beyond compliance: how can i (and my board) make better decisions? gavin nicholson

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. Strongly agree

2. Agree

3. Neither

4. Disagree

5. Strongly disagree

6. 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

• 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 - some basic facts

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.




<3> You do need some basic finance – for lot’s of reasons.

Process really matters – independent of motivation and knowledge

p

(need)

q

(donate)

p q -> r⋀

(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...

Management

Strategy and Goals

Board Meeting

Cttee

Item

Issue

IssueIssue

Issue

Item

Board Meeting

Item

Item

Environment

In the real world…

5 Sept

Cosmetic changes wanted by PwC made prior to

meeting

Likely draft #4 of accounts

before board(27)

6 Sept

Full & Conciseaccounts

before board and BARMC (28)

BARMCmeeting

(275)

Boardmeeting

(2)

31 Aug

Balance sheet of CER identical to that signed and

relied on by ASIC (29)

BARMC pack sent

4 Sept

Printer’s proof of CER final accounts

sent to directors

2-4 Sept

Members of BARMC say they

read full accounts at Glen (280-281)

2 Sept

Full financial statements available

for directors to review at Glen (33)

Uncertainty from board members as

to what is in accounts (34)

Concise financial statements of CNP

and CER emailed to all directors (282)

Members told of change to

Appendix 4E versus account

7 Sept 20 Sept24 Aug

Draft #1(350)

Draft #2(350)

Draft #4 (350)(post BARMC)

Draft #5 (350)

Draft #6(350)

Jud

ge’s

co

ncl

usi

ons

Key

mee

tin

gsA

ccou

nts

Act

ivit

ies

Draft #4.1 (350)(exact timing unsure)

Draft #3 (350) (exact timing unsure)

Checklist for decision processWhat 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?




<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?




<3> You need some basic finance – for several reasons.

Current suggestions focus on lots of technicalities…

• [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.”

The judge in Centro?

Together with Westpac’s support

Source: Jackie Bettington, Masters by Research Submission

The key findings?


24

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)


And what we often overlook about Centro…• 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;




<3> You do need some basic finance – for lots of reasons.

The core research group includes…

• Abdallah Bader Mahamoud Al-Zoubi• Jackie Bettington• Dr Pieter-Jan Bezemer• Natalie Elms• Anne Overell• Dr Amedeo Pugliese• Michelle Sheldrake

beyond compliance: how can i (and my board) make better decisions? gavin nicholson

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