It focused particularly on the growing imbalance between boards’ (particularly publicly listed company boards) attention to improving company performance and the pressure on them to conform with increasing compliance obligations:
Commercially, it is little comfort for shareholders of a poorly performing company to know their directors, management and auditors are neither negligent not fraudulent, just not very good at creating and conserving wealth. [1]
So, what does Hilmer think is wrong with governance nearly 30 years on? In many respects this new work carries on where he left off in 1993. More than anything, though, it is a clarion call to the boards of listed companies, in particular, to lift their game.
Today, Hilmer is still vitally concerned about continually increasing compliance pressures on boards. However, despite the many efforts that have been made to legislate and regulate for improved board performance, governance crises still occur. And still these are followed by demands that yet more new rules and regulations should be imposed to prevent governance-related failures. Unfortunately, history tells us that the effort to, in effect, ‘legislate’ for better governance has largely been futile. As Hilmer stated in Strictly Boardroom, the problem to be solved is one of human nature, which is not one susceptible to more detailed and onerous regulation. [2]
Hilmer’s concern about the compliance pressures still on boards today is for different reasons and therefore, he says, fresh thinking is required. The board performance problem that greater regulation sought to solve in the 1990s was mainly one of poor business judgement in boom markets. Today he suggests the problem is centred on business ethics and community concerns about corporate misbehaviour at the expense of customers and employees. Formal inquiries into such concerns—such as the banking and financial services Royal Commission in Australia—support Hilmer’s contention that, rather than prescriptive rules, governance should be grounded on fundamental principles.
Hilmer accepts that the challenge of surviving the COVID-19 pandemic drove some changes in governance practice (eg, short, sharp meetings and heavily modified agendas). However, he laments that the pandemic did not stimulate more creative thinking about how boards should go about their work. He is concerned, for example, that it did not overcome the tendency for listed company directors to:
…retreat into form over substance via box-ticking processes, all based on so-called best practices…to protect themselves against accusations of failed governance when something inevitably goes wrong.
It is his intention in What’s Wrong with Boards, therefore, ’…to provoke a more fundamental and far-reaching conversation about governance…’.
In large part due to its well thought-out structure, this book is easy to read and digest. It has three distinct but linked parts: the first describes a range of governance challenges; the second develops the case for a fundamental rethink of current approaches to improving governance; and the final argues for a change from ‘best practice’ to ‘best fit’.
Governance challenges
Hilmer identifies four major sources of governance failure, two of which are described as failures of performance, while the remaining two relate to unsatisfactory ethical conduct.
1. Failure to generate long-term returns that meet investor requirements and community expectations. Hilmer attributes this failure primarily to board acceptance of marginal performance by management. He points to a fundamental divergence between the interests of owners and management, and the significant mismatch between the demands that result from business complexity and the time available to a typical board to understand and address these.
The condition of being time-poor is compounded by difficulties boards face in accruing the information they need, and in defining what is good performance. Hilmer suggests necessary performance conversations are not occurring for at least three reasons:
- there is no burning platform—it is easier to live with marginal performance than seek significant improvement
- difficult performance conversations are easily swamped by process discussions
- some actions needed to deal with marginal performance are risky and challenging to execute.
2. ‘Can kicking’. Hilmer accuses boards of apparently choosing to live with specific performance issues or strategic problems rather facing and addressing them. Not surprisingly he attributes this to excessive board attention to conformance at the expense of more productive engagement on matters of corporate performance.
To this is added the risk, he says, of there being willing coalitions between boards, investors and managers in favour of convenient stories that avoid the need for each of those parties to face up to embarrassment. ‘Can kicking’ is ultimately about the standards boards set for themselves, and their willingness to hear about and deal appropriately with obvious or predictable performance issues.
3. Unethical conduct. Hilmer describes situations in which salespeople take advantage of customers’ poor understanding, or peddle products designed or maintained to disadvantage them. Uncovering these kinds of unethical behaviour and addressing their prevention was central to the findings of the Australian financial services Royal Commission.
The final report of the Commission identified four contributing factors:
- unethical behaviour driven not only by the relevant entities’ pursuit of profit but by the pursuit of individual personal gain
- entities and individuals who acted in unethical ways simply because they could
- the tendency for consumers to deal with financial services entities through intermediaries
- financial services entities that broke the law not being properly held to account.
4. Deliberate concealment from the board of actual or emerging problems. The flow of information coming to the board is controlled by management. Boards, like anyone, can be deceived. Hilmer suggests that wilful deceit by a charismatic chief executive, for example, is almost impossible to detect. He concludes that prevention is difficult and motives for this type of misconduct are varied and powerful. A contributing factor, he says, is the unwillingness of directors to push back and question the CEO, because the large gap in knowledge between management and part-time directors means the latter can be reluctant to ask ‘dumb questions’. On top of that, directors are often reluctant to develop a reputation for being ‘difficult’.
More-of-the-same won’t work
Hilmer launches a strong assault on the basic premise of ‘best practice’. His main concern is that currently favoured practices become widely expressed and locked into in various increasingly detailed, generic governance codes. Rather than acting as a guide, these codes become restrictive ‘one-size-fits-all’ prescriptions. As implicit rules with little tolerance for diversity in their application, these have added to boards’ conformance burden without reducing the number of governance failures.
