Governance Bites #59: board tenure and avoiding stagnation, with Craig Mulholland

In this episode, Mark Banicevich asks Craig Mulholland about board tenure and avoiding stagnation. Mark starts by asking how the board can ensure a balance between continuity and fresh perspectives, particularly regarding director tenure. They discuss the benefits and drawbacks of limiting board tenure. Craig also shares some great techniques that can be used to refresh board thinking and reduce stagnation. They also discuss how a board can evaluate its own performance. Finally, Craig shares the best advice that he would give to a new director. 
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, #boardroom, #boardcraft, #director

Transcript

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Hi all. I'm Craig Mulholland. I'm the CEO [Chief Executive Officer] of Apex Advice Group, and I'm here with Mark today. And he wants to ask me a few questions about board tenure and avoiding board stagnation. Hi, welcome to Governance Bites. My name is Mark Banicevich, and once again, I have the honour of spending time with Craig Mulholland. Craig, thank you very much for your time. Once again Craig was way too modest in his introduction. Yes, CEO of Apex Advice but has also been a director of a number of companies and a senior executive in ANZ Bank and AAPT, Telecom, so, a number of listed companies. Not just major companies, but you've got experience in listed companies, as well. So, a very exciting person to spend time with and have a conversation with. So, thank you very much again for your time. Pleasure. Today, as you said, board tenure and avoiding stagnation. I'll start with the question: How does the board ensure a balance between continuity and fresh perspectives, particularly regarding the tenure of directors? I think it's a really good point. Before I start talking about the board, I think it comes down to the individual director. You know, the directors are the ones who accept the appointment, and it's up to every individual director to continually focus on the company and make sure that at every point in time they are adding value to that company, looking back, looking forward. Rather than being a board issue, I think it's really an obligation on directors to be constantly focused on adding value to the board. If you're not adding value, then you should be the first one to say to the chair, or the shareholder who appointed you, "I don't think I'm adding value anymore. Let's talk about succession," or, "Let's talk about how we"do this differently." You know, from a board perspective, listed companies will have three-year appointments, and often in the constitution, there will be rules around no more than two terms or three terms. Some other places will do it, private companies, may do it for a year or again a set period. So, there are lots of ways and means of trying to ensure that you don't have stagnation. And part of that is just a rotation, as well. You never want to have your change out of your board all at once. You want to manage it. Which is often why you have your three- or six-year terms to give you a constant cycle of change. That cycle of change also assists with stagnation avoidance because it means you're bringing in new people and new capability with new skill sets. Right, right. One of the key things, I think, the most important thing that you raised there was this whole, the attitude of the director to know that their time is done and it's time for them to stand down rather than just holding on and collecting the pay cheque. It's important for their own credibility, as well, right. Because if you stagnate on a board, then you damage your own reputation. You're better off to step back and find a new board where you can be a fresh set of eyes and add new value. Yeah. You mentioned there about the concept of limiting tenure, how some constitutions will limit one to maybe three terms, six to nine years. What are the benefits and what are the drawbacks of actually saying, "That's it, you're done."You can't do any more?" I think, to start with the positives. The positives of having those fixed appointment periods — whether it's three years, six years, or three lots of three, so a maximum of nine years — it means you can manage your succession really, really well. It's not just the directors on the board; it's also the industry. Because your business, and the industry, will evolve. And you may start with being an engineering company, and needing lots of capability in a startup, but then you might evolve to being a sales organisation or offshoots, or be technology. You’ll have other skills that you require, - Right. - or data may become one of your strongest points. So, having the ability to bring on new directors and change out the old directors where you don't need the skills as much. Excuse me. Or you may have other people who have complementary skills. It's a matter of changing it out as and when you need it. The negatives to that is, lack of continuity. You may have a director that's adding a huge amount of value, has reinvented themselves, and knows the industry inside out, and is one of your go-to people, but they reach the end of their tenure and can't re-stand. And sometimes that can be quite