Inside the Boardroom
Helen Mallovy Hicks
Release date: Jan. 26, 2010
Hosts: Dean Mullett and Helen Mallovy Hicks
Guests: Brenda Eprile, John Willson
Running time: 26:21 minutes
In this episode of Strategy Talks, Brenda Eprile, leader of PwC’s regulatory advisory services and John Willson, a Director at Nexen Inc. and former CEO of Placer Dome Inc., talk about the results of the PwC Directors Survey and the changing roles directors now have in this new economy.
Voiceover: Welcome to Strategy Talks, the business podcast series from PricewaterhouseCoopers Canada. Hosted by Dean Mullett, a corporate finance partner specializing in Capital Markets and M&A, and Helen Mallovy Hicks, a partner the Dispute Analysis and Valuations group, this interview series, featuring new topics and guests every episode, is designed to give you valuable insight into some of today's hottest issues affecting your business.
Helen: Over the past decade boards of directors have experienced an unprecedented increase in scrutiny from external stake holders, which has lead to greater focus on governed practices. PwC and the institute of corporate directors retain that Clarkson Center for board of effectiveness to conduct a survey of recent director's experiences.
The survey conducted in the spring of 2009, received responses from 429 directors across Canada in a variety of industries and sectors. Joining us today to discuss the survey are Brenda Eprile, a partner and leader of PwC's regulatory advisory services and special guest John Willson, a director of Nexen Inc., and a former CEO of Placer Dome Inc. John is joining us today via telephone from Australia. So thank you John for joining us and welcome John and welcome Brenda.
John: Thank you
Brenda: Thank you
Helen: One of the things the survey talks about is the fact that since the economic crisis boards have spent much more time on risk management. John can you talk a little bit about that and what you are seeing specifically in your board experience?
John: Well, yes of course. Due to the greater emphasis on board responsibility, board of accountability and so on and of course the economic crisis we've been through, clearly, we are spending much more time on risk and in both my boards. But particularly the one you mentioned, Nexen, we are very international, and we've been in a period of low oil price and with the sort of all the troubles that there is going on around the world and all of the increase in national ceilings, the desire of nations to capitalize on their oil resources or gas resources for example. We've spent a lot of time on that, at every board meeting in the finance committee and the other committee, then with the whole board. Then we look at the top, let's say 20 risks, and then we give a really hard look at the top five risks as they move around from quarter to quarter.
Dean: And John, when you're looking at this risk you're obviously focused in the key ones facing the particular business, but is part of it also looking at ways to reconfigure how the organizations are managing the risks? And kind of putting practices in place that perhaps was a bit different than were there before the economic crisis hit?
John: I think we were well into the ERM for several years and encouraged by our external auditors or our helpers in that area and I don't think we have looked at it very differently, but we looked at it much harder and much more consciously. With these emerging risks like climate change for example, there's been a huge emphasis, I don't think there's been much difference in of the process because we are well into that some years ago.
Brenda: And that seems to be consistent with the survey results that there isn't a significant in change in sort of board activity or process as a result of the economic crisis and the impact it would have had on particular companies. But John I wonder for the financial services sector, not so much Canada, because we've been somewhat insulated, but whether if other parts in the world there was better reporting on some key risks that some of the stuff could have been averted.
John: Well indeed, if reporting had been brought to the boards, it might have been a different outcome. But my own feelings that in this crisis that has revealed that so many different instruments and so many different methods of making loans, mortgages and offsetting risks and hedging and so on, that many board members don't understand those things. In fact, many managers don't understand them perfectly.
They haven't thought them all right through. I think too, that some of people in the financial services industry who promote them don't understand them completely. We need to keep things simple and in order to sell things, people make things sound simple when they're not at all. When you come back to education, you've got to be very well educated about these issues.
Helen: I think you're quite right John, some of those financial products are really quite complex and some of them hadn't really been tested or you know, in certain economic circumstances, people didn't really know what the impact might be. John, just another question around risk management with the economic crisis, the focus has really been strong on risk management and caused boards to really spend a lot more time on risk management. Has the pendulum swung too far? Are boards spending too much time on risk management? Or is it enough what boards are doing right now?
John: I can only speak for the boards I'm on. I don't think we've spent too much; the pendulum hasn't swung too far at all. We've learned a lot in this crisis and I don't think we've gone too far. There are other areas that we've been engaged in with respect to disclose and regulations and so on. Where things have swung too far in my opinion but not in risk management, we look it at it a balanced way, I'm sure, because management is always trying to put the company ahead and typically in crises like this the board gets a little bit of cold feet. There is push back but there is balance in the whole discursion.
