'Tough stuff' sets the test

It's not just Air New Zealand. Boards all over the country are under fire for poor company performance. What's wrong? JULIE MIDDLETON quizzes an expert.

If you're an Ansett staffer or Air New Zealand shareholder, the following assertion is probably heresy - the best board directors are people who have felt the searing heat of business hell. Like the members of the Air New Zealand board.

Unfortunately, most New Zealanders don't like trial and error in their boards, says governance guru Garry Diack.

"We're going to slaughter the directors [of Air New Zealand], slaughter the chief executive officer."

But it's what he terms "tough stuff" which gives board members the lessons to manage business well in the future's rocky times.

"The breeding ground of insight is trauma, being challenged as to who you really are and as to what your real competencies are ... and that's where insight comes from," Diack says.

"The tough stuff gives insight. The commercial side would have tested any skills in the world, and these directors and [chief executive officer Gary] Toomey have been through something that will give them insight that, if we're really honest, many directors should aspire to."

Christchurch-based Diack is a boardroom troubleshooter, gaining insight from close-up study of the nation's boardrooms.

And he says too many directors behave in the boardroom as if they're still working within a stable economy - deferential, reactive, and regulation-focused - when it's decidedly stormy outside and the current economic turbulence couldn't have been predicted, let alone planned for.

Boardrooms in trouble, says Diack, might be suffering from the following ailments.

* Housekeeping overshadows strategy.

Kiwi boards are good at compliance, says Diack - doing things by the book. He reckons that's an overhang from our "British colonial" past.

But strategy - where the business is going, how it's getting there and how it may have to reinvent itself - "is an event in the diary of a company, and the event is usually once or twice a year".

"It becomes an event that has to fight for agenda time against the compliance stuff."

Strategy needs to be intertwined with the agenda, he says.

"Without doing the research, I'd be pretty confident 50 to 60 per cent [of a board agenda] is reporting and compliance, and then 30 to 40 per cent is around the planning and just 10 per cent around the thinking.

"The compliance culture of a boardroom is a natural counter to the strategic thinking. It needs to be up to 30 per cent."

If your board just runs through the motions, there's a risk, says Diack, that people become "a board attendee rather than a true director".

* Ritual gets in the way.

"Board protocols and rituals count against thinking," says Diack. There's way too much issue, discussion, resolution, vote.

"That forces an end point. If we slice 'resolution' and 'vote' off the bottom of the strategic part of the agenda, we open up the thinking."

Boards are about rigour of debate, he says, and that should be at the centre of everything else for which a board is responsible - shareholder accountability, strategy direction, governance policy, monitoring of CEO performance, board reporting, and retaining reinvestment confidence.

* Shortage of talent.

"The change in the commercial environment in New Zealand has moved way too fast for boards to develop directorial talent," says Diack.

People can argue that expertise can be bought, "but what you're buying is advice. If you blindly accept advice then that's OK, but someone's got to stand back and make a judgment on its application to the business."

Some boards, he says, are setting up advisory groups to help them through specific issues when a board is short on skills.

"We need an intermediate stage while we bring the people through."

* Shortage of mavericks.

"There's a conformity of directors in New Zealand," says Diack.

"They are the captains of industry and we tend to value them because they are the captains of industry, and without them we'd die."

But they're all cut from the same cloth, tending to be male suit-wearers with an address in Remuera (or Khandallah, or Fendalton).

More commercially astute dissenters are required.

"In the wild west they used to shoot maverick cattle because they influenced the mood of the herd," muses Diack.

"In Australia they breed maverick cattle because it's the only way to survive in that environment. What are we doing? We're shooting mavericks.

"We're keen to put successful, risk-based professionals like accountants on board rather than the people who have been out there and earned their stripes ... like entrepreneurs, those with commercial acumen who have continued to grow.

"I think we fundamentally are a risk-averse country, and that risk-averse culture flows into our board rooms.

"Most New Zealand investors invest with a relatively low-risk profile. People know the big investors like Brierley, but they take risks and they win and they lose, but invariably they win because they're still here."

* Board members underestimate how a company's life cycle should influence focus.

"The life cycle of business is the fundamental driver of what should go on in the boardroom," says Diack.

Companies move through phases - start-up, emerging and mature, leading to new growth and acquisition phases - "but our boardrooms don't reflect that business life cycle in their composition or the agenda of items that are brought before the board."

Take Air New Zealand, he says: "It was a real stable entity in New Zealand, and all the commercial pressures were about getting people where they wanted to go on time.

"It probably had a board that was constituted around those competencies, getting people where they wanted to go on time."

Then the commercial environment shifted to performance, market share, mergers and acquisitions - with the technical get-them-where-they-want-to-go specialists still in charge. Recipe for trouble.

* An insufficiently rigorous appointment process for directors.

The old boys' network way of doing things is not objective.

"There is a practice around word of mouth ... and the risks around that are much greater than an objective process," says Diack.

That's an odd dichotomy, he says, considering the huge amount of rigour applied to appointing executives.

* Directors not being trained.

No matter how experienced, board members should never think they have nothing left to learn.

Diack advocates "depreciating" directors.

Say you depreciate the assets of a company by 15 to 20 per cent a year, he suggests.

"Let's say there are eight directors at $50,000 each. Depreciate that $400,000 by 20 per cent a year and you should be spending $80,000 on developing those directors."

* Directors are overcommitted.

The piles of work juggled by Air New Zealand's former chairman, Sir Selwyn Cushing, have in part been blamed for the airline's troubles - when he was running Air NZ between July last year and January, he was chairman of five other bodies and a director of four companies.

In a more stable economy of mature businesses, where directors' roles are more oversight, says Diack, nine companies is probably OK.

"But in the economy we have, the predicted demands on directors can't be calculated. I think we have to look quite seriously at the fact that our good directors are stretched too far."

* Too many people on the board.

Meetings are most effective with between four and six people, says Diack. Thanks to mergers and acquisitions, and the extra representation that may demand, some boards have reached double figures.

"My view is that five to eight would be the ideal size of a board."

* Boardroom culture not being managed.

A boardroom should be like a football match, Diack says, quoting an American friend: "I don't come to see the scorekeepers, who are the accountants. I don't come to see the referees, who are the lawyers, and I don't come to see the groundspeople, who are the engineers.

"I come to see the players, and these are the people who have been out there, run businesses and been successful. And they should be on the boards."