Governance Bites #119: Navigating Shifting Winds, with Katie Beith

In this insightful conversation, Mark Banicevich speaks with Katie Beith about fresh research on governance in New Zealand listed companies. The study, Governing New Zealand Listed Companies: Navigating Shifting Winds, analysed five poorly performing firms to uncover how traditional governance metrics stack up against new measures of board effectiveness. Katie explains the data sources, highlights emerging metrics that may better predict company performance, and reflects on best-practice guidance from global and local regulators. With lessons for boards, practical takeaways for directors, and advice for those new to governance, this interview offers valuable insights for investors and governance professionals alike.
Katie Beith serves as the Head of Environment, Social and Governance (ESG) at Forsyth Barr, having joined in November 2021. In this role, she is responsible for integrating ESG principles across the firm's operations and investment processes, also supporting advisers with client-specific needs. Katie brings nearly 20 years of experience in responsible investment in the UK, Australia and New Zealand. Katie’s past roles include for the Responsible Investment Association Australasia, UN Principles for Responsible Investment, and the New Zealand Super Fund. Katie is a member of New Zealand’s Stewardship Code Governing Committee, a member of the External Reporting Board Advisory Panel, and a former board member of the Impact Investing Network.
#CorporateGovernance , #BoardLeadership , #BoardEffectiveness , #GovernanceMatters , #GoodGovernance , #InvestorInsights , #InvestmentAnalysis , #ESGInvesting , #RiskManagement , #BusinessPerformance , #NZBusiness , #NZBoards , #NZDirectors , #NZListedCompanies

Transcript

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Good afternoon, everybody. I'm Katie Beith. I'm the head of ESG at Forsyth Barr and it's a pleasure to be here with Mark today to talk about a piece of research I wrote recently on governing New Zealand companies. Just very quickly, my background, I've actually for most of my career have always been in the ESG space, ESG standing for environmental, social, and governance. Pretty much since 2004 is when I started working in the area. So, it's been most of my career. We've seen, I've seen a lot of chops and changes over those years, and it moving from, you know, something peripheral to something mainstream. And now we're actually out the other side where we're seeing a bit of pushback and another evolution taking place, which we can talk about another time. But it's a pleasure to be here today to talk to you, Mark. Thanks. Hi, welcome to "Governance Bites." My name is Mark Banicevich and as you just heard today I have the pleasure again of spending time with Katie Beith. Katie, thank you very much. I saw an announcement I think, of this piece of research, "Navigating Shifting Winds," and asked a mutual colleague whether I could possibly get a copy of this and she put us in touch. A really interesting piece of research. So thanks for the opportunity to talk to you about this. It has some really good insights for boards of directors and governance, which is, of course, where I've kind of chosen to focus these conversations. You and your team, released this, "Governing New Zealand Listed

Companies: 1:33

Navigating Shifting Winds." What was the research about? Sure. And I might. So what the research was about, we looked at five prominent New Zealand companies. Those five companies have all been pretty poor performers in terms of share price performance over the last 3 to 5 years plus. And really it was an opportunity to stop and reflect using the benefit of hindsight to understand what went wrong and see if there's any key learnings that we could take from it. I guess there's, just before we go any further, there's probably, the reasons why we did it. I think there's sort of two folds. First of all, you know, frustration by the analysts that cover these stocks around the poor performance and, you know, almost a cathartic process to look into what went wrong and why. And then from my perspective, it was really about, well, on the surface, when you look at corporate governance metrics, these companies look pretty healthy, but actually some things have been going wrong, and why is, at least, the information that I'm collecting from companies on their corporate governance practices, why isn't it telling me signals, you know, in advance or why, you know, why am I not picking up on these fundamental issues, and what are these issues? So that was why we came together and, yeah, decided to use the benefit of hindsight and go in and really investigate what went wrong and why. It was an interesting piece, because you talk about in the research the common governance metrics that you've traditionally used. And in an earlier conversation you mentioned that these are almost like the minimum standards now, and everyone kind of meets mostly those minimum standards and it's something new that you need to look for, is what these predictors are, as you say, which was a good finding in the research. To start with, how did you choose those five companies? First of all, we sort of, we took the whole NZX50 or all and plus a few more of the companies that we cover and we ranked them in terms of shareholder