Brenda: That resonates with me as well, in the experience that we have. Where it's critical to look at risk from a strategic perspective and make sure when a company is evaluating its strategic direction that the balance between risk and opportunity is factored in. I think boards can play a very important role in insuring that balance is achieved.
Dean: John, it sounds that the boards in which you sit on are engaged in the business and understand that business can have good information flow, from the business such that you can have a perspective on the risk, I guess the survey seems to indicate that there is still some concerns amongst directors and other businesses that there is an information gap. I guess what I would like to draw upon, you're a former CEO, you've been on the opposite side of the table where you are going to the board and reporting to the board and I guess there is a bit of a fine line, perhaps, between a board having oversight and being involved in management and maybe sometimes there is a bit of tug of war on that in certain organizations. Maybe you can give us a little bit of your thoughts around that.
John: Well, what you say is right. I would say that in the recent years, I'm not sure how many; that the balance that you're talking about has improved a great deal on the boards I've been on. As I mentioned that I think the response of the surveys, if you have management's view of the board was important, 10 years ago many managers did not see the board as being very helpful and perhaps didn't give all the information that they should have to the boards, but more recently that has improved a whole lot.
Also, with the boards' understanding of their role, the boards' knowledge that they must not get involved in the management, the board has to advise and be a great source of experience and judgment, and so the conversation has gotten a whole lot better. There's much more respect between the two entities: management and board. The quality of information and detail of information going to the board has also improved a whole lot. That really, I think because management now trusts the board much more to detail with the information properly and not to try to get involved in management. It's always a push/pull in that area, but it has reduced a whole lot in my experience in the last 10 years.
Brenda: John, is there a risk at all to boards being overwhelmed with information? Getting sort of too much granular information and because they're not in running the business they won't necessarily they won't be able to sift through that and focus on sort of the key elements that they should be?
John: Well, that's an area where again, I don't know what other boards are doing. Our boards, the ones I'm on, have been pushing back on management to make the information that we get less granular, more strategic, we're spending much less time on routine things and spending much more time strategic things. So our board packages are getting smaller, big effort by management to reduce and to reduce a great deal of presentations of board meetings which have already been presented in essence, in the board book. To allow much more time for discussion of strategy and input from the board, to help management through the issues that they're working on.
Brenda: I think that it's a very important issue that you're raising and it's no small task to refine information so that it's not detailed but does convey the kind of key issues. I think that one of the concerns from the survey that we can see is that some boards struggling with the information issues is in fact that they're getting too much information and management hasn't spend the time, that you're describing, on synthesizing it, presenting it in a way that you can have a very meaningful discussion.
Dean: I guess it sounds like it's listening to both of you raising a point that management, a t least a vast majority of management, starts to see the board as actually as a tool that they can gain something from and they want to use their time effectively. Whereas John, maybe in the past you referred to how things have improved in the past ten years. Maybe before it was more of let's make sure we take this box and send all this info to the board.
John: Yup, you're right.
Helen: John, you talk about this increasing quality of directors and the increasing quality of the boards and their inputs. The survey also highlights the need for having risk skills on boards and the importance of characteristics of understanding organizations strategy, being independent of management and directors being well prepared for meetings. However, I think that the other thing that we find from the survey is that the process is still for finding suitable board members, is still largely informal and the majority of boards do not have formal nominating committees. Can you talk about the process of finding board members and your views on that?
John: Yes, of course. Here again, there has been a distinct shift over the last 15 years I'd say. In those 15 years ago it would be very common when the board is talking about the composition of boards. For people to be asked to think about the people that they know and put forward ideas for new board members and there would be not much analysis of the needs of the boards, of the skills that were on the board and of what was missing. Sometimes, that would work. Sometimes you get some excellent board members out of that but there wasn't much process, I think today there is a lot more process. I think that most boards certainly the ones I'm around, are looking around the skills matrix that is needed to run the company or to rise the company and they're actually targeting people with the particular skills that they think are missing or not so strong.
Then again, there is, most companies today are certainly hiring recruiters, let's say, to find people with the required skill sets that we conclude we need. So it's a process, it's oriented, it's must less old way driven but let's not discount that because people have relationships and that's one of the things you look for on the board, people with relationships. If they have relationships it can be beneficial to the company and they can fill the skill matrix that we're looking for, that's great. You can save the money on the consultants; I think that most people are looking for consultants to help them today to keep a list of people who fit what the board thinks it needs.
Brenda: John, I think that the behavioral aspects are also quite important when you're looking at a board membership so that someone may have a particular expertise but being not shy to ask questions but being good working with a committee type structure in a constructive way, those sorts of things are important to the dynamic of the board and using a network can be very helpful in that regard because people in that network will be able to comment on those attributes of the individual that they might be considering.