problematic if you can't find someone else in the industry with that level of depth, experience, and skills. But again, if you look at it another way, if you have a director that is going through the motions, and is not willing to step down, so you can refresh them, it also gives the ability to say, "Thanks, we really appreciate your tenure, but now we're going to"look to go for a reappointment." And they have to go."And the shareholders aren't supporting you to be reelected." So, I think there are both pros and cons, and it'll be a little bit different for listed companies than it is for private companies. Private companies, you’re there at the grace of the shareholder. It's important that the shareholder sees that you’re adding value. But again, shareholders, again they don't want to have a turnover of the board, but they should be constantly looking at how do they refresh and what skills do they need. And again, it comes back to your skills matrix of, where's your market and what skills you need on the board? I'm going to tell you a story that I think will horrify you. I was on a board of an international sports organisation that was reestablishing its constitution. It was in a scenario where all of the board’s terms expired at the same time. And I tried to convince them that rolling terms were a better idea so that, on a four-year term, as it was, you might have a quarter of your board roll over, or be up for reelection each year. The response from one member on the board was, "But then how would you get continuity?" Interesting. What would you say to that story? I think in an earlier podcast we talked about the most important thing to think about as a director, and it was: be careful of the company you keep. You can only be as good as everyone else, but you've also got shared liability. So, you sometimes have to make a tough call that if people aren't willing to make sure that a business, or a board, or an organisation, is governed really well, you can't do it on your own. So, should you be there? And sometimes you may form the view, "I need to, because it's really important for the sport, that I do the hard yards, do the mahi [work],"and make it work." Other times, you say, "Can I add better value elsewhere to someone that’s listening?" It's always more difficult for not-for-profits and sports organisations - Yes. - because you get people who are very passionate about it. And people who give up a lot of their time. And usually it's unpaid. Yes. And that brings about a whole different set of skills, experience, or lack thereof. The other counterbalance is,"I'm taking on a lot of risk here, as a director." Absolutely."Can I afford to do that?" Yeah, very much. An unusual situation, right. You don’t tend to have all of your directors have their terms expire in the same year. Yeah. You tend to have a, if you have a three-year term, a third of them will expire each year, and be up for reelection. Absolutely. You get continuity by getting one or two new voices on the board each year, not all of them. That's absolutely right. Quite a horrifying situation, but yes, that really happened. What are some of the methods that you then, apart from, as you were saying, replacing board members, what are some of the other methods that are used to avoid stagnation of thinking? If your strategy is changing, then you’re constantly reassessing your market. If you’re in a high-change industry, that is necessarily going to change the board content. It may mean new CEOs. It may mean new executive teams. You need to think about it in different ways. So, again, an industry, or market changes, may force you to think differently and avoid stagnation. It could be a major event like a GFC [Global Financial Crisis]. You may go from being a very viable organisation to then struggling. That's going to solidify your focus and force you to think differently about the future. It could be as simple as just changing up the agenda. Don’t report the same papers in the same way at every meeting. Bring new themes through. It could be that you place focus on different parts of the business. So you have a different member of the executive come and present a completely different angle. And you may prepare the board, and say, "When you hear this paper, or, "When you see this presentation, can you think about X or Y?" So you almost, as a CEO or a leadership group, asking the board to give different viewpoints or experience that expands their horizon. It could be a matter of, asking the board, based on their experience, to bring their view of another industry or another thought process into the meeting, to critique what’s happening. So there's lots of different mechanisms you can use through strategy, agenda, force changes, direct changes that you can keep mixing it up. But if you’ve got a really good board, and you've got no gaps in your skills matrix, and everyone is doing what they need to do and it’s working really, really well, you don’t rest on your laurels because things change pretty quickly. I think it’s just constantly evolving. It does come back to the directors. Directors have to constantly think about, "What value am I adding to this organisation? What can I bring to this meeting?"What is the one question I think no-one else has