As we move into an era of pricing carbon the savvy Director has to keep their duties top of mind and their liabilities understood whilst steering clear of the political rabbit holes that eat up valuable time and don’t help with either aim.  ‘Clean Energy Future’ is a carbon pricing mechanism based on a cap and trade model with an initial three year fixed price period – not a tax – though the latter is useful for selling headlines and creating a politicised debate.

Whether we agree with it or not or want to dicker about the accuracy of the science behind it does not change the fact that you – the Director – have to protect your corporation from negative impacts, have your finger on the pulse of potential opportunities, and minimise your exposure to known (and unknown) liabilities.  At a practical level you must have your clean energy future integrated with your risk management strategy, and at the heart of it all you must have a Board that is leading the charge, embracing the future, and creating a company culture ‘inspired’ by the future – not grounded in fear.

As all good leaders know, when you tap into the knowledge of your organisation many of the solutions you seek will come from within.   Do you want the people who know most about the inner workings of your organisation feeling afraid, fearful and resentful about the future?  Or, do you want them to feel empowered to explore potential solutions that might just save you money AND reduce your energy consumption?  Thought so – and TWG is in full agreement that this is both desirable and possible no matter what the physical or financial size of your organisation.

Companies ought to be focusing on what they can do to reduce energy consumption, reduce emissions, and improve the bottom line.  This just makes good sense.  The Board leads the charge and an inspired team will respond.  The Board must hold the ‘whole picture’ in its collective head and ensure that the organisational culture, systems and processes are aligned with the corporate ESG (Environment, Social & Governance) strategy.  Alignment helps perpetuate a culture of better and more consistent decision-making and action.

This month’s issue of Company Director (the magazine published by the Australian Institute of Company Directors) contains two very compelling articles about the mounting pressures on companies to report on ESG and to prepare for a low carbon world.  The AICD’s inaugural Director Sentiment Index also concludes that most directors expect an increase in ESG regulation in the next two years, with climate change, workplace health and safety and industrial relations being the biggest pressure points (see “Under Scrutiny”, page 22 of Company Director, Vol. 27, Issue 7, August 2011).

We aren’t going to give you another long checklist of what to do, but a quick temperature check of your organisation should cover:  do you have mechanisms for the shareholders, employees and significant stakeholders to provide recommendations to the highest governance body as part of a best practice governance framework?  Is the Board providing the right kind of thinking to take the company to the next level of innovation?  And lastly, how are you tapping into your organisational knowledge, ferreting out hidden risks, accessing ideas, and building carbon productivity?

TWG can help you get your house in order.   We can engage your board in a series of working lunchtime sessions, round table briefings, or committee workshops (in a number of formats) and at the level of ‘tools’, we can provide strategic frameworks, full integration services, Carbon Management Response Plans (CMRP), Carbon training, stakeholder engagement models, and use our proprietary analytical tool called SHAARP (Stakeholder Audit, Alignment and Risk Perception) to unlock your organisation’s knowledge.

The issue of fairness and equity is always important to society but the current debate about the number of women in boardrooms goes beyond that.  Essentially, it is an issue of board performance and effectiveness in the crucial role of decision making and governance.  Why? Good decision making depends on access to good information and the multiple ways of interpreting that information. The inherent bias that causes us all to filter and prioritise the information we get means that we can overlook something important or simply not get the value we need to get from the information we have.  This human tendency is behind the principle of having companies governed by a collective – the board – instead of one person, no matter how able that person is!

These differences result from differences in blood flow, brain structures and chemistry. People at the more female end of the brain structure spectrum will take more input via their five senses and store this material for later use than those at the male structure end.  Hence the female brain is more likely to remember detail of conversations and pick up moods and unspoken information, than the male structured brain.

The female structure will use more words than the male and see more colour and fine detail than the male structure perceives. The wiring of the more female end brains also links emotional activity with thoughts and words in the top of the brain so that emotional issues are quite literally top of mind. In contrast those at the male side of the spectrum may need many hours to process emotional laden experiences.

Scientifically speaking, people at the female end of the spectrum have more white matter in their brains whereas the male end has more grey matter ( see Gurian, M. & Annis, B. (2008), Leadership and the Sexes: Using Gender Science to Create Success in Business. San Francisco: Jossey-Bass.). White matter is the connective tissue which connects brain centres in the neural network, allowing them to make connections between disparate bits of information more easily.Conversely, grey matter tends to localise brain activity into single brain centres, allowing focus on one thing at a time with greater success whilst filtering out other bits of information that are coming through the senses or just outside the sphere of focus.

Important to the role of a board, is that they must hold all of the pieces of the business; it must see how they connect and where they are going; what could undermine success; what is needed from people for performance; it must relate strategy to day to day operational needs and issues, and so on, in an increasingly complex environment.  The connective ability that comes with white matter seems to enable women to hold all of this complexity in a way which is often difficult for a lot of men and to see possible consequences and risk more readily.If we ask the question what type of thinking skills does a board need to be most effective, the answer we always get is both!

What do you think? At its simplest level it is being seen as a male/female thing and generally speaking that is ok. But remember that it is a spectrum, and both sexes can be at various positions within that spectrum, including a “bridge brain” that has components of both.  So ask some questions to test your director candidate’s thinking styles so you get a clearer picture about the board you are building.  Visit our Board Development section of the TWG website, to see what else might help you build a more effective team.

You could be forgiven for being a bit shocked about what happened recently in the Centro case ( ASIC v Healy [2011] FCA 717) when not only the board of Centro but all of the financial staff, the CFO, Managing Director and the PWC Audit team missed the fact that about $2 billion dollars of short term debt had been misclassified as long term debt. As most people would have heard by now, the Court found that the directors had breached their duties in failing to pick up a mistake, which according to Middleton J, has come to be known as the “Blind Freddy” proposition (par.251).  There has been a lot of comment about what this means for directors – especially in the context of large, complex companies, who should surely be able to rely on the experts advising them – however, the use of the expression “Blind Freddy” probably puts the result of this case in context.

There are a number of problems emerging in our traditional approach to the role and responsibilities of directors in Australia, a major one being what can realistically be expected of them as companies get larger and larger and more complex. The corporate model that we use and our legal imperatives were, of course, set down in a much simpler corporate environment of the 19 and 20th centuries. Clearly things have changed: not only in the size and complexity of companies and the business environment, but also the level of public participation in the share market and the gap between those ‘owners’ and the people who control the company. Government and regulators thus have a political motivation to demand a level of oversight that it is increasingly doubtful that a board, especially a board of part time directors, can  provide even with the best will in the world.

ASIC v Healy appears to be one of those cases: honest, intelligent, highly ethical directors, who were trying to do the right thing, who appeared to have all of the right systems and processes, and to ask all of the right questions, still got it wrong. It seems to be a tough decision. As the defence said, if the experts in the company get it wrong what hope has the board?!

The line in the judgement that sends a chill through my bones is in paragraph 333 where evidence was given of a discussion at the Board Audit Committee meeting about whether there was sufficient time for review of the financial statements, and the practical consequences if final amendments to the Annual Report did not get finalised that day. At this point, Mr Cougle of PwC, said that “he could give comfort that the auditors had signed off on the full accounts.” The question that every one of us as a director must think about is: how would we respond to that assurance, or more particularly, how would we have responded before this case?

As would be expected, a lot of the case centred around the issue of reliance under section 189 of the Corporations Law (2001). One side argued that directors must, in all reality, be able to rely on the information that came from the experts both in management and the external auditors, while the other saying that this is so, but that there are limits to this power. As is often the case, media and commentators have reviewed the decision in terms of ‘all or nothing’. That is,  there is either a total power to rely on others, or there is none. This would mean, following the case of Centro, that directors everywhere will be forced to trawl through the minutiae of the accounts to second guess the so called experts. However, like life, the answer is much greyer than that! ASIC never suggested that directors were responsible for all errors, only those which were so obvious that ‘blind Freddy’ could have seen them. Or in ASIC’s words:

“We will submit that the court can draw the conclusion [ as to the breach of standards of care and diligence] from the obviousness of the error to any reader of the accounts who had the requisite financial literacy and the knowledge that these directors had of the affairs of the companies, specifically their debts.” (Para 251.)

Middleton J ultimately agreed with this submission, but again and again throughout the judgement, he emphasized that this does not mean that directors should be experts or delve into the minutiae of operations. But that directors do have a real role – “they are not an ornament but an essential component of corporate governance.” (Para 19).

He said:

“All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the declaration required by Section 295(4). Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position. This accumulated knowledge arises out of a number of responsibilities a director has in carrying out the role and function of a director.” (Para 17)

In summary, I think the judgement draws out some very important issues for directors, a number of which we have been promoting for some time:

  • Where directors are specifically required to sign off on an area of company reporting , such as under Section 295(4) of the Corporations Act ( that there are reasonable grounds to believe that a company would be able to pay its debts as and when they become due, that the accounts comply with the requisite accounting standards, and that the accounts present a true and fair view of the company’s financial circumstances) they cannot merely rely or delegate this to others, but must satisfy themselves that this declaration is correct;
  • The Reliance Provision in Section 189 cannot be used where a director’s personal opinion or individual certification is sought. He or she must apply their own minds and cannot delegate that assessment to somebody else;
  • A director’s role is to bring their ‘accumulated knowledge’ of the business as a whole to the task before them. This is a different perspective from other people in the organisation; it is a directorial perspective which requires the board to stand back and view the whole business, from a strategic or helicopter level;
  • The judgement upheld ASIC’s view that had the directors taken a whole view, they should have noticed the error. Middleton J said:

“A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic. The reading of the financial statements by a director is for a higher and more important purpose: to ensure that the information included therein is accurate. The scrutiny by the directors …involves understanding their content…These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements and their own director’s reports.”( Para.22)

  • The ‘line in the sand’ on what directors should have seen is the ‘Blind Freddy” proposition. That is something large and obvious that it should have been visible to those “at the top of the governance apex’ because it impacted the whole business, in this case $2 billion of misstated current debt as well as $1.75 billion in guarantees of an associated company;
  • Even with the need for diversity within boards, there is a skill all directors must have which is a level of financial acumen to enable them, personally, to sign off on a provision such as Section 295(4) Corporations Act 2001;
  • Indeed, if a business is becoming too large and complex for the board to truly understand what is going on, then that too is an issue for the board. Is ‘big’ necessarily better? If continued growth is what your business needs, it then is for the board to consider what governance structure is necessary to ensure that the business is still coherent enough to enable the board to fulfil its role and duties?

One of the traps of collective decision making, is how easy it is to sit back and rely on others, especially if they appear to have skills and experience that one doesn’t have. This is a basic human tendency that we see occur even amongst people who have highly developed skills. It serves to show that everything is relative!

We now have the results of the sentencing hearing where Middleton J maintained his path in defining further the fine line between a director’s role and that of his or her advisors within management and beyond. The directors have been found guilty of breaching their duties but no further penalty was considered necessary in the circumstances of this case. This, we believe, is the right outcome. Some might ask (and have) whether it is enough to change behaviours? However, the impact of this case on the individuals involved, and the consequences for their reputations cannot be overstated. As for the rest, the judgement in this case serves as a valuable restatement of the issues and the fault lines that are appearing in our corporate model. More importantly it emphasises the need for all of us, as directors, to understand the business of the company to which we owe our duty of care, and to bring our independent judgement to the issues before us taking into account the ‘Blind Freddy’ proposition before we rely too heavily on others!

For the full case details, open the PDF document.