returns. And then we had a look at some other things that have happened over time, whether companies had to meaningfully repair their balance sheet, whether they had to write down debt, whether they, whether they changed their dividend policy for reasons. Mostly kind of financial metrics. And we sort of ranked and basically just counted up the number of 'yeses' and then we narrowed it down to five companies, which we felt gave quite a good representative of different sectors across New Zealand, and we focused on those five.Yeah. It was initially a short list of ten poor performers, wasn't it? We took the ten, that's right. And then, using those metrics, you chose the five of the ten. Right. Right. What data and information sources did you use to analyse these companies? It was the analysts at Forsyth Barr who cover each of the stocks. They know these companies inside out and around the wrong way. So for us, it was, we started with a framework of looking at what went wrong and why and then we sat around the table and drew out the commonalities, so it was a very organic kind of, bottom-up process of, when we went through each of the case studies and you know, just, it was quite interesting to see those commonalities bubble up. And the same with me, as well. If I was looking at the corporate governance data that I collect and when I went through them all, you know, where the holes were and, you know, there was a couple of metrics that popped out, one around length, auditor tenure, and one around how, self-reviews by boards, were common areas that not all of those five companies, but just some commonalities that those issues were at play. I'll ask you a little bit more about that in a moment, but to start with, you know, the research suggests, as we've just talked about, that the traditional governance metrics should be supplemented with these new metrics that you've discovered through this research. But to start with, what are the traditional governance metrics? Yeah. Oh, so traditional governance metrics like the number of independent directors on boards, you know, what their auditor tenure is, you know, if they've got, you know, how many other boards they're on, do they have enough time to dedicate, those sorts of things are, you know, and it, good corporate governance practice is really well defined and well understood in the market. There's a lot of different places that you can go to. It's the FMA's [Financial Markets Authority] handbook, there's NZX [New Zealand Exchange] codes. There's New Zealand Corporate Governance Forum guidelines. There's plenty. ICGN, which is International Corporate Governance Network. It's got good practice. You know, IoD [Institute of Directors] also. There's plenty of places and they're very common, you know, around what those good practices are. So it's it's well understood. So the picture we're getting from, that I was getting and the information that I collect on good corporate governance gives a fairly, fairly healthy picture of New Zealand corporates, but we'd actually, you know, we've had some - You still get some poor performers. - poor performance, which is where, as we've spoken about before, the traditional metrics are almost like a starting point to enter the gate that everyone's doing most of those things reasonably well, but you still had some poor performers and part of this research was to find out why. Yes, that's right. Yeah. Right. Right. What are the new metrics? You mentioned two of them before. I did. Yeah. There were five. Yeah. I was just going to go bring this page open back. Oh, yeah, cool. You have the auditor tenure. That was one that you already mentioned. Yeah. And you mentioned a second one as well. Yes. Reviews by, annual reviews by boards. We had sort of a couple of quantitative ones that came out and then a couple of qualitative ones. The more quantitative ones that we say were, you know, evidence of cash conversions or poor capital allocation. Maybe not traditionally seen as governance, maybe more just seen as, you know, well, capital decisions. Certainly big decisions made by the board. Yes. That's right. Things like if we saw financial restatements or large impairments, things like changes in accounting practices, principles, you know, generally from they've been aggressive to more conservative that was an indicator for us. And then the last two of the main ones were the auditor tenure being over 10 years and the self-reviews by boards. So those were the five quantitative things that popped up as we discussed the commonalities. Right. And then on the qualitative side, we found that in each of those five cases, we found, we were of the view that there was some slow recognition of and response to structural change by boards. And what I mean is, you know, something that we believe was obvious to the company, they didn't act on. Right. So let me take SkyCity for an example where regulatory change overseas was happening a lot but they didn't invest in building up their compliance and, you know, mechanisms until after the issues came to light. Right. So you know, things like that, why wasn't the board doing that before issues came to light? Things that would seem obvious. Yeah. And we've had the AML, the anti-money laundering legislation here since 2009, right. So it's been 16 years in this country and it took a review in Australia, sort of, you know, to lift the lid