asked?" And if you constantly do that, then you are going to avoid stagnation. But it’s also up to individual directors to say, "I think I’ve done my time." And like every sportsperson, you know when you’re getting to the end of your career. Or you just don’t have the motivation to get up at 5:00 every morning and go for that run, or go to the gym, or whatever it is. And I think if you’re a director that is sitting there going,"I'm going through the motions," well then you should be honest with the business, and have that conversation. Another classic would be if that is the case to say, "Well, actually you’ve been chairing the Technology Committee for five years,"you’ve got a great skill set. How about you go and chair the Human Resources Committee. Or you go and chair"the Risk and Audit Committee?" And that will then, again, means that you're forcing change on those directors. They need to think about things differently. Yes. But if you swap over your chairs, they’ll have a different viewpoint. They know the business, they know it well. But again, changing roles on the board can make it very different. Or again, another one is, do you put them out to different industry bodies, and ask them to represent the board on different industry bodies? Again, if they've got to give a speech to represent the company, they have to think differently about it again. So, there's lots of different tools and mechanisms, because directors aren't just there to attend board meetings. Directors are there to look at the whole life of the company and how they can add value. There is a huge number of great examples there. The, probably, least favourable example is the burning platform, right, like a GFC. All of those other methods of keeping things fresh. You mentioned in an earlier conversation the idea of having a deep dive in each board meeting on a different area of the business. That's a really great example of getting the board to think about something differently. Not having the same agenda each board meeting. Another point just to add to that is, again, don't have the meeting in the same boardroom, in head office every time. Take the board, and you have to manage cost and time, but take the board to different plants, to different offices. And then get people in that office to present. You can go and meet with key clients or key customers, or invite, have a function that evening with key people. And get the board to mingle with your staff in that office or region. Get them to mingle with key clients. These things are really, really important because, again, the directors have to take accountability for the business. But by moving the location, the themes, client meetings, you get directors get really involved in the business. And again, it gives them a different perspective. Yeah, right. I'm going to have to rewatch this and take notes of some of those, because there were so many great ideas there! Thank you, Craig. How does a board evaluate its own performance and effectiveness? That's really important. Lots of different ways. I'm a big fan of having a standard evaluation at the end of every board meeting. So, before directors leave the room, or that day, send out your standard evaluation. About, you know, how did you rate the papers? How did you rate, how was it linked to strategy? What was the most helpful part of this board meeting? What was the least helpful? Any other comments? How do you rank the papers? What would you like to see more of? What would you like to see less of? That doesn't mean management have to do that. But it's a really good indicator to the chair, and to management, about what worked and what didn't work. And then have free-form comments afterwards. And that then, once it's completed, gets distributed to all the board, following the meeting. And then, at the next meeting, you sit and discuss, and say, "Why did one person"give this a three out of ten, and another gave it an eight out of ten. Are we talking about the same thing?"Are we missing something? What's happening?" And again, you look at how your board is performing there. So, that's a formal evaluation form. I'm also a fan of retrospective. You know, just a verbal conversation at the end. Management can leave, and you can say, well, how does this feel? You could have board-only time where you, you know, you could. And again, because if you trust each other, and there's a lot of integrity, you could say to your fellow director,"I really didn't appreciate when you made that comment. Had you read the papers? Because that was in the paper."I felt that we went off on a tangent for 10 minutes on something which management had already told us." So again, you can have very honest conversations with each other at the board. But you got to have an underlying level of trust and respect for each other to have those robust conversations. And, you know, if people get upset about that, then probably the dynamic on the board is not right. If people would accept that and go, "That's," you know, "That's really good."That's really important. I never knew the way I said that or the way my body language was, would cause offense." Or, and it could be the CEO, saying to the board, you know,"Thank you so much for your input in these sessions." You know, "The