John: Yeah, absolutely. Absolutely and of course the collegiate aspect of a board are very important. I have seen boards where there are factions on the boards where in a group sort of huddle and it's very unhealthy. So you want people with the right characteristics, obviously you want to people who are not afraid to ask difficult questions and to pursue those difficult questions. So even when you go out and you create a short list through a consultant then the interviewing that goes on and the checking that goes on with the respect of the individual characteristics of the candidate is rigorously done. That's important because I can remember a time when we interviewed a very suitable candidate and it was concluded that, though a wonderfully qualified candidate, he would not fit the culture of the board that was being considered.
Dean: You know it sounds like there is a lot more scrutiny around board activities, there is a lot more demands on companies on the boards and John you made the comment about recruiters and things of that nature helping fill the boards hit the right skill sets, but I would be curious from either your experience or Brenda's, whether companies have a little bit more difficult time filling the board seats given what's been happening in the world and the changes that we've been discussing.
John: If I could answer first, I think there are fewer people interested in being directors because of the kind of focus, emphasis, harder work no doubt that there is today on a board. But if a company is a quality company with a quality reputation, known for its good governance practices, known for its good human resource record, employer of choice, its culture and its reputation, I haven't seen any difficulty getting somebody that you want. I'm sure different companies have different difficulties, but there are very high quality people available if a company is right for them.
Dean: Brenda, anything you would like to add to that?
Brenda: I mean, John, people say that the increasing scrutiny or kind of regulations in a sense of conduct is off-putting to some senior people that would be good for directors because there is so much more process required. Now we're seeing the US go into…let's go into regulating compensation, which would really fall on the doorsteps of boards. So it makes it more of a compliance driven responsibility, which is a lot less enjoyable than being more focused on oversight of strategy etc.
John: You're absolutely right. Now, I didn't dwell on that, but the amount of time the boards have been spending on new regulation, new rules, new accounting processes etc., has been staggering. But board and management have frequently expressed themselves as frustrated by having to do all that. So yes, there are some people that say I can't be bothered with it, but quality people can see beyond that and can see that all of this work we've been doing has improved the way it works, has improved our relationship with management and in fact has not been in vain. If we get talking about compensation and regulators getting into compensation, that's a very difficult subject and one that we would all not want to get involved in. It's very difficult.
Dean: Brenda, I was wondering if you could maybe give us a little bit of background on the thinking of pulling this survey together. What the objective of it was and the benefits perhaps to board members who get access to some of the findings?
Brenda: Sure. What we wanted to do was to take a measurement of sort of what are the recent trends and development in boards. So, for both on the positive and on the negative on what's working well and is improved and where are the areas to improve on, that would be very helpful for directors to reference their own boards to the survey findings to see if they're kind of in the mix with everybody else or if they're a bit of an outlier, or to get ideas as to what are some of the best practices so that if you are on a board that needs to sort of pull its socks up in a few areas, how might you do that? So we're hoping that it might be a part of an education process for directors in a way - a way of connecting the network. Which is a bit difficult for directors…it's more challenging for directors to get connected, because they tend to be off doing a bunch of different things and they're semi-retired. That really is the thinking behind the survey.
Helen: Any other findings in the survey that you want to share with us or that were a surprise, a change in trend?
Brenda: I think that the one thing that we haven't touched on that would be useful to note is that in terms of continuing education directors are doing a lot themselves, they're encouraged to do a lot, they're taking advantage of doing a lot of programs that are offered by firms like ourselves, ICD, etc. Where there is a shortfall is that there are some companies that are doing more to sort of educate their directors doing site visits, deep dives on particular complicated parts of their business, etc. But they're in the minority. So although companies want their directors to be doing continuing education, many are expecting all of that they have to sort that out for themselves as opposed to realizing that the company actually can do a fair amount themselves also. I think that's a best practice.
Dean: Well John and Brenda, I think that wraps up our time for today. I want to thank you for joining us. John for sharing with us your experiences from around the board room table, I think that's very helpful to our listeners. I think that you calling us from vacation all the way in Australia I think we're going to put you into our podcast hall of fame because that's above and beyond and we certainly do appreciate your contribution for today.
John: You're very welcome. I hope I've said something that could help somebody.
Brenda: Thank you so much John.
Dean: For more information or to download a copy of our director survey. Please visit our director connect micro site at pwc.com/ca/directorconnect.
Voiceover: This concludes this episode of Strategy Talks. Thank you for listening. We hope you’ll join us again, soon for another episode. To download or subscribe to this podcast series, or to find more information on this topic, please visit pwc.com/ca/strategytalks.
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