Governance Bites #56: holding management to account, with Craig Mulholland

In this episode, Mark Banicevich asks Craig Mulholland about the board holding management to account. Holding management to account is one of the four pillars of good governance promoted by the NZ Institute of Directors. Mark asks what this means, what types of information the board needs to hold management to account, and what tools the board can use to do so. He asks how the board can establish clear expectations of the CEO and management, and what types of metrics are commonly used. Craig also shares the best advice he received about chairing a board. 
Craig Mulholland is CEO of Apex Advice Group. He is an experience director and senior manager. During his 10 years at ANZ Bank, he held roles as Managing Director of Wealth and Private Banking, General Counsel and Company Secretary. This included board roles on the bank’s investment and life insurance subsidiaries. Prior to that, he held various executive and executive director roles at Telecom New Zealand (where he led the demerger of Telecom into Spark and Chorus), and AAPT in Australia. 
#governance, #director, #boardroom, #boardcraft, #accountability

Transcript

0:00

Hi, I'm Craig Mulholland. I'm the CEO of Apex Advice Group, and I'm here with Mark today. And he's got a few questions he's going to ask me, and I'm very happy to join you, Mark. Hi, welcome to Governance Bites. My name is Mark Banicevich, and I have the absolute pleasure, once again, to spend some more time with Craig Mulholland, who is a very experienced executive and director. Having been a director on multiple subsidiary companies of banks like ANZ, where he worked for 10 years. You were as Corporate Counsel for ANZ and Managing Director of Wealth. And now as CEO of Apex, you keep a very full plate, Craig, so I really appreciate your time. Thank you very much. Pleasure. The topic du jour is holding the CEO and executive to account. One of the four pillars according to the Institute of Directors. What I'd like to ask you initially is, what does this mean? What is holding management to account? I think it's really simple. The board is there for governance, and management is there to manage. And, you know, it's the board's responsibility to make sure that the strategy that management has presented to them, and they approve, is executed on. And then the annual forecast you get put through, that's delivered. The board can't do it. They've got to do it through management. And management has to be fronting up and delivering to that strategy. And at any point in time - any day, week, month - it's got to be very clear to the board that that has been delivered. And things can slip pretty quickly. So, it depends on the board, the nature of the industry, the nature of management as to how frequently the board may or may not want that reported on. But you've got to be there every day in a management role, to deliver to the shareholders, and to your customers or clients. And then it's the board's job to make sure that occurs. Right. So in summary then, the role of holding management to account is that the company has set goals through its strategy, and it's the job of management to deliver on that strategy to achieve those goals. Absolutely. And the role of the board is to track the management team against those goals, and make sure that they're achieving them. That's right. And you know, as a board, you've approved budgets for the year, you've set the strategy, and you know, through the delegated authority framework, if you got that in place, you've provided management to all the resources to do it. So, there's no reason not to do it. Now if management can't deliver on a strategy, because they don't have the resources, well then they have to go back to the board and say, either the world has changed, the strategy is not right, or we don't have the resources, if the strategy is right. But again, management has to be doing the doing. Management has to be in there making sure it works. And then, you know, the board is there in full support. So if the board has given, you know, management everything they need to do it and they're not doing it, then, you know, that then puts the directors at risk. Because then they're not making sure that the organisation is delivering. So, you know, it's not a"them and us" scenario. It's very much a partnership. And the best boards and best management teams work very closely together, but are very clear on what their roles are. One is governance, one is management. But there's only one that can execute. The other element that you raised there, as well, was the point about the budget, and holding management to account to spending according to the budget. A very important part of any board's role, right, - Absolutely. - to make sure that they don't overspend and suddenly the company can be in a bit of financial difficulty. Right. What sort of information does the board need to hold management to account? And again, it depends on the nature of the industry and the board. But if you're in a board role, you want to have a broad overview of the business and what it's delivering. If you're in a management role, you need the board to know what's happening. Give them sufficient information so they're very clear on what is happening, where, when, and how. So, you know, when I step back, you know, at every meeting, you're going to have a financial update. Yes. If you're a sales and marketing organisation, you're going to have a sales update. If you're a technology organisation or most organisations, you're going to have a technology update. Operational, how the operations of the business are performing. You're going to have your risk, your compliance. If you're large, you may have internal audit. You're going to want to have that report coming through. So again, it really depends on the organisation and what are the key drivers of your industry, and make sure you report on those. And there