Brian Gaynor: Bring greater diversity to the boardroom

We need younger people with more specific industry experience. Photo / 123RF

The Blues' success in the State of Origin thriller and the referee's decisions that supposedly robbed the Wallabies against Ireland weren't the only topics of conversation in Sydney this week.

These sporting highlights were partly usurped by the new Fletcher Building board appointments, which were the subject of a patronising CBD column in the Sydney Morning Herald.

The Aussies love to have a dig at our business practices and the CBD column was a perfect example of this.

Under the sardonic heading "Nothing constructive about board", it began: "Kiwi construction giant Fletcher Building lost a fortune amid the biggest construction boom in the country's history.

"If there was one lesson that Sir Ralph Norris' board was meant to learn from the disaster it was that it needed more people with experience in its core business — building materials and construction."

But no. The column pointed out that two new directors, Barbara Chapman and Rob McDonald, had close connections with Norris.

Chapman had been CEO of ASB, Norris' former bank, and McDonald was appointed Air New Zealand's CFO in 2004 when Norris was the airline's chief executive.

The other new directors are lawyer Cathy Quinn and former Auckland Council chief executive Doug McKay.

The latter currently sits on the National Australia Bank board.

CBD added: "A great crew, the Kiwis agree, but absolutely zero construction experience between them. What gives?"

The Aussie columnist continued with his low blows. He wrote that former CEO Mark Adamson led the board "on a merry dance until the facade on its building division (B+I) collapsed and revealed a disaster of truly epic proportions".

The final punch below the belt was the prediction that Fletcher Building's next board appointment could be "Sir Ralph's former Kiwi protege at Commonwealth Bank Ian 'Aussie' Narev".

The Aussies love to have a go at us, partly because our economy and sharemarket have outperformed theirs in recent years. Although CBD landed low blows, we cannot totally dismiss its piercing attack because our director selection processes have two major flaws.

First, the New Zealand director selection process is secretive with almost no shareholder involvement. Second, our director pool is narrow with far too many accountants, lawyers, knights and former bank chief executives.

In addition to Sir Ralph Norris, former ANZ Bank managing director Murray Horn chaired the failed Wynyard Group while Sir John Goulter and Sir John Wells have chaired Metro Performance Glass and CBL Corporation respectively.

There seems to be a widely held view that ageing knights and former bank chief executives make great directors but Fletcher Building, Wynyard, Metro Glass and CBL contradict this.

Meanwhile, we don't appoint enough younger individuals with specific industry experience.

This issue was highlighted in a major August 2016 Financial Times survey under the heading "US board composition: male, stale and frail?".

The figures in the accompanying table are derived from the Financial Times/International Shareholder Services analytics database attached to the 2016 survey.

The first point to note from the Financial Times study is that New Zealand directors had an average age of 59.1 in 2016, slightly lower than the United States, Canadian and Australian averages but above the 10-country average of 57.7. European companies, particularly in Scandinavia, have a much lower average director age and a higher ratio of female directors.

New Zealand had only 19 per cent female directors two years ago compared with a 10-country average of 26 per cent.

Norway had 42 per cent female directors, France 38 per cent and Sweden 35 per cent.

These figures indicate that New Zealand boards are dominated by older males with limited diversity.

One of the best insights into New Zealand director selection processes was published by Harvard Business School four years ago.

It was authored by Professor Boris Groysberg of the Harvard Business School and research associate Sarah L. Abbott under the title "Chorus and Telecom: Building the Boards".

It describes the Telecom split into Telecom and Chorus in late 2011 and the selection process for the new boards. The selection process was driven by Telecom chairman Wayne Boyd with the assistance of Sue Sheldon, the new Chorus chairwoman.

Sheldon told the authors: "The pool from which directors in New Zealand are drawn, and I think it has been pretty similar worldwide, is far too narrow. And, the process in New Zealand has been typically that people sitting around the board table found new people to come on to their board, and they tended to be people who looked similar to themselves."

This was essentially the core argument of the Sydney Morning Herald column.
Sheldon added: "And so there has been a thinking in my mind for quite some time that we need to find ways to broaden and deepen this pool."

Boyd had been a strong champion of diversity on corporate boards, arguing for the inclusion of more women and younger professionals.

He believed that a diverse board resulted in better decision making.

He told the Harvard study: "I felt strongly that most of us sitting around the board table were cut from the same cloth. And so, I worked quite hard to try and get diversity in the broader sense.

" I think you only get best outcomes from boards with that broad diversity aspect reflected at that board table. It's definitely not just about gender."

Mark Laing, a Telecom executive, recalled that Boyd "had a very strong belief set around developing diversity on boards".

"Over the last three or four years, his two objectives were to bring young people, he called them bright young things, on to boards in New Zealand and increase the number of females on boards."

The Harvard study compared the traditional New Zealand board selection process, which was mainly based on choosing acquaintances of existing male directors, and Boyd's new approach. Boyd was quoted as saying: "We can't have any Christmas tree lights on the board — these names that everyone knows, and they look great on an annual report but they're not actually driving the company's performance where it needs to go."

The Telecom and Chorus selection process involved a preliminary list of approximately 160 candidates which was reduced to a final list of 28 individuals after phone and subsequent in-person interviews.

The Harvard report outlines the process which included extensive interviews with the chairs and CEOs of Telecom and Chorus.

The new Telecom and Chorus boards had no knights or Christmas tree lights although there were several lawyers and accountants.

The Chorus board had three males and three females and, although no ages were provided, it looked younger than the traditional New Zealand listed-company board.

The new Telecom board had six males and two females with Mark Verbiest replacing Boyd as chairman.

Verbiest is a lawyer who was a member of Telecom's senior executive team from late 2000 to 2008. Murray Horn, the former ANZ Bank managing director, remained on the Telecom board.

The Aussies have had a swing at Fletcher Building's corporate governance but when we do it right we can beat our neighbours as the share prices of Telecom (now Spark) and Chorus have substantially outperformed Telstra in recent years.

Unfortunately, New Zealand is slipping back to the more traditional director selection approach outlined in the Harvard Business School study.

We need more Wayne Boyds, directors with a strong emphasis on a rigorous board selection process, greater diversity and a no Christmas tree lights philosophy.

- Brian Gaynor is an executive director of Milford Asset Management, which holds shares in Spark, Chorus and Telstra on behalf of clients.