Beyond compliance:
How can I (and my board) make better decisions?
Gavin Nicholson
“It amazes me that you can take 10 or 12
intelligent people and put them in a board
room, and their IQ drops by half.”
Source: Nell Minow qtd in Daniel Kadlec, “8 Remedies”, Time, June 17, 2002
Our board has great decision making processes?
1.
2.
3.
4.
5.
6.
Strongly agree
Agree
Neither
Disagree
Strongly disagree
What do you mean?
“Apart from the inadequacy of relevant financial
experience ... it is clear that serious shortcomings of
other kinds were also relevant, above all the failure of
individuals or of NEDs as a group to challenge the
executive on substantive issues as distinct from a
conventional relatively box-ticking focus on process.”
Walker (2009: 53)
Independence ?
Data withheld for publication purposes
So, what else?
Centro: a recap of how the factors came together
Centro - some basic facts
•
Listed Australian company
• Implication: Market disclosure is important
•
$1.5 B in wrongly classified debt and $1.7 B unrecognized guarantee
• Fundamental to risks of company and investors who rely on the reports
•
Breach of ss s 341(1), 180(1) and 601FD(3)
• Can’t delegate some things – fundamental
•
Argued accounts prepared by management and cleared by auditor
• OK – but look at the process and focus overall
Centro: a recap of how the factors came together
[8] By way of briefest summary, I make the following comments
regarding the directors. The directors are intelligent, experienced and
conscientious people. There has been no suggestion that each director
did not honestly carry out his responsibilities as a director. However, I
have found, in the specific circumstances the subject of this proceeding,
that the directors failed to take all reasonable steps required of them,
and acted in the performance of their duties as directors without
exercising the degree of care and diligence the law requires of them
Key ideas to incorporate
<1> Think of decision making as a process (often routine); it
is vital for your organisation’s success.
<2> What your board focuses on shapes your organisation’s
attention.
<3> You do need some basic finance – for lots of reasons.
Key ideas to incorporate
<1> Think of decision making as a process (often routine); it
is vital for your organisation’s success.
<2> What your board focuses on shapes your organisation’s
attention.
<3> You do need some basic finance – for lot’s of reasons.
Process really matters – independent of motivation and
knowledge
p
q
p ⋀ q -> r
(need)
(donate)
(pursue)
Director 1
Yes
Yes
Yes
Director 2
No
Yes
No
Director 3
Yes
No
No
Majority
Yes
Yes
No
Decision making is a process
Tichy, N. M., & Bennis, W. G. (2007). Making judgment calls. Harvard
Business Review, 85(10), 94.
The decision process in a board is even more complex...
Strategy and
Goals
Environment
Issue
Issue
Issue
Issue
Board Meeting
Board Meeting
Item
Item
Item
Item
Cttee
Management
In the real world…
31 Aug
2 Sept
2-4 Sept
4 Sept
Judge’s
conclusions
Activities
Accounts
Key
meetings
24 Aug
Draft #2
(350)
Draft #1
(350)
BARMC pack sent
Balance sheet of
CER identical to
that signed and
relied on by ASIC
(29)
Full financial
statements available
for directors to
review at Glen (33)
Draft #3 (350)
(exact timing unsure)
Members of
BARMC say they
read full accounts
at Glen (280-281)
5 Sept
6 Sept
BARMC
meeting
(275)
Board
meeting
(2)
Draft #4 (350)
(post BARMC)
Concise financial
statements of CNP
and CER emailed to
all directors (282)
Members told of
change to
Appendix 4E
versus account
Printer’s proof of
CER final accounts
sent to directors
Cosmetic changes
wanted by PwC
made prior to
meeting
Draft #4.1 (350)
(exact timing unsure)
Likely draft #4
of accounts
before board(27)
Uncertainty from
board members as
to what is in
accounts (34)
7 Sept
Full & Concise
accounts
before board
and BARMC (28)
Draft #5
(350)
20 Sept
Draft #6
(350)
Checklist for decision process
What are our “big 5” strategic issues?
Do we have alignment between our decisions - are the “big 5” reflected in what
we are deciding?
Do we know the role of our governance bodies & people in the decision process?
Terms of reference
Charters
Policies
Are our decision processes right?
What are our sources of information - or is it just management?
Do we have appropriate timing between Committee meetings and Board
meetings?
Do we have enough time to consider papers?
Do we unpack our assumptions for important issues?
Do we understand how our decisions evolve and develop over time?
Key ideas to incorporate
<1> Think of decision making as a process (often routine); it
is vital for your organisation’s success.
<2> What your board focuses on shapes your organisation’s
attention.
<3> You need some basic finance – for lots of reasons.
Drew, T., Võ, M. L. H., & Wolfe, J. M. (2013). The invisible gorilla strikes again
sustained inattentional blindness in expert observers. Psychological Science, 24(9),
1848-1853.
Presentation of information - resolutions
Data withheld for publication purposes
Checklist for focus
 What do we focus on now – and are they the right things?
Agenda
Board Calendar
KPIs
 What systems and structures (regular reporting) do we
need to drive the change we desire?
 Is our information being focused for us in the right way?