will be certain, as you've said, there'll be certain elements that will be common across organisations. There's always going to be a financial report. There's most likely be a technology report - Absolutely. - because everyone relies on tech these days, particularly around cyber security, I expect. And then your elements around risk, that'll be a very common one. And then, as you say, your sales and marketing, how are you going, how's business going for revenue, all those sorts of areas, as well. And with your sales and marketing, it's predictors of future revenue, right, rather than just... Absolutely. Yeah. Okay. What other tools can the board use apart from the reporting that comes in? What other tools does management have? I think there's, you know, one of my favourites is a dashboard. So if you meeting cycle is monthly, in my view, it's probably almost too frequently, you'd have dashboards to say, you know, this is the information. And you'd have gone through and be very clear on, you know, what are the things that are important to the board? What information does the board need to know? What reporting from what departments or what segments are going to be reported on? And in that dashboard you'd have, you know, you have red, amber, green. These are the numbers. But we're ahead of target, below target, to which input, outputs. You'd have standard reports like, you know, complaints. You may have internal audit reports on what's happening. Again, it's very important that management and the board set those up. Now, if you're a board that only has, say, quarterly meetings, so you got four meetings a year, then often it's advisable to have a monthly report go up to the board, again in a dashboard style, to say, this is the key things that have happened this month, here's our monthly financials. And you're trying to get it out by day eight of the following month. So the board always have information. So you're not lurching from quarter to quarter and the are board going, "Oh, how did we get from here to here?" You know, "We thought it'd be a continuum." Manage your seasonality, those sort of things. And by keeping your monthly report going to your board between your quarterly meetings, it's a really good way of keeping them in the loop. They can come back. They can query anything. They can talk about trends. But also, really importantly, the directors aren't in the business; they're not seeing what you're seeing. They can see the wood for the trees, and they've got a lot of life experience outside of the board. So you go back to your skills matrix. They all should be thinking about your company and your board in a different way. So them looking at that monthly report or the board reports, they can then come back and say,"Have you thought about this? We've seen something else going on in another board I'm on, or another industry I'm in."Do you think these adjacent industries may impact each other?" Maybe world events or global trends, all those sorts of things? So, you know, the board doesn't have to wait 'til the quarterly meeting to provide input. Now, again, there's a balance, and you don't want to inundate management with every thought that a director has, and often you direct those through the chair. But, you know, as a member of management, you've got a board, and you want to use them because, you know, they are your backstop. They're often, you know, supporting the brains trust within the business that you make really good decisions. And so, you know, again, I think having that open relationship between a chair, and a CEO, and within the board, making it channel directly, can be really, really powerful. You know, use your board as a friend. And when I sat on boards, you know, knowing that you got management there and management are listening, and they may come back and say, "Thank you. We've considered that. It's not relevant." Then, you know, you leave that. Now, they've said it's not relevant. Well, then they say, "What do you mean by that? Can I talk to someone?" And as a director, you can put them in touch with someone else, another industry or another business, to help pull these concepts together. So, by the time you get to the next quarterly board meeting, you may be in a really good position to discuss these things. You've alluded to a couple of key points there. One is board meetings tend to be in a cycle of somewhere between monthly and quarterly. You favour quarterly? And this concept of having monthly reporting so that the board can keep up to date between board meetings. Very, very useful. You also made the point that your monthly reporting should be available by day eight of the end of the month, which is, you know, it means that the board are getting up-to-date information, particularly financial information. I've been on boards where you're trying to chase financial information for months, which is... Not good. No. We were talking about risk before. Yeah, absolutely. That's a significant risk if you're not getting that information in a timely way. So, yes. So, quarterly meetings, monthly reporting, timely reporting within the month. And something that you mentioned actually, when we were chatting after our last catch-up, talking about tailoring reports to the audience. Absolutely. So, you said if you've got one person on the board who's a very visual learner, you'll have a lot more graphs and things for them. And I've come across this before, as well, where the company secretary or the CEO will be making sure that the board papers are written to cater to - Absolutely. - to the audience. And that's really important. So, yeah, you deliberately have very diverse boards, and that, you know, diversity leads to strength on the board. Yes. But you could say the same thing three ways in a very succinct paper. One, have a diagram that explains it. Two, have a commentary. Three, have supporting statistics or facts and figures. And you may have three different traits on your