code of ethics

Structuring the Board

Week 3 Workshop

MBA402 Governance, Ethics and Sustainability

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2

• In groups, design and build a structure that will support the weight of a marshmallow.

Your building materials include:

• 20 sticks of spaghetti • 1 metre of tape • 1 metre of string • 1 marshmallow

You have 18 minutes to complete your challenge.

The group with the tallest structure wins.

Small Group Challenge

Marshmallow Challenge

Play Video

Board Collaboration

• A collaborative, well structured board is essential for effective governance.

• Board size can be determined by appointing the appropriate number of directors for the company.

• Board composition can be determined by appointing directors of varying type, skill, and commitment.

Principle 2

2. Structure the board to be effective and add value Companies should have boards of an appropriate size, composition, level of skill and level of commitment to enable them to discharge their duties effectively.

Non-Executive Directors

• A non-executive director is not also a part of the executive team, or senior management, of the company.

• Non-executive directors are necessary to challenge management and hold them to account and represent the best interests of the company and its shareholders as a whole.

Recommendation 2.1

2.1 The board of a listed entity should: (a) have a nomination committee which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director,

Recommendation 2.1

2.1 and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or

Recommendation 2.1 2.1 (b) if it does not have a nomination

committee, disclose that fact and the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively.

Board Committees

• All directors are equally responsible for the governance of the company.

• Board committees can provide independent and objective corporate governance supervision.

• Board committees prevent management domination of board decisions.

Nomination Committee

• A separate nomination committee can be an efficient and effective mechanism to bring transparency, focus and independent judgement needed on decisions regarding the composition of the board.

Nomination Committee

• The nomination committee makes recommendations to the board regarding: o board succession planning. o induction and continuing professional

development of directors. o the process for recruiting a new director. o the appointment and re-election of

directors.

Wrong Guy

Play Video

• What does Canadian educator Laurence Peter mean when he says:

Small Group Discussion

Managers are promoted to their level of incompetence.

2. List three skills that are required to perform the job.

Individual Challenge 1. Find an advertisement for a job that interests you on the

internet.

3. Assign yourself a skill rating for each skill: High = 3, Medium = 2, Low = 1

The Peter Principle • The Peter Principle states the selection

of a candidate for a position is based on the candidate’s performance in their current role, rather than on abilities relevant to the intended role.

• The skill set necessary for a director to effectively govern is different from the one they may have relied upon previously to effectively manage.

General Board Skills

• A well-structured board will have a good balance of professional director skills.

• In groups, identify four such skill areas. o Risk & Compliance o Financial & Audit o Leadership & Strategy o Policy Development

Specialist Board Skills

• A well-structured board will also have a balance of specialist skills relevant to the operations of the company such as: o Geomechanics for a mining multinational o Toxicology for a pharmaceutical

conglomerate o Computer engineering for a tech start up o Cognitive science for a university

Recommendation 2.2

2.2 A listed entity should have and disclose a board skills matrix setting out the mix of skills that the board currently has or is looking to achieve in its membership.

Board Skills Matrix

• A board skills matrix is a useful tool that can help identify any gaps in necessary skills to be addressed by further education, professional development initiatives, or board succession planning.

• Each director is assigned a skills rating: High = 3, Medium = 2, Low = 1, NA = 0

• Where is the skills gap?

Board Skills Matrix

Director Skills Santosh Dora Omais Ngoc Jess

Risk & Compliance 3 1 2 3 2

Financial & Audit 3 2 3 1 3

Leadership & Strategy 2 3 3 2 2

Policy Development 1 1 2 1 1

Computer Engineering 0 3 0 2 0

An Elephant in the Dark

Play Video

• Do you agree with fictional corporate raider Gordon Gekko when he says:

Small Group Discussion

Greed, for lack of a better word, is good.

2. Now assume the role of student and take the quiz by writing answers to the three questions.

Individual Challenge 1. Choose a topic that you find interesting. Assume the role of teacher

and create a three-question quiz about that topic.

3. Now assume the role of assessor and mark the quiz answers by scoring each one a mark out of 5 for a total score out of 15.

Imagine this is your only assessment for MBA402.

That is, your final grade depends entirely on the mark you award yourself.

Self-Interest

• Self-interest can obscure perception leading to tainted judgements.

• A person motivated by self-interest acts for their own personal advantage, sometimes without regard for others.

• A conflict of interest can arise where a director has a personal interest in the outcome of a board decision.

Conflict of Interests

• A director may be placed in a position of conflict if he or she is: o allied with the interests of

management. o a substantial shareholder in the

company. o a relevant stakeholder of the

company.

Recommendation 2.3

2.3 A listed entity should disclose: (a) the names of the directors considered by the board to be independent directors;

Recommendation 2.3 2.3 (b) if a director has an interest,

position or relationship of the type described in Box 2.3 but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position or relationship in question and an explanation of why the board is of that opinion, and (c) the length of service of each director

Recommendations 2.4 & 2.5

2.4 A majority of the board of a listed entity should be independent directors.

2.5 The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity

Independent Directors

• An independent director is free of any interest, position, association or relationship that might influence his or her capacity to bring an independent judgement to bear on issues before the board, and to act in the best interests of the company.

Relevant Factors

• Box 2.3 outlines relevant factors to assessing the independence of a director including: o Employment in an executive capacity o Receipt of performance based pay o Having a material business relationship o Being a substantial holder of securities

in the entity

Chair of the Board

• The chair of the board is responsible for leading the board, facilitating the effective contribution of all directors and promoting constructive and respectful relations between directors, and between the board and management.

Independence and the Board

• A majority independent board with an independent chair minimises the risk of any individual dominating the board’s decision-making and maximises the likelihood that board decisions will reflect the best interests of the company and its shareholders generally.

Dragon Warrior

Play Video

• What does Austrian philosopher Karl Popper mean when he says:

Small Group Discussion

True ignorance is not the absence of knowledge, but the

refusal to acquire it.

• In groups, think of something the Zen Master could say in response to his disciple’s comment.

A Zen Master is meditating deeply when he is interrupted by a question from an inquisitive disciple.

“What happens after we die, Master?” the disciple asks.

The Master opens his eyes, “I don’t know.”

“Oh,” says the student with disappointment.

“I thought you were a Zen Master.”

Small Group Challenge Truc Lam Tay Thien Zen Monastery, Vietnam 230 BC

Learning and Development

• Management educator Peter Drucker says:

“We now accept the fact that learning is a lifelong process of keeping abreast of change. And the most pressing task is to teach people how to learn.”

Recommendation 2.6

2.6 A listed entity should have a program for inducting new directors and for periodically reviewing whether there is a need for existing directors to undertake professional development to maintain the skills and knowledge needed to perform their roles as directors effectively.

Professional Development

• The board or nomination committee should regularly review whether the directors have the skills, knowledge and familiarity with the company’s operations required to fulfil their roles effectively, and consider what training or development could be undertaken to fill any gaps identified.

Financial Statements

• In the case of ASIC v Healey & Ors the Federal Court held that it is a duty of every director to read the company’s financial statements carefully and to consider whether what they disclose is consistent with the director’s own knowledge of the company’s affairs.

Financial Statements • This means each director must have an

appropriate base level of understanding of accounting matters.

• The board or nomination committee should ensure that any director who lacks specialist accounting skills is provided with professional development to learn how to interpret the company’s financial statements.

Playtime

Week 3 Workshop

MBA402 Governance, Ethics and Sustainability

The convenience store cashier grows impatient as Ruth Laughton frantically searches her pockets for enough change to purchase two $3.99 sandwiches. You offer to pay for lunch and hand the cashier your credit card, enjoying the irony of FundCorp’s CEO being caught short of funds. The two of you walk to the park and find a seat under some shade to eat your lunch.

“FundCorp and Meridian’s other institutional shareholders were more than ready to sell down our holdings when the Financial Review story broke,” Ruth begins, “but your management strategy announcement stayed our hand. That was a deft manoeuvre.”

“Thank you,” you say. “But don’t think we’ve taken our finger off the trigger just yet,” Ruth warns

as she bites into her sandwich. “Some of us are beginning to wonder if we were perhaps a bit hasty in electing a few of the directors to the new board.”

“What would give FundCorp and the other institutional investors confidence in the new board and ease your concerns?” you ask.

“They lack experience and not a single director on Meridian’s board is independent, including Veda. You might want to consider a restructure.”

You explain to the Meridian directors that FundCorp and the other institutional investors are concerned about the board’s lack of experience and independence. They are not altogether thrilled by the news.

“The institutional investors are hypocrites!” roars Marco Nolan, a non- executive director with a quick temper. “How independent are their boards? Independence doesn’t make boards better – incentives do. Directors should have their financial interests tied to the performance of the company’s share price by being shareholders themselves.”

The other directors agree with Marco on this. They all talk of previous company boards they’ve sat on that had lucrative equity-based remuneration schemes and little to no regard for director independence.

Ironically, the only director who doesn’t appear to be in complete agreement is Veda, the chair of the board, and she owns more Meridian shares than any of them.

It’s obvious you’re going to need a comprehensive board restructure proposal and a compelling case for its adoption…

Group One In your group, propose a board restructure to gain the confidence of the institutional investors Focus on the following:

• Explain the concept of board composition • Discuss Recommendations 2.1 of the ASX

Corporate Governance Principles and Recommendations

• Propose three things Meridian could do to implement the Recommendations

Group Two In your group, propose a board restructure to gain the confidence of the institutional investors Focus on the following:

• Explain the difference between general board skills and specialist board skills

• Discuss Recommendation 2.2 of the ASX Corporate Governance Principles and Recommendations

• Propose three things Meridian could do to implement the Recommendation

Group Three In your group, propose a board restructure to gain the confidence of the institutional investors Focus on the following:

• Explain the concept of a conflict of interest • Discuss Recommendations 2.3, 2.4, and 2.5 of the

ASX Corporate Governance Principles and Recommendations

• Propose three things Meridian could do to implement the Recommendations

Group Four In your group, propose a board restructure to gain the confidence of the institutional investors Focus on the following:

• Explain the importance of ongoing education and professional development

• Discuss Recommendation 2.6 of the ASX Corporate Governance Principles and Recommendations

• Propose three things Meridian could do to implement the Recommendation

Group One Group Two

Group FourGroup Three

• Present your board restructure proposal to the Meridian board.

Marco Nolan continues his tirade against the institutional investors. “FundCorp simply can’t push us around like this. The general power of

management resides with this board. The shareholders may own Meridian but they do not control Meridian.”

The other directors cheer in support of Marco and the board meeting descends into a muddled sort of troop rally.

You almost have to shout just to be heard above the melee. “The institutional shareholders hold the majority vote, Marco. We can

either wait for them to exercise that voting power to replace every single director in this boardroom or we can restructure.”

The directors calm down and fall silent. “Restructure what?” Marco asks.

Everybody silently waits for the Board Chair, Veda Hosknik, to respond to your presentation. She doesn’t move for a long time. Finally, she clears her throat to address the board.

“Our CEO has presented a proposal to restructure the Meridian board to add value and placate the concerns of our institutional investors. I know this will not be an easy decision for many of us to make. For some of us, a resolution to adopt the proposal will require us to sell off our Meridian shareholdings at a time when the share price is not particularly favourable.”

Veda pauses. Marco and Eric look at you and shake their heads. “We will now take a vote as to whether we adopt the proposed board

restructure. All those in favour please raise your hands. Thank you. All those against, please raise your hands. Thank you.”

She records the votes tally in her iPad. “The board resolves to…”