Key ideas to incorporate
<1> Think of decision making as a process (often routine); it
is vital for your organisation’s success.
<2> What your board focuses on shapes your organisation’s
attention.
<3> You need some basic finance – for several reasons.
Current suggestions focus on lots of
technicalities…
The judge in Centro?
•
•
[124] In my view, the objective duty of competence requires that the directors
have the ability to read and understand the financial statements, including
the understanding that financial statements classify assets and liabilities as
current and non-current, and what those concepts mean. This classification is
relevant to the assessment of solvency and liquidity. Equally, a director should
have an understanding of the need to disclose certain events post balance sheet
date.
The judge noted with approval the NZ Feltex case (J Doogue Ministry of
Economic Development v Feeney & Ors (District Court of New Zealand,
Auckland CRI-2008-044- 29199, 2 August 2010):
• [155] “Her Honour concluded the directors did take appropriate steps to
obtain advice upon which they relied as they were entitled to do, describing
that the regulators “should have done it themselves” proposition was
utterly unrealistic.”
Together with Westpac’s support
Source: Jackie Bettington, Masters by Research Submission
The key findings?
24
Source: Jackie Bettington, Masters by Research Submission
The lingua franca of board work…
The essentials of financial literacy










Solvency
 Capacity to service debt
 Liquidity
Financial position
Budget or forecasts vs actuals
Audit opinion
'Going concern' assumption
Financial statements – the purpose of each statement and the relationships between them
Directors' declaration
Balance sheet
 Assets
 Liabilities
 Equity
 Reserves
Statement of cash flows
 Operating activities
 Financing activities
 Investing activities
Income statement
 Income
 Expenses
 Profit/loss
 Profit vs cash at the bank
 Measures of profit (e.g. EBIT, EBITDA and NPAT)
Source: Jackie Bettington, Masters by Research Submission
And what we often overlook about Centro…
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Mr Healey:
–(a) did not believe he had to read all the financial statements to be confident about signing them. He also said that he had sat through the Appendix 4E page
turn and meeting earlier on 5 September 2007 when there were clearances. There were a number of factors that influenced his signing of the financial statements
without reading them...;
–(b) did not read the full financial statements or the annual report of CER before signing;
–(c) signed the full financial statements of CNP on 6 September 2007 but did not read them before doing so...
–(f) read the concise financial reports the day before the Board meeting on 6 September 2007 and looked at the balance sheet but did not read it line by line;
–(g) did not believe he had to read all the financial statements to be confident about signing them...
–(n) stated that if he had known of note 18 regarding the difference between the Appendix 4E and the final financial statements then he would have said “How
has this come about?”;
Mr Hall:
–(a) went to the Glen on both 2 and 3 September 2007 and read the full statements for CNP, CER and over 10 other entities and syndicates...
–(d) did not read the profit and loss and balance sheet extracts in the papers for the September 2007 audit committee meeting because it would be a waste
of time, as he knew he would be going out to the Glen to read the full financial statements...
–(f) agreed he probably received an email from Mr Hourigan on 4 September 2007 with concise financial statements but did not read the concise financial report
attached as he had read the full financial statements;
Mr Kavourakis:
–(a) would have a looked at the balance sheets and associated profit statements for CNP, CPT and CRT in the September audit committee pack, but he regarded
them as secondary because of ...
–(b) could not recall which version of the financial statements he read at the Glen but would have passed quickly through the balance sheets because he would
expect no change from the Appendix 4E;
–(c) for the same reasons, he did not have pay attention to the balance sheets in the concise financial report as he had read the balance sheet in the full financial
statements the day before;
–(d) his comments at the audit committee meeting about not having two or three days to review were just an expression of irritation, that it might put others out who
were more busy than him.
Mr Cooper:...
–(b) applied no system to the reading of the financial statements of the companies, but merely read them from the first page to the last page to back;
–(c) did not analyse the balance sheet because based on his experience he expected the numbers to be correct as they had gone through a thorough process of
development by accounting staff and had been reviewed by senior executives and also by the audit team. Further in Mr Cooper’s experience and in his experience
in years past, they had been right...
Mr Goldie:
–(a) Did not read the financial statements at the BARMC meeting or the Board meeting in September 2007, as he had previously read the content of what he
thought was the same information...
–(c) did try to read the Appendix 4E during the page turn on 3 August 2007, at which time he did not read the balance sheet in detail, as he did not have time to
read the whole of each page as it was turned.
Mr Wilkinson:
–(a) believed he did read the concise report at least before the board meeting on the Thursday. He would have paged through the whole document, including
looking at the balance sheet...
–(d) thought it was possible that if he had read the balance sheet carefully he would have noticed the $1.1 billion figure and it would have raised questions in his
mind but he cannot recall;
Key ideas to incorporate
<1> Think of decision making as a process (often routine); it
is vital for your organisation’s success.
<2> What your board focuses on shapes your organisation’s
attention.
<3> You do need some basic finance – for lots of reasons.
The core research group includes…
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Abdallah Bader Mahamoud Al-Zoubi
Jackie Bettington
Dr Pieter-Jan Bezemer
Natalie Elms
Anne Overell
Dr Amedeo Pugliese
Michelle Sheldrake