board, and each person will read each of those things differently. Right. And again, that makes sure that getting the message across. Again, you know, from a management perspective, it's really important that you cater to your board to get the best out of your board. But your board also to trust management that, you know, you're going to get all the right information to them. Yeah. Great. Thank you. How does the board establish clear expectations of the CEO? So, clear involvement in the strategy from the outset, being very clear on what's the financial forecast, what are the key drivers for the year. And then, my view is, you know, you've got to have very clear KPIs [key performance indicators]. So, the CEO, their KPI is basically to deliver on the strategy and the forecast. Yes. So, they'll be necessarily broad, and they have a whole lot of other things in them which don't relate necessarily to purely the running of the business. But then it's important for the CEO to cascade KPIs. And I think it's important that every part of the leadership group has KPIs. And so, when the CEO looks at their KPIs, they can see exactly how those KPIs are split, individually, to different members of the exec, but also those KPIs that are shared. So, everything's got to dovetail. Right. All your KPIs have to be locked in. And then, those KPIs are then cascaded to teams. Now, they may be team KPIs rather than individual. And then, on top of that, you may have, you know, bring in specialists. And if you bring in specialists to do a specific role, it could be a contractor for six or twelve months, or whatever it is, got to be very clear how the work that they're doing links back into the KPIs of the individual exec or the CEO, and how that cascades up to the board to make sure, again, that if you're introducing different resources, that everything is dovetailed. And I think the other part is communication. communication from the board to the CEO and management, but really importantly, communication from management to the business as to what is happening. Right. And where is it happening, and how is it happening, for what reason? Because everything comes back to, "what about me", and the why. So, if you can tell the "why" story, the KPIs make sense, and then it cascades up, and you can demonstrate that back to the board. Right. As an undergrad, I did a lot of work in management accounting, and the whole process of identifying and choosing KPIs is very important because they have to tie to your strategy, right. Yeah. You can't just say, "These are the KPIs that everyone else uses,"therefore, we'll use these." Yeah. It's very much around this is the strategy we want to achieve, how do we measure whether or not we're meeting that strategy? Yeah. Identifying some KPIs. Are there any sort of common metrics that a board will commonly use, having said that, to hold management to account? Again, it really depends on the industry. So, each industry will have just those quintessential metrics that they know will dictate the strength or weakness of the business, the economy, and where things are at. You know, you'll have your lead indicators, your lag indicators, and typically, you know, looking back is not a good way to predict the future. And so, as much when you're developing your metrics, it's got to be, "Well, this is what history tells us, but these are the other overlays we put over it"to bring into our forecast." And I think if you get to the stage where you have to rely on "the vibe", from that great saying in The Castle, then I think you're in trouble. Right. And you know, as much as financial reporting is essential and you need to have that as up-to-date as you can, that is very much a lagging indicator, right? Absolutely. Your earnings before interest, tax, depreciation, amortisation,[EBITDA], that very much lags. Your revenue lags. So it's about identifying KPIs that predict future revenue. Absolutely. That predict future operating expenditure, and so forth, depending on what, whether you're manufacturing or whatever it may be. You know, and for us in financial services, you mentioned last time, we're looking at things like complaints. So you probably want measures around the number of complaints because it's an area the regulator is so interested in. Absolutely. Possibly something that's very useful in any organisation, right. Because complaints are a measure of how happy your customers are. Yeah. But again, it's a lagging indicator. Yeah. But it could be that your strategy is to double the sales the following year. Well, is there a market for it? Have you got enough machinery for it? Do you need more factory space? Can you get the employees? Can you employ them? Can you train them? So again, if your strategy is to double within a year because the market is receptive to your product or service, can you actually deliver it with your fixed variable costs and your inputs and outputs? So again, that will change the metrics that are really important. You may be able to fund it. Yes. Or maybe with that, you know, you can't fund it. So then it's a pipe dream. So again, you've got to look at not only the financial metrics, but you know, the people, the capability, the training. Yes. The resource availability, you know, how to get to market, all those sorts of things. And again, it very much comes back to, you know, is it a physical industry, is it a services industry, because that will dictate what your key metrics are. Yeah, right. Some great examples there of tying KPIs to strategy, as well. Really, really helpful, thank you. Cool. I'll have one final question for you then, if I can, and I'm going to - last time I asked you about the best advice you had received. And you said, "For a new director, or for a chair?" Let's go the other way this time. Right. What's the best advice that you've been given as a chair of a board? Make sure you've got a very clear dialogue, clear lines of communication with your CEO. The chair-CEO