Hilmer contends that there has been an emphasis on process at the expense of outcomes across almost every area of board construction and operation, with a consequent growth in ‘box ticking’ behaviour. While few boards can expect to have complete control over business outcomes, they can control whether a defined process is completed. In this regard he observes that:
In an environment where directors feel under significant personal as well as collective pressure, focusing on process has considerable practical appeal.
Hilmer argues that more process will not address the structural imbalances in time, information flow and in-depth knowledge that lie at the heart of, for example, deliberately concealing bad news from boards.
He reaches similar negative conclusions about some common underlying beliefs about the characteristics of high-performing boards, such as director independence. He also highlights long acknowledged but little attended to problems with executive remuneration.
He also squelches any idea of loading boards with additional tasks:
Why should directors and chairs deploy the additional effort required to implement and then sustain the changes ‘more of the same’ implies if they do not contribute to improved governance performance in the areas of greatest impact and focus?
Equipping boards to meet governance challenges
On the back of this analysis of what’s wrong with boards, Hilmer proposes that the notion of ‘best practice’ should be jettisoned and replaced by a search for ‘best fit’. In this search he describes a range of governance models [3] and suggests when and how these might be the best option.
He then considers how boards might operate more effectively in the time available, notwithstanding generally increasing expectations of them. He looks at what are reasonable and what are unreasonable expectations and proposes two complementary approaches—greater focus and more delegation.
Finally, Hilmer stresses the vital importance of the leadership of the board chair, who he sees as the necessary integrator and promulgator of the various elements he proposes.
- Best fit not best practice. To explain this, Hilmer calls on contingency theory, suggesting that contingent governance recognises that organisations are open systems operating in fluid environments. Effective governance (and management) needs to reflect the context in which the organisation operates because, even within the same industries, companies face different contexts.
- Focus and delegation. Hilmer describes these two ideas as complementary. Focus without effective delegation is impossible; delegation without focus is abdication.
Focus is obvious in the context of this book. No organisation can do everything, so it should focus on the activities where it can have the greatest positive impact. A key challenge at the board level is to know when to focus (or not) on certain issues and when to delegate to management or a board committee.
Hilmer contrasts this with signals from the regulatory environment that suggest most matters boards must deal with are of equal importance most of the time:
Focus matters because, no matter how much time a Board has available, there is an impossibly long list of issues on which the Board could be asked to provide guidance or approve a decision.
Determining focus must be recognised as the primary driver of board effectiveness. Boards must decide what they should focus on at any stage; what level of involvement to have and scrutiny to apply; and how any additional areas should best be handled. Improved focus, Hilmer suggests, is better than finding more time for board work (and particularly for compliance-related work). Increasing the time involved reduces the talent pool and blurs the line between governance and management:
To avoid fragmenting available time across broadening agendas, Boards should act deliberately in allocating their increasingly scarce available time, delegating to support or enable this focus.
To back this up, Hilmer offers examples of the matters on which a listed company board should focus and the questions that might help it reach a conclusion consistent with the ‘best fit’ ideal. These are a good starting point for a worthwhile board discussion.
Similarly, Hilmer’s discussion on when and what to delegate is a valuable contribution. It goes to the heart of effective board/management collaboration. As he comments:
There are many observed examples of management simply transferring risk or burying committees in voluminous detail rather than exercising genuine delegated responsibility.
Points covered include the extent to which boards should understand operational detail; how they should approach chief executive appointments and subsequent performance evaluation; and the board’s role (compared to management) in developing company strategy.
The chair’s contribution to governance
The final chapter in the book underlines the vital importance of board leadership. We could not agree more, but rather than extending this already long review and exploring Hilmer’s views on the chair’s role and responsibilities in detail, we will leave you with just his preliminary observation:
…if the chair can’t tackle these issues, who can?
Hilmer states in his introduction that his intended audience are those concerned with the boards of Australian publicly listed companies—although he adds that the issues addressed are also relevant to smaller, unlisted companies.
We would add that the book’s value extends well beyond Australia, and it will also be a worthwhile read for the directors of ‘for-purpose’ organisations and any others similarly subject to increasing regulation and prescription of their approach to governance.
At the outset, Hilmer also expresses the hope for the book that it ‘…will be seen as pragmatic rather than evangelical, practical rather than theoretical, and thought provoking rather than prescriptive’. We think he has succeeded. It is a relatively short book (less than 200 pages), well written, and easily digested. Like Strictly Boardroom, we expect this will be on our reference list for a long time to come.
Notes
[1] Hilmer, FG. Strictly Boardroom: Improving Governance to Enhance Company Performance. Melbourne, Information Australia. Second Edition 1998. Pp 2-3
[2] Hilmer, FG. op cit. Preface, p. i
[3] The models he reviews are:
- the ASX board
- the executive-heavy board
- the private equity model board
- the governance 3.0 board. This is essentially a traditional ASX board but with a small number of more empowered and closely involved directors (full-time or nearly so)
- the two-tiered board.
