knowledge. If members of such boards enter the fray at all in terms of questioning management, they tend to be “fighting the last battle,” not looking to future ones.

The key issue with foundational boards is tenure. As one senior analyst we interviewed said: “It’s not that these boards don’t want to do the job properly. But if you have too many directors who are ten years out of their executive career, at this time of disruption, their value is diminishing considerably—by the day. Their best contribution typically happens between about years three and four and years eight and nine. But there should be a checkpoint at nine years.”

Advanced board

While the foundational board is strong on compliance skills, the advanced board treats these as “hygiene” factors, with up-to-date technology understanding also seen as a basic competency. The board makeup encourages a joint mind-set of curiosity, boldness, and a willingness to examine more adventurous choices. For the advanced board, its compliance talent is there to help manage risk, not prevent it.

The advanced board accepts that to be successful in a corporate context means taking risks. The advanced board manages risk on a paradigm that encourages success, but does not impose frameworks and regulations that strangle innovation or entrepreneurial spirit.

Fit-for-purpose board

The fit-for-purpose board is not just forward-thinking; it is ready for anything. Beyond being built to last, it is designed for change and rapid response. Globally experienced and highly talented, fit-for-purpose board members are selected for their high-performance track record.

Let’s look at an example of a fit-for-purpose board mix for a financial services business operating internationally. The board has a measured skill and competency matrix consisting of one lawyer (with broad experience in financial services and energy), one accountant (with strong business experience and a former CEO), a female senior executive who has worked and lived in several countries, and other board members with skill sets including actuarial, global trade, investment banking, and insurance—and a dash of consumer products. Ideally it would also have a global director—though there are difficulties in sourcing good non-executive directors prepared to make the trip to Australia 10 times a year for board meetings.

Such a board is self-critical and open to argument about any aspect of the business, seeking proof of hypotheses and constantly encouraging fresh initiatives from the management team. Board members are usually more experienced than management is and are counted as valuable mentors, available at any time for consultation by the leadership team.

How to build a better board

In our work over more than 60 years with the world’s leading boards, and in light of our recent findings in Australia, we believe the following characteristics exemplify the type of fit-for-purpose board needed in today’s business environment:

  • Strong teamwork
  • World-class insights
  • In-depth knowledge on best practice and a relentless focus on tomorrow
  • Candidness about development needs
  • Diversity of views


One of the hardest dynamics for a board to achieve is teamwork. It takes time to develop, with people learning to trust each other over time. It cannot be contrived as an academic exercise.

In the words of one chair we interviewed: “You can have what is theoretically a perfect mix of skills, but it’s compromised by a very imperfect mix of style. I’ve seen a very capable board behave in a dysfunctional manner because of the personal styles. The chair needs to ensure that the styles are collegiate, and you want everyone to be friendly—but not necessarily friends. So it’s a matter of being more rigorous about the proverbial skills matrix and taking it to what is truly a diversity matrix—but diversity in its complete sense.”

World-class insights

To obtain world-class insights, fit-for-purpose boards rely on directors who have served on boards globally or who travel regularly to places where innovation is happening and can almost be thought of as “locals.” While it seems everyone is making the pilgrimage to San Francisco in the hope of absorbing by osmosis some Silicon Valley stardust, it’s a truly global viewpoint that is often lacking on boards.

In our interviews, one chair who served on global corporate boards said: “When I returned to Australia, I got the impression that we all think we live on this wonderful little island down at the bottom of the earth, and we’re very comfortable but completely xenophobic and ignorant of what goes on offshore. Such a mind-set really stifles debate and dumbs down the conversation.”

He added: “I can’t believe there are not more international people on boards, and when we talk about diversity, we don’t just mean women. For instance, how many Asian people are on Australian boards?”

Best practice and a “tomorrow focus”

A vital part of fit-for-purpose boards are directors who know from experience how to reduce risk while transforming a business. But directors who have been at the helm of corporate turnarounds are few and far between. Similarly, directors who have had genuine transformation experience are also hard to find. This is because, even as recently as 10 years ago, businesses did not need to know how to “transform” the business; the business environment tended to be more domestic, conservative, and evolving. Now it is global, entrepreneurial, and disruptive.