relationship is absolutely essential. If that breaks down, then it'll start fraying at every part. So there has to be a high degree of integrity, a high degree of trust, the ability to have hard conversations, and that's both ways. So as chair, you want to have a very firm conversation with the managing director or CEO if you need to. They need to be receptive to it. It's got to be in a safe environment. You've been on both sides of that CEO and chair, and more than once, in both cases. How frequently are your conversations between chair and CEO? It depends. If you're in a very stable industry, you can go for 2 or 3 weeks without a conversation. Or just general catch-ups or monitoring. I think when there's a crisis or when there's something new or different happening, that's when it gets really, really important. You know, I remember one time as an exec, you know, someone said to me, "How's the day going?" And I said, "Well, I was speaking to the chairman 13 times and it's only lunchtime." Again, major change event going on. Yeah. And that dialogue was really important. But then again, you know, I might not speak to that chairman for weeks, depending on what's happening. So it's being available, and you know, as a chair, and likewise management being available to the board and that, when's required, because again, you know, communication is critical to the running of a business and the ability to make fast good decisions and know you've got the support of the board, or vice versa, the board knowing that the CEO is not going to wing it. They're going to come along and, you know, keep you appraised of what's going on. Because there's nothing worse than being on a board, and seeing something pop up in the press or across the stock exchange that you didn't know about. We've talked - I've talked a lot in previous conversations, as well, as this one about that communication between the chair and the CEO. What about the conversation between chair and other board members? How frequent are they? I think it's really important. I think it's no different to the conversation between a CEO and their execs. You know, the chair is responsible for making that board run effectively, and if the board's not running effectively, it's very hard for management to do their job. And so I think, you know, constant dialogue between the chair and directors is important. And it could be that's a really positive line, you know, or channel, or line of thought. Or, you know, it could be, "Can you go in and support management to this? We need your expertise"on this particular project. Can you deep dive? Do you mind going in?" It could be that you've got a bigger entity with multiple committees. Yes. And you know, boards are devolving a lot of responsibility to committees to make quite detailed decisions. And so often, it's important for the chair to have dialogue with the chair of the committee,- Yes. - based on what they're doing. And so you don't get the committee going off doing things in a vacuum. And there's also, you know, sometimes you have directors that are not putting in the effort, or not understanding, or unintentionally or intentionally being disruptive. So again, really important. And it's also a job of the chair to have a conversation with those directors and say, you know,"You need to do things differently. You need to improve." And again, depending on the personality of the person as to how that'll be managed. But if the chair can get the board running really effectively and have all those directors lined up, then they'll be a united front and they'll come into the boardroom, and they'll instantly add value to the business and to management. Right. So don't take on a directorship thinking it's going to be a couple of days a month reading reports and doing a board meeting. Correct. There's going to be a lot more conversations involved, as well as your ongoing reading about the industry. Making sure you know what's going on. Absolutely. And the most effective chairs I've ever worked with are the ones who are always available at the end of the phone. And as a rule, they say a chair should do three times the work of another director. And I think that probably understates that a really good chair, it can be, not always, in constant dialogue with the CEO. I think it's also important that, because of the trust between the CEO and the chair, that it's really important for the chair, or even directors, to get out and about through the network, meet different teams, and be able to go into the business. Because boards learn a lot by being in the depths of the business, whether it's a manufacturing plant, or a product launch, or meeting with industry representatives. You having that involvement means that your board can contextualize what's going on when they come back to the board meeting. And so, if you're really open as a company, there's no reason why you can't have the board there. Now, again, it's a trust thing with the board that the board is not there to make decisions. The board are there to represent the board and let management do everything. So again, it comes back to governance, management, and trust, and clear demarcation. But I think the more involved your board are, to an extent, the better the company will run. The more they understand what's going on, - Absolutely. - and they'll be able to learn. And then they will see things that because you're in management, you don't see, because you're so busy focusing on delivering. And they may come with just a little snippet, "Have you thought about this?"I saw this. I wasn't sure about that." And then the penny drops, and you go, "Yep, we missed it." Yeah. Or it could be there's a good reason for that, we've done this because of that, and, you know. Yeah, that's, Craig, thank you. Pleasure. What a great conversation! I really, really enjoyed it. I'll look forward to catching up again soon. Fantastic, thanks, Mark. See you next episode. Thanks for listening.