questions you brought were really important." You know, "I could see my team leaving the room and," you know, "they were 10 feet tall." It could go the other way and say, you know, "You didn't mean it, but that was a"very negative comment. Now, I can see that person just looks demoralised that they put a whole lot of work into"achieving this outcome, and one comment by a leader who casts a long shadow has a very negative effect.""Oh, I didn't even realise I did that." Or, you know, it could be someone online that clearly is distracted off doing something else in the background. Well, nothing worse for a member of management to be presenting to a board, and they've been preparing a lot of time, and the board, you know, someone online being distracted, having people in the background having conversations. So again, coming back to the theme of, you know, you've got to be able to have that difficult conversation, and ask people, "When you're online, you need to be online." If you're not in the room, you need to be online, you need to be focused and without the distractions. Alternatively, you know, put a screen on the back so people can't see what's happening in the background. Again, honest conversations is usually the best way to do it. Right, right. There are a couple of, again, really strong points that I liked in what you just said. The first one around the evaluation, which presumably is only kind of a one-pager or something like that, fairly short. A couple of key questions. Oh, something about, sort of eight questions over three or four pages, but simply, you select a box. Right, right. Fairly straightforward stuff to get some feedback. And so that's happening on a very regular basis. If you've got quarterly meetings, you're doing it every quarter. And then the other thing that you implied in that, in what you said there, was that the board, its outward face is very united. You talked about the management team leaving, and then the board having their honest conversations. Absolutely. That's something we call "in-committee time", or "board-only time". Yeah. But, you know, that's really important. It's like any relationship, you know, it's communication which makes a relationship work. Yes. And you know, by having that open dialogue, it's really important. But, you know, everyone on the board is there because they have different strengths and weaknesses, but it's also respecting that. Yes. Have you been through a process, and do you value the process, of having an external board evaluation on an annual basis, where they evaluate each other? And through questionnaires and so forth? Absolutely. You can do that. Do I find them helpful? Yes, but not as much as a board holding itself to account. An external evaluator could say,"You could do this better", "You could do that better", and those things are really important. And a lot of boards use them. Probably more in, sort of, very large entity space. Where you've got "A-level" directors on the board. And then that facility can go back to individual directors. But, you know, I think if a board's being honest with itself, you don't need an external facilitator because they're not going to have the context. Now, sometimes not having context is really helpful because it means they're more objective. Yes. But I think, if you've got a good chair, and you've selected your directors really, really well, and you can have honest conversations with each other, then you're onto an absolute winner. Yeah, right. The board's nimble, it can move fast, and trust each other. So, in some ways, potentially as a chair, would I be right in saying that you would potentially use a board evaluation if there were some problems that needed to be pulled out from an independent? But otherwise, everything's going to be humming along internally, - Yeah. - without a problem. Yeah, fantastic. How does a board foster active engagement of all members regardless of its tenure? Now, you've already come out with a huge number of great ideas. If, you know, as you said, a lot of constitutions would have a limited number of terms. We have some companies where board members have been on them for really extended periods of time. And then you'll have, you know, the sports organisation I was on, seniority was a very big issue. So talking to a senior was, you know, - Yeah. - you weren't really sitting in a room as equals, which was very difficult. Yeah. So, regardless of that tenure of time on a board, and the seniority of somebody on a board, how do you then foster that active engagement across all the members? Yeah, I think it comes back to the trust in the board. Do you have a board charter? Do you have a code of ethics? Do people actually, you know, comply with that? And that's really important, you know, to link back to that. And, you know, do we trust each other, and can we have these broad conversations? Because, you know, if people are acting to different standards, then it's problematic. I think it, my earlier comment, it comes back to every director holding themselves to account and making sure that at any point in time they're delivering it. Because if you get it wrong, you all go to the same jail. Yeah. You know. So that's a very extreme example, but, you know, everyone in that room is