A board with a “tomorrow focus” is one that has members who understand how new and emerging technologies can be harnessed to help build, market, and deliver products via new technologies and channels.

Candidness about development needs

Being candid about development needs doesn’t just mean that a director “knows what he or she doesn’t know” and takes advantage of board reviews to look at areas of improvement. Directors who are truly focused on self-development take an energetic and proactive approach to it.

As one analyst we interviewed told us: “If you’re on the board of a petroleum company, and you’ve never been on an oil rig in the Bass Strait, you can conceptualize it, but until you’ve actually been on it, you can’t get a feel for it. It’s like trying to explain to someone how to ride a bike.”

Beyond the board papers, directors need to be proactive and interested in the company. We heard of one new director with a financial services background who was appointed to a consumer products company and spent several weeks walking around the warehouses and distribution centers to gain a deeper understanding of how the business works.

Diversity of views

Diversity of gender, race, culture, and experience is the base-level requirement in fit-for-purpose boards. The key is not difference for the sake of appearances but for the different perspectives diversity brings—including new ideas that challenge old thinking.

“We already have too many lawyers and too many accountants,” one chairman we interviewed said. “We need directors who’ve run businesses, who are agile and decisive, and who understand that often 100% perfection isn’t ‘commercial’—sometimes you just need to get things done.”

As a chief investment officer we interviewed observed: “By trying too hard on diversity, you run the risk of losing clarity of purpose. Political correctness in terms of broadly trying to achieve social and environmental objectives can actually cloud the purpose of the company and lead to dilution of the core objectives. As long as the board is not behaving unethically, you shouldn’t try to achieve a specific mix of ethnic, gender, and age equality—apart from what is essential for your particular type of business sector, customer base, and geography.”


While it may appear that, in smaller markets, opportunities for sustained competitive advantage are limited, with investors punishing failed attempts at innovation and growth, we believe companies that combine vision with values will succeed every time.

If their boards are fit for purpose, acting as true strategic assets by mentoring and guiding their talented top teams, they will know their purpose, pursue it with vigor, and continue to deliver profits.

What is required for effective board performance is clear to the thoughtful observer, but how to achieve it may be less obvious. We believe the game has changed for directors. They are now exposed to significant risk. They not only risk financial loss but reputational damage impinging on their future. We live in a world where everyone operates in the glare of a pervasive and invasive digital media.

More risk means more time needed to fulfill the role of director, and time means money. It may be time for a radical overhaul of the payment structure for directors, not just to attract better candidates, but also to properly compensate directors for the time required to read, think, and investigate by “walking and talking” with people in the business, over and above the base role of oversight and mentoring required in a complex and volatile business climate.

About the author

David Scambler ( is a partner in Heidrick & Struggles’ Sydney office and a member of the Financial Services and CEO & Board practices.


Patrick Commins and James Thomson, “Macquarie’s $100 milestone not the end of the road,” Financial Review (Australia), November 27, 2017,

For more on these scandals and the subsequent response by the banking royal commission, see Carrington Clarke, “CBA admits breaching money laundering, counter-terror laws more than 53,000 times, expects more changes,” ABC News (Australia), December 13, 2017,; Clancy Yeates, “Board shake-up can’t halt slide as CBA hits new low,” The Sydney Morning Herald, September 4, 2017,; “What is rate rigging and what are we doing about it?” ABC News (Australia), June 7, 2016,; Jon Yeomans, “Rio Tinto suspends senior exec over Guinea mine bribery claims,” The Telegraph, November 9, 2016,; Lucy Sweeney and Louise Yaxley, “Malcolm Turnbull backflips on banking royal commission after big four call for inquiry to restore public faith,” ABC News (Australia), November 30, 2017,; and Sarah Danckert, “NAB board aware of alleged fraud ring for months: Commission told,” The Sydney Morning Herald, March 14, 2018,

Tess Ingram, “Former Rio Tinto CEO Sam Walsh breaks his silence on Guinea,” Financial Review (Australia), July 14, 2017,

Rob Stock, “Angry and hurt: Fletcher Building chairman Ralph Norris speaks out in his own defense,” Stuff, February 18, 2018,

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