on this. So that was one key thing. We also, talking to the analysts around the table as well. It was, you know, they meet with the companies regularly and so they picked up on things like potential indications of limited challenge around the board table or maybe there was a gap of skills or, you know, sometimes there was dominant personalities in the room that weren't getting enough challenge. So it was really interesting, you know, talking about how those indicators came to light. In some cases, we also saw growth at the expense of business performance and that was particularly clear in Fletcher Building and the last one we picked up on was sort of weak internal controls or reporting systems or stakeholder engagement. It's sort of a big, big wide one there, but it was picking up on things like do we think the board is getting the right information that's robust and enabling them to make, you know, good decisions and challenge management appropriately? So those were the four qualitative factors that came together with the quantitative ones. The challenge, with the last one in particular that you mentioned there is, it would seem to be something that would be very difficult for a member of the public to have access to that information. It seems to me that that would be, because the analysts, as you say, get the opportunity to talk to these companies closely. Yes, yeah. They're the things that they can dig into far more than a retail person will be able to. That's right. But certainly there, I think there's some really strong learnings for the boards themselves around these metrics. Although some of them are probably lagging indicators rather than leading indicators. In your board, you'd want a leading. If you're on the board, right. Yeah. "Oh, we were a bit slow to adapt to that." So you kind of want to adapt to these things before it's too slow. Yes, yes. So it's about identifying what they are early. One of the things that I found was really interesting about this research, and all research works like this, right. You come out with a great research idea, you do the research and at the end of it, you get more questions. And, you know, you've taken five poorly performing companies and looked into them and found these common threads. I think one of the things that would be really interesting is to look at other companies and find out are those common threads different than the companies that are not underperforming. Yes, yeah. Are they therefore an indicator of poor performance? Yeah. Or are they actually a commonality among companies, and some were lucky and some were unlucky. So that would be an interesting piece of research. What other research, or what sort of questions does this raise for you for future research? Yeah. And it is an interesting one. And actually there's tons of ideas of what to do next. So, I've got to really think through and narrow it down. But, you know, some of the other ideas of being, well, what about the really well-performing companies? Is there some good, you know, bits in there that, you know, we might see some commonalities. Some common good themes as well as negative things, right. Yes, yeah. I'm not committing to anything. No, no, no. These are big pieces of work. I'm not going to hold you to any of this. But yeah, it did and then also, you know, I'd love to sort of be able to monitor this stuff a little bit more like, you know, even since we released this paper and watching, you know, news flow come out. You know, SkyCity just announced their capital raise today, and, you know, just some of the other announcements that have, you know, come out recently around their, like, what does this all mean for the governance and because in the paper as well, we sort of we had a piece about where the company's positioned now, in our view, going forward. And all of these things kind of feed our views and how they're changing. So, I'd love to really be able to continue to monitor these five companies. Yes. And you know, talk about how they evolve based on these factors. Do they manage to turn around and and how do these factors change? You know, some of them turn around, some of them don't. Are these factors part of the reasoning behind it? Yes, yeah. Yeah. So, your longitudinal study of the existing companies, you're looking at the other end to find out what the common themes are, then your potentially broader, if you can do a more quantitative one on all of the companies to find out, how are these metrics performing? I do know that I've got some friends from universities that watch this. I was going to say this is my wish list, but I think I, you know, there's only so much you can do in a day, but you're right, we need we need to tap into - Look at some partnerships. - the universities and see. So if you're at a university, get in touch. Yep, with me. We have research ideas and potentially, you know, need some help with getting the research done because the more research we can do, the better this can be, right? Absolutely. That sounds great. What lessons can boards of directors learn from this research? I suggested this before and, you know, a lot of this, of course, we're looking at this, as you say, in hindsight and they're lagging indicators. If you're sitting on a board of directors, then how do you take this research and say, "What do I need to change to make sure that we don't fall"into this trap?" Yeah, I think it's, I think it's a good question. I don't really know the answer. I hope this document has been really useful in stimulating debate. And by all accounts, I think lots of the follow-on conversations that I've had have that, it is the document in itself is causing companies, particularly in the similar sectors to the companies that we case-studied, to sit around the table and discuss and think about things. So from that perspective, I think it's been, you know, a great addition to the debate around the board table. And I think also for shareholders from the discussions that I've had with some of our clients, as well, is that it's helpful in prompting them to ask different questions to companies, as well, that might go to the heart of some of the issues that they've been worrying about. And as much as I say they're lagging indicators, some of them, I think you talked about the hygiene factors. So if you're on a board, look down that list of hygiene factors and say, "Have we done these things? How long has our auditor been in place? Is it"time that we should change? Do we do a board evaluation every year? And what do we do with"the information that comes out of it?" So there are some things I think off the back of that. Yes, that they can take away. They can absolutely take away now. Yeah. Yeah. Great. Thank you. Following the research, and hopefully I haven't just pre-empted with an answer to this question. Following the findings in the research, what is one thing that all boards should do right now? Look, I think one thing this research stimulated was, I'm just thinking about the internal challenge around the table and the right skills around the table. And, you know, I've talked about it with you previously, you know, but we get, you know, we see skills matrices come out in annual reports, but I think how can, do boards really feel that they've got the right people around the table to help management, steer management through, to understand the strategy, what the risks are and to help that company navigate to meet its strategy and navigate those risks along the way? And it's not just the skills around the table. But it's also, you know, the personalities and being able to challenge strong personalities. It's a real sort of board dynamics thing, and, you know, as shareholders, we find it really hard to assess because we're not at the table. We're not in the boardrooms, but we do pick up on a lot of signals. And we'll make, you know, assumptions around those signals. But I think, you know, for boards, ensuring that there's a healthy, particularly for chairs, I think, this is a chair thing, to ensure that that healthy debate, that everybody's has that opportunity to challenge things, that challenge is heard and listened to and acted on if needed, and, you know, because it can, you do sort of find there's often dominant personalities at the table and, you know, how can you challenge and get your point of view across and I think there's a big role for a chair in there. Right. I think there's a couple of things that come out of that for me, and one of them, as you say, coming back to the skills matrix and in an earlier conversation, you talked about how listed companies in particular will put their skills matrix in their annual report, the board members, and do they have these skills, yes or no. And how that kind of lacks the depth of, well, how current are those skills? How deep are those skills? So, even maybe a rating from one to five, or a green, amber, red kind of scenario would give more depth than 'yes' or 'no', around the skill set. So, that's the first element that I've taken away from that. And then the second one as you say is around the dynamics, and very much the importance of the role of the chair to make sure that that that person can bring the best out of every director to ensure you're getting value out of all of the skills on the table, not just one or two dominant personalities. Yeah. Great. Okay. That's really insightful. Thank you. The research is this publicly available on the website or is this something that we have to kind of contact you and ask nicely? Yeah, I mean we're happy to share it. I don't have it available on our public website but more than happy to share it if people get in contact with you or me or reach out to Forsyth Barr through in LinkedIn or whatever, you know, however it might be. Yeah. Great. Okay. Cool. Thank you. One last question for you, then. What advice would you give to a a person sitting in a director's chair for the first time? I think it would be really around being bold and speaking out your views and not just accepting a standard response but really digging into seek proper data to back up that response, and to, you know, really just to challenge the direction of the company constantly, to be aware of the the risks involved in a strategy, you know, and that that's their job, that's their job, you know, to ensure that they're comfortable that the the pathway is right for the company. So I think that's it really, you know, just be bold. Katie, great. Thank you so much for your time. It's a pleasure. I really appreciate it. I'll look forward to catching up again soon, - Yes. - because I really enjoyed this conversation. And we'll see you next episode. Thank you. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe, and share the videos and podcasts.