Should chief executives also serve on the company's board? Photo / 123 rf
It's commonplace in Australia and becoming that way in New Zealand, but should a chief executive of a company also serve on its board?
The New Zealand Shareholders Association (NZSA) doesn't think so.
NZSA chief executive Oliver Mander took a2 Milk to task for appointing new chief executive David Bortolussi to the board - a move approved at the company's annual meeting in November.
"We recognise that Mr Bortolussi may have appropriate experience to be considered as a board member of a2 Milk in his own right," Mander said in a note issued after the meeting.
"However, his foremost responsibility is as CEO, to implement the strategy and operations of a2," Mander said in a note issued after the meeting.
Asked for comment, a spokesman for a2 Milk said: "We respect the NZ Shareholders Association's perspective on the matter but don't believe it affects our board's independent governance of the company in any way whatsoever.
"Our approach is more consistent with market practice globally and supported by our shareholders, with over 99 per cent voting in favour of the CEO's appointment as a director," the spokesman said in an email.
"In regard to the specific reasons for appointing David to the board, his role as a director contributes strongly to the mix of skills, knowledge, experience and perspectives and improves the board's overall effectiveness – including as a key contributor to the board's work in determining The a2 Milk company's strategic direction."
But for Mander, having CEOs on boards is the thin edge of the wedge, and he fears that more Kiwi companies could lean toward the Aussie example.
Felicity Caird, who leads the governance leadership centre and membership team at the Institute of Directors of NZ, says it comes down to a matter of choice for the board, and that the decision depends on that organisation's circumstances.
"In New Zealand we might see a CEO also filling the role as managing director when they've been the original founder of the company," Caird said.
"As a business grows, there often becomes a need for that split between the roles," she said.
But there were considerations that boards needed to be aware of if the CEO is also serving as a managing or executive director.
"For example, you would not expect to see a chief executive also receiving fees for their role on the board," she said.
"However, in respect of liability, the managing director is as liable as any other member of the board," she said.
"For the board and the CEO/managing director it's about being aware of any potential conflicts.
"There is a delicate balance of power here, given that it is the board's role to also hold management to account – and that may be why you don't see this happening as often in larger companies.
"Whatever the decision, it's essential that the CEO's relationship and responsibilities to the board are clearly set out in their employment agreement," she says.
Mander says ideas about governance differ, depending on what side of the Tasman you are on.
"We note that 76 per cent of the NZX Top 50 companies do not appoint the CEO to the board, a position supported by most leadership research.
"We are also aware that the opposite is true in Australia, which forms the operational base for a2 Milk. Ninety-six per cent of the 25-largest ASX listed companies have their CEO on the board.
"In our view, a2's operating base does not offer an exception to what would be considered effective governance practice," Mander said in his note.
Mander told the Herald the credibility of Bortolussi was not in doubt.
"It's not about him not having the smarts or the skills to serve on the board of a2. It's about the separation of duty between being on the board and being in charge of running a company."
There are of course some highly successful Kiwi companies that have CEOs sitting on the board.
There is the NZX's biggest company and one of its best performers, Fisher & Paykel Healthcare, which has the long-serving Lewis Gradon as its managing director and chief executive.
F&P Healthcare chairman Scott St John said Gradon's role as managing director offered "significant value".
"He has spent 37 years with F&P Healthcare, and his depth of knowledge in our highly specialised and regulated industry proves vital in our decision-making process," St John said in a written response to an inquiry from the Herald.
"Having Lewis serve as an executive director also means there is shared ownership in decisions between the board and CEO, which we believe is a positive reflection of the F&P culture of collaboration," he said.
St John said the company had measures in place to ensure the board can discuss the performance of the management team, which include frequent non-executive-director-only sessions in which Gradon is not present.
"As you would expect, Lewis does not participate in discussions regarding his remuneration and abstains from voting on any matters where there may be a conflict of interest given his role as CEO," St John said.
Another successful big cap company, Infratil, has Jason Boyes as chief executive and a director.
Mander is quick to say that it's not a "black and white" conversation.
"But if you were taking a purists' view, research does tend to support the fact that it's good to separate governance from management.
"In that respect, what that can lead to is a situation where governance can hold management accountable.
"That's more difficult to do when management is actually part of the governance structure as well," he said.
"That's the premise that this comes from, but like any rules there are exceptions to that."
The core of his objection lay in the risk of chief executives having undue influence on boards.
"What we are worried about is a CEO essentially justifying their own performance, and their own existence, on the back of being part of the board.
"Most boards are awake to that.
"And it would be a push for a CEO on a board to serve on a remuneration committee for example, or even an audit committee, although I can think of examples.
"There are controls around it, but the way we think about it is that it is the thin edge of the wedge.
"We don't want to go back to a world where there was one person as CEO, chairman, and president as well, yet in the US, that still occurs."
Mander says that once a stock enters the S&P/NZX50 index, companies should start to think about different forms of board composition that allow for a more independent and sustainable governance structure.
"I'm not going to sit here and knock F&P Healthcare's performance, because you can't, but it just highlights the point that nothing is black and white."
But Mander struggles with the examples of a2 Milk and retailer Kathmandu, whose CEO Michael Daly also serves on the board of the Australasian retailer.
"What we are seeing in both examples is the influence of an Australia-based culture, and an Australia-based governance structure that is starting to look starkly different to New Zealand's.
"We are seeing areas where Australian governance is departing in principle from what is acceptable here, and one of those is in the nature of CEOs on a board."
Each of the top 25 ASX-listed companies - with the exception of Sydney airport - have a CEO on the board compared with just six in the top 25 here which Mander says highlights the clear difference between the New Zealand and Australian cultures.
Bortolussi's predecessor, Geoff Babidge, having taken the company from near collapse to the multibillion-dollar enterprise that it is today, was chief executive and managing director for several years.
Mander says that if a CEO plays a big part in a company's transformation, as Babidge was, then being on the board makes sense.
But what happens afterwards is the legacy of a CEO also being on the board, which becomes hard to undo, he says.
Mander says there is a divergence in governance standards between New Zealand and Australia.
"And that's a concern for us because what happens in Australia - big brother - will manifest in some way over here."
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