Management consultants, McKinsey, published a paper this week titled, ‘Corporate boards need a facelift‘. It includes:
“Knowledge gap: Our 2013 survey of 772 directors revealed a shocking lack of comprehension of their companies. Only 16% said directors strongly understood the dynamics of their industries, just 22% said directors were aware of how their firms created value, and a mere 34% said directors fully comprehended their companies’ strategies. Our latest survey indicates these findings haven’t changed much since 2013. Frankly, these flaws limit the effectiveness in the board and often lead management to limit interactions with their board by trying to manage through meetings, rather than viewing the board as a helpful source of new ideas and expertise and a sanity check on strategy.”
Here is an exchange with a Cuffelinks reader on the subject of board expertise. In response to revelations at the Royal Commission and the subsequent resignation of four directors from the AMP Board, I wrote this editorial comment last week:
“The structure of wealth management is a complex and intriguing web. There are so many gatekeepers, with dealer groups, asset consultants, rating agencies, fund managers, regulators, industry associations, media groups, platforms and financial advisers, each with a power base and clients. The Royal Commission is only unraveling parts of it.
Which is why the calls for ‘clean brooms’ from outside wealth management to sweep through the industry are misplaced. Every time I see a person from another industry appointed to a board position in wealth management, I wonder what they know about the value chain and who pays the piper. The AMP head of advice told the Royal Commission he had not “turned his mind” to commission structures. How could the former Chair of AMP, previously a middle-level executive at investment bank ABN Amro, have understood thoroughly what was happening in the advice payment structure?”
Response from a reader
A reader who is not known to me personally, Carlo Bongarzoni, sent this email with another perspective:
“As a relative newcomer to Cuffelinks Newsletter I count myself lucky to receive such a wide and penetrating set of thought and opinion frameworks so regularly. However in this issue 253 I would like to take issue with the negative views expressed about “non financial industry” people being appointed to positions aimed at cleaning up various facets of the industry.
Firstly many non-financially qualified people have proven ability in the investment side and other avenues within the FS industry. Secondly in my own experience within a broadish industry career range I think I can modestly claim that entering an executive role with no previous experience in that industry has in fact been an advantage to changing the culture and the results. Thirdly I would advance that ASIC’s failure to be a pre-emptive and prosecuting “supervisor” has seriously something to do with its staff mostly being drawn from industry insiders.
Becoming knowledgeable about a product or an industry or for that matter any subject does not necessarily require prior ancillary or mainstream background – only the keen desire or need to do so. It’s the qualities/abilities of the candidate that are paramount. As well – I found that listening first to those who could warts and all explain processes, history and the fundamentals prepared an initial framework of understanding. From then on it became first a process of thorough exploration within the ‘entity” asking dumb questions where necessary but always aiming for complete comprehension of the organisation, its business, its culture and its directions. Second – engaging with customers and suppliers sufficiently to learn the strengths/must dos/improvement areas and explore opportunities. Thirdly – as far as possible engaging with competitors and relevant community groups. Diving down through the organisation to the “shop floor” also vital. On this last – usually it’s the people within an organisation who can tell you what needs doing! Something that outside consultants milk and then claim it as their own insight.
That above process equips one with the ability to fulfil the CEO/Chair role or lesser executive function. I have managed that in a leading financial service organisation; the superannuation industry; the logistics industry of port management; the chemical industry and in general consulting. I raise all of this not as a boast but as a relatively striving rather than intellectual person who successfully showed that one can lead achievement in an industry without previous background.
ASIC needs a head from outside the industry who is zealous about changing the Corporation with will and the unfettered energy to prosecute its duties and clean up the industry. The banks have long portrayed little desire to fulfil their obligations under their charter – having consulted within and engaged as a B2B customer. My contact with advisor groups and investment managers indicates likewise. There are exceptions but few to the maxim that “experience within an industry” is often the best way to achieve needed change, recant the operation to fulfil its socially as well as business obligations and forecasts.
Sorry about the length but I get so frustrated with the expectancy that inside knowledge/experience is the vital pre-requisite in such matters. That’s why using past politicians to head up enquiries or to change situations invariably fail too. The head of the Royal Commission has little financial industry experience I would guess? Regards Carlo”
Then I wrote back
Thanks for your extensive comments. We would like to post them to our website if that is ok.
I accept the need for a diversity of backgrounds on a board, as skills from other industries can be shared. However, it is also important for many on the Board, I think a majority including the Chair, to have deep experience in the company’s industry, so they can provide the appropriate due diligence and governance. In any large company, the Chair needs to guide and advise the CEO, and we saw the consequences at CBA of the former Chair being too distant from the business.
It was especially important in AMP’s case to have industry knowledge because it seemed the Head of Advice was ‘hands off’ himself. If he wasn’t watching the business closely enough, did the board know what was happening? The fact that 70% of AMP’s advice commission was subject to grandfathering which now may be overturned is a massive issue the company should have discussed at board level. How much did the board know about the value chain in the advice business?
So this is what I meant when I wrote:
“Every time I see a person from another industry appointed to a board position in wealth management, I wonder what they know about the value chain and who pays the piper. The AMP head of advice told the Royal Commission he had not “turned his mind” to commission structures. How could the former Chair of AMP, previously a middle-level executive at investment bank ABN Amro, have understood thoroughly what was happening in the advice payment structure?”
I was not saying boards should not have people from other industries.”
And then he responded:
“I do agree that some if not most Board members should have industry experience but that’s only as good as it should be if they’re prepared to question wisely and penetratingly. I’m not sure that the Chair needs industry experience though – just broad scope of background and a persona that isn’t easily side-tracked. One of the problems with having industry knowledge sometimes is that it offers a tendency to sometimes make assumptions about a matter that more properly should be questioned more deeply. But thank you for your response. Regards Carlo”
Your comments are welcome.
Graham Hand is Managing Editor of Cuffelinks