Unravelling the Complexities of Corporate Governