Discussions with Chairmen and Directors of ASX Top 50 Companies

Discussions with Chairmen and Directors of ASX Top 50 Companies


In March 2006, I commenced over 60 interviews with Chairmen and Directors of Australia’s leading companies – mostly in the ASX top 50. The purpose of this study was to:

  • Understand the major business issues facing these companies
  • Understand how boards were dealing with these issues
  • Understand what issues boards were dealing with in how they discharged their responsibilities to shareholders

This understanding would allow Heidrick & Struggles to better serve the major boards of this country. One thing that struck me throughout this process was the amazing changes that are sweeping through the corporate world globally. Anticipating and dealing with these adds a whole new level of complexity to the work of boards.

Consider the following

We are living in exponential times.

Did you know:

  • China will soon become the number one English-speaking country in the world
  • According to the US Deparment of Labor:

    • 1 out of 4 workers today is working for a company for whom they have been employed
      less than 1 year

    • More than 1 out of 2 are working for a company for whom they have worked
      less than 5 years

  • According to former Secretary of Education Richard Riley:

    • The top 10 jobs that will be in demand in 2010 didn’t exist in 2004

    • 1 of every 8 couples married in the U.S. last year met online

  • There are over 2.7 billion searches performed on Google each month
  • SEEK now has a market capitalisation greater than the whole of Fairfax

  • The number of text messages sent and received every day exceeds the population of the planet

  • There are about 540,000 words in the English language - 5 times as many as during Shakespeare’s time
  • More than 3,000 new books are published daily
  • It is estimated that a week’s worth of New York Times contains more information than a person was likely to come across in a lifetime in the 18th century
  • It is estimated that 1.5 Exabytes (1.5 x 10 to the power of 18) of unique new information will be generated worldwide this year
  • That’s estimated to be more than in the previous 5,000 years

  • The amount of new information is doubling every 2 years
  • Third-generation fibre optics has recently been tested by both NEC and Alcatel - that pushes 10 trillion bits per second down one strand of fibre
  • That’s 1,900 CDs, or 150 million simultaneous phones calls, every second
  • It’s currently tripling about every 6 months and is expected to do so for at least the next 20 years
  • Predictions are that by 2013 a supercomputer will be built that exceeds the computation capability of the human brain
  • 2009 was the first year in the history of the industrialised world that more people left the workforce than joined it

Findings - Major Business Issues


Possible Discussion Topics

  • The growth of regulations

    • GC’s role in using board time effectively
    • Managing NED liabilities
  • The management of risk

    • Where should the GC focus be?
  • The PE threat

    • Any role here?
  • Acquisition and retention of talent

    • Rapid decline in tenure of senior management
    • What opportunities are there for GC’s to spread out beyond the legal function in major corporates
  • GC role in globalisation process

Paradigm Shift

Many people have argued that we are observing a new class of active investor who are prepared to run businesses with a different management model. This trend has a number of factors supporting it:

  • Rapid increase in the pool of money
  • The growth of derivatives and structured financial products has made the use of this larger pool of money more efficient

    • Technology has supported these developments
  • Inflation is low in much of the western world, and this provides relatively cheap debt financing

Private Equity (PE) and Hedge Fund operators have used these points to gear underperforming businesses through debt financing, thereby reducing the cost of capital.

Most people think that there are now no companies beyond the reach of the Private Equity operators. These PE firms focus on value – not earnings - and they have a clear view of the value of each key asset in a company’s portfolio. It is argued that they have a much clearer view than many boards have of value at a disaggregated level. 

Key elements of the private equity management model are:

  • Hands on board – all with equity that could produce significant returns
  • Management has the same significant upside opportunity
  • They take a long term view – 3 to 5 years
  • They have very aggressive business plans – and everyone is very clear of what is expected of them
  • These private companies have less regulatory and compliance burdens
  • Other implications of this trend
  • Many talented CEO’s, Directors and senior managers prefer the new model because
  • They can earn more money
  • There is much less of a “boring” factor on these boards, because there is much less regulatory requirements
  • They prefer to take a longer term view, rather than the short term view taken by many public companies driven by
  • Institutional investors
  • CEO and senior management remuneration systems
  • Media scrutiny
  • This is reducing the pool of people that would traditionally work in the public companies
  • Are public company boards ready for a phone call from the KKR’s of this world?
  • Alternative view
  • 16 years of uninterrupted economic growth will eventually end
  • This will drive up interest rates
  • Which in turn will make some deals uneconomic
  • Which will lead to collapses
  • It is just a matter of time
  • There is scope for the public company model to observe the PE model and see if any aspects of that model are worth considering for the public company

Acquisition and Retention of Talent

  • Most Australian companies are constrained in implementing strategies by the lack of suitable talent at all levels of the business
  • It is most acute at senior levels
  • For many companies – particularly in the services sector – this is the number 1 strategic issue
  • Much more emphasis is being placed on building a company culture and policies that attract talent – and keep it
  • It is now commonplace for HR Directors to present regularly to boards about
    these issues
  • Rigorous succession planning for all key board and executive roles is now standard practice in many companies
  • Companies who operate internationally mentioned that this issue is even more difficult because the employer brand was less well known in foreign markets – this point even applies to Australian global icons
  • The consequences of these points are

    • Executive remuneration costs are soaring
    • Over the past 4 years from an analysis of ASX top 50 annual reports
    • Average CEO remuneration has increased by 88% - $3.2 mill to $6 mill
    • Average FD remuneration has increased by 110% - $1.1 mill to $2.3 mill
    • Strategy implementation is delayed

The importance of human capital management at all levels of a company have never been more important – and have never had such serious attention at board levels.

The Growth of Regulations

There has been an explosion of regulations over the past 5 years fuelled by many well known collapses overseas and in Australia. Most business people think that the pendulum has swung too far – the market is now overly regulated. The consequences of this trend are as follows:

  • Boards are now swamped by regulatory requirements – particularly international companies with operations in the USA and financial institutions
  • Many people have said that as much as 50% of board time is spent on these matters
  • Probably an average would be 30-35%
  • Many Directors are having difficulty keeping up with all these regulations – IFRS, Basel 2, APRA, Sarbanes-Oxley, ASIC, ASX, etc.

The consequences of this trend are as follows:

  • Many Directors are concerned about the personal liabilities that flow from failure to comply with these regulations
  • The cost of compliance is significant – particularly in financial institutions
  • McKinsey did a study recently to understand why London was in the process of taking over from New York as the pre-eminent capital market in the world – one of the major reasons was the Sarbanes-Oxley regulations
  • The most significant consequence is that if boards are spending much greater time on these matters – they are therefore not spending as much time as they should on the most important matters

    • Strategy
    • Senior management performance and succession issues

Many boards are thinking through how to ensure that:

  • Regulatory risks are managed properly
  • This process doesn’t dominate board agendas
  • The agendas reflect the most important and value added matters that protect the interests of shareholders and maximise the value of their shares
  • Many people I spoke to felt that there was a way to manage these issues in a constructive way
  • A greater level of regulation is a fact of life – and just needs to be managed

Growing the Business

Boards are judged amongst a variety of things by their ability, working with management, to create shareholder wealth. There are two primary ways to do this:

  • Improve the operational performance of the business

    • Reduce costs
    • Maximise asset utilisation
    • Increase customer service
    • Redeploy inefficient capital
  • Grow revenues

    • In existing markets
    • In new markets in home country
    • In overseas markets

There are two different views:

  • Some companies believe that there is plenty of scope to grow their businesses in Australia by

    • Increasing product penetration levels in existing segments
    • Entering new markets where they are not constrained by ACCC requirements
    • Some of the major banks fit this category
  • Some companies believe that they have exhausted opportunities in the Australian market, and they need to go offshore to continue to grow shareholder value

    • The companies who have been very successful have built an excellent business model that they can export to other major markets and acquire considerable scale reasonably quickly
    • MBL, QBE and Westfield are often quoted examples

The challenges of the two views are quite different.

  • Domestic growth
  • For major companies this requires taking market share from another major player
  • In turn, this requires some form of differentiation backed up by superior delivery
  • This depends on these companies acquiring superior management talent to build and embed these differentiated strategies
  • Overseas growth
  • Finding people in the overseas markets who can absorb the Australian business model and apply it locally with the same quality, ethics and values that have made the company so successful in Australia
  • Companies who set up in the USA need to learn how to compete in the most brutally competitive market in the world
  • Companies also need to adapt to a different position in these much bigger overseas markets – they might be in the top 3 in Australia, but they find themselves not even in the top 10 in some markets in Europe or USA

Risk Management

The world is now a much more complex place. Most boards are grappling with how to:

  • Identify relevant and significant risks
  • Measure these risks
  • Mitigate these risks through contingency planning or tight day to day management

There has been the emergence of the Chief Risk Officer role in major companies around the world in order to undertake these tasks.

  • The CFO continues to manage financial risks and the internal audit processes
  • The GC looks after legal and commercial risks with the FD
  • The CRO looks after most other risks

The kinds of risks that the CRO looks at are

  • Operational risks
  • Environmental risks
  • Terrorist risks
  • Security risks
  • Brand risks
  • Culture risks
  • Business continuity risks
  • OH&S

    • Directors are very concerned about this one – since there is the threat of criminal prosecution if something goes badly wrong in this space
  • The role of boards in risk management
  • Make sure that there is a good risk management system in place that determines what the risks are, measures them and reports to the board on these every month
  • However, there is no substitute for board members relying on instinct when something doesn’t feel right
  • Many people have said that the best NED’s have an uncanny ability to spot emerging business risks and constructively challenge management on these
  • Boards need to make sure that there is an appropriate balance to risk – business is about taking managed risks – a risk free environment probably means that innovation and having a go has been driven out of the organisation
  • There is a danger that boards delve too deeply into management matters and blur the line between board and management accountability


Many people believe that globalisation is the most important major issue facing major companies, because:

  • Competition intensifies
  • Prices get reduced
  • Margins decline
  • Market share is reduced
  • Commoditisation is accelerated

On the flip side – opportunities are created in other markets, as we have discussed above. This process and others we have talked about (PE) just mean that Boards need to ensure that the management team is competent to deliver increasing shareholder value in the spite of these trends.

Operational Excellence

Many people mentioned that pushing operational excellence initiatives is simply a requirement for staying in business. Most major companies have major projects underway to:

  • Drive out costs
  • Improve asset utilisation
  • Implement new technologies
  • Design and implement new HR processes designed to attract and retain the best people

Boards are interested in how these projects get implemented. The best management teams are very good at execution – this is one of the major factors that boards look at in assessing the merits of a management team.


Many people feel that the media sees the regulators as the “good guys”, and the companies as “bad guys”. There is much scrutiny and criticism of public companies, and in particular on the remuneration of senior managers. There is an overall view that there is not a healthy balance of views by the media on many matters that impact on companies.

  • Environment
  • Social responsibilities

Findings – Board Operating Issues


Recruiting NED’s

There is a feeling that a problem is brewing in terms of attracting high quality people to take on NED roles in publicly listed companies. The reasons given for a shrinking of the high quality talent pools are as follows:

  • CEO’s and FD’s are now paid so much that when they retire they don’t need the money offered by NED roles
  • Many of these people are put off by the “boring” aspects of regulatory compliance that is a major part of board work today
  • Many of these people are more attracted to the Private Equity model with higher returns and less compliance work
  • There are real legal liabilities associated with NED roles. There are a number of cases that people look at and question whether the risks are worth the rewards

    • Some people commented that Chairman of the Audit Committee is a dangerous job
  • There is now a much greater workload for NED’s, and many people believe that the rewards are not in keeping with the workloads and risks involved
  • However it is unlikely that these points will make it difficult for a top 20 company to find suitable talent for their boards
  • Other points
  • More Australian companies are looking to put international Directors on boards

    • There are real logistical issues with this – however many companies are using video conferencing for some of the meetings to alleviate the travel burden
  • Many boards are looking at the skills mix required for the board to ensure the balance of talent is available to discharge the board’s work
  • Many Chairmen told me that there will be a significant refreshment of boards over the next 3-5 years. It is felt that the days of people spending 15 years as a NED of one company are gone
  • Candidates from the professions are now less likely candidates – unless they have had major management jobs in their firms
  • There is a view – if we need legal or tax skills - we will go out and buy the best available talent

CEO and Senior Management Remuneration

CEO and senior management pay is one of the most vexed issues on board agendas for a number of reasons:

  • Competition for talent is fierce, and if you don’t pay market rates then that talent will walk

    • In a perverse twist of the regulatory framework – it is generally believed that remuneration disclosure has had the effect of causing salaries to increase more rapidly than they otherwise would have
  • This subject is played out in the full glare of public scrutiny – all the stakeholders have a say in this matter – and boards have their recommendations put to a shareholder vote
  • This is a very complex and technical subject. Many Directors find it difficult to understand all the nuances
  • Most of the remuneration models tried have not worked – eg TSR
  • And in the absence of a generally agreed system which treats shareholders and management fairly – negotiation skills and the loudest voices tend to win the day
  • At the AGM – there is often a barrage of questions from disgruntled shareholders on this subject

There is a general consensus that major companies need a much better system for paying senior management.

Chairman and CEO Succession

Most Directors believe that one of the most important tasks that a board undertakes is to plan for the succession of the existing CEO. Some boards take this process extremely seriously – the recent publicity surrounding the BHP Billiton process shows the investment that some boards have made to do this job extremely well.

However, most Directors I spoke to felt that most companies can improve this process significantly. The process needs to be open and transparent so that good levels of trust build up between the board and executives who are engaged in this process. Failure to do this well could lead to many of the failed CEO internal candidates leaving the company.

Several Directors commented that PE firms do the job much better than public companies. I was given an example of one PE firm who took 70 references to make sure they were getting the right person to lead the company.

Many people believe that the second most important person in a company is the Chairman. This person sets the tone for the board and therefore the whole company/

In my discussions with Directors, it seems to be much less clear:

  • Who decides when to initiate a Chairman succession process?
  • Who drives the process?
  • Who decides the timing?
  • Other points
  • Good CEO’s don’t necessarily make good Chairmen
  • Chairmen don’t necessarily need to have been a CEO
  • It is the personal attributes of the Chairman that are much more important

Board Performance Evaluation

There are two schools of thought:

  1. There needs to be a formal process of evaluation of overall board performance and individual board member performance
  2. There should be a focus on how to make the board flourish – not to delve deeply into the past

Some advocates of the formal process however say that many of these processes are “tick the box” and therefore of not much value.

As with other board matters we have discussed, there is a trend toward a more rigorous process in determining whether the board and it’s members are adding value to the business and discharging their responsibilities to the shareholders.

Board Skills Needed

Many boards are taking a very systematic process in determining the skills needed to discharge the board’s responsibilities. Some boards are looking at the following issues:

  • Should we bolster our HR capability to make sure all the human capital and cultural aspects are properly dealt with?
  • Same with technology
  • Do we need international skills on the board?
  • Do we have the right level of diversity?

15 years ago, boards were made up by accountants and lawyers. There is now a more sophisticated approach to determining the mix of skills and personalities required for a good board.

Chairmen/NED Fees

  • Everybody thinks that Directors are underpaid
  • This is despite for the top 50 ASX listed companies
  • Average Chairman remuneration increasing by 92% over the past 4 years from $237k to $456k
  • Average Director remuneration increasing by 72% over the past 4 years from $112k to $192K
  • This is explained by the fact that Director workloads have increased significantly over this period
  • In fact, some people have calculated that Directors are paid a daily rate of about $3000 – which is less than many of them could earn as a consultant, with much less risk

Prioritising Board Work

Given the challenges and trends mentioned above, many people believe that board agendas are in need of a radical overhaul. Some of the issues raised in the day to day work of boards are:

  • Boards are swamped by paper. There is not enough management discipline to distil key documents down to a page or two
  • A lot of the detail work can be delegated to various committees – some boards do this well – others struggle with this
  • Agendas are often handed down from one generation to the next, and are controlled by management. Chairmen need to assert authority in setting the agendas for the board meetings, in conjunction with management
  • The agendas need to focus on the important issues that help deliver high performance in the short term, and also a quality and sustainable business in the longer term as well.

Monitoring Health of Culture

  • Some of the most publicised corporate problems in recent years have resulted from a breakdown in the culture of the organisation
  • Inappropriate behaviours creep into the business over time, they go unnoticed until there is a major event – and these lead to a crisis of confidence between the board and management
  • A number of companies are focussing in on this subject, and are getting professional external advice on how to monitor the health of the culture on an ongoing basis
  • A hallmark of many successful companies is the strength of the culture, and in particular the strength of personal accountability for delivering results that permeates through the business
  • Building strong cultures starts with the board – they set the tone for the whole business

Some Data Collected

  • For top 50 listed ASX companies
  • Average board size is between 9-10 members

    • 34% of boards have between 6-8 board members
    • 29% of boards have between 9-10 board members
    • 27% of boards have between 11-12 board members
  • Board NED turnover pa = 10%
  • Over the past 4 years

    • 66% of companies had the same Chairman
    • 66% of companies had the same CEO
    • 66% of companies had the same FD
    • Only 30% of companies had the same Chairman, CEO and FD

Director Discussion Topics

  • Are there aspects of the PE model that could be applied to publicly listed companies?
  • What are some smart ways to deal with the regulatory explosion?
  • How do you go about determining the ideal mix of talent for a board?
  • Is there a better way of managing CEO and senior management compensation?
  • What is the best way to manage Chairman & CEO succession?
  • How do you assess the capability of senior management to deliver the business outcomes required by the Board?
  • What is the best way of assessing Board and individual Director performance?

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