equal, even the chair. You've just got different jobs. Yes. Or different skill sets you're bringing. Everyone has a voice, and everyone should use it. I'm critical of directors when they could have said something but didn't. Now, often, if the comment's already been made, don't say it again. Because they're not there to point-score. But, you know, the most junior person on the board has got the same level of responsibilities, and the same legal obligations and legal liability, as the most tenured, the most senior person on the board. And so, you know, the senior people, yes, they may have more knowledge, but, you know, you've got a new person here, you've got to allow them the space to have the conversation. Sometimes the dumb question, or the dumb comments, are the most important ones. Sometimes you can have massive epiphanies from a new person that comes on the board and says, "Why do we do it like that?" The answer was, "Because we've always done it that way." And that's the worst possible answer you can have. And that's when you should be deep diving and going,"How do you do it differently? What do you mean?"Why do you ask that question?" And it could lead to something really good. It maybe just a lack of understanding. But senior people have to give space to the junior people. And junior people have to be willing to front up and say,"I don't understand it." If, in the first couple of meetings, they're not aware of the dynamics, then have the conversation with the chair. And the chair's got to provide that space, whether it's going around the room or through a prior conversation, the chair going, you know, "Person X, I know you had thought about this before the meeting. Would you like to share that?" And give them the platform to build their confidence. Right. But I also think it takes a full cycle to get to understand the board. And my view is not just your 12-month business cycle. I think it takes about 18 months to really embed yourself into a board. So when you talked earlier on about succession planning, and all these sorts of things, you know, the first, you've got your training wheels on. Usually for the first 12 to 18 months. Just learning the industry, and all the nuances. But in that time, your most valuable asset you bring is, (1) your different skills, and (2) your fresh thinking that you bring to the board, because that's incredibly powerful. We spoke a little earlier offline about one of New Zealand's stellar companies that is, kind of, an unusual situation, right. Yeah. Where they've got a very well-established board, where I think all the board members have been on the board for a significant period of time. Yeah. And yet they still knock it out of the park. Yeah. How? So, and that example is Mainfreight. I think it comes down to the individual on the board, the way they manage themselves, the way they refresh themselves, the way they think about the industry, the way they're constantly evolving. And they've got a lot of skin in the game. They own a lot of shares. Right. And, you know, so that's in it, as well. Which brings you another complete topic around, should your board have skin in the game or not? And is that a conflict, is it not? And what should that look like? But again, that's another whole topic which I don't propose we get into now. No, no. You know, a board with a shareholding will look quite differently at it to a board member without a shareholding. That can be positive. It can also be negative. In that case of Mainfreight, do you know how they keep it fresh? How do they keep them... No. I'd love to know. Yeah, I'm sure there's case studies been done. That would be really... I'm sure, that's the next podcast for you. Maybe I can try and knock on the door of one of those directors and say, "Can you tell us about keeping it fresh?" Absolutely. Absolutely. Yeah. Well, one final question for you then, Craig. As an experienced director, what advice would you give to somebody joining a board? Work out where it is that you're adding the value. Where are your skills different to everyone else's on the board? Why have you been selected? And really focus on doing a good job right across everything, and being across the whole business. But, you know, why are you appointed? What's skills that you bring that no-one else has? And how do you really leverage that for the benefit of the board, and the company, and the shareholders? So don't be part of a group voice. Be an individual thinker that brings their own skill set, - Absolutely. - and always bring your own perspective to the conversation - Absolutely. - to get a better outcome for everyone. Yeah, and challenge yourself. You know, when you're going through every board pack,"What question can I ask that no one else would ask,"that's going to add a lot of value to this business?" Or alternatively, "What insight can I give to the CEO"or management, which would help them do their jobs better?" Yeah, Craig, thank you. Pleasure. We've got another couple of topics that I would love to talk about. Maybe one day we'll get the opportunity to do so. But thank you very much again for your time. It's been an awesome conversation again! I'll look forward to catching up soon. Fantastic. Thanks, Mark. See you next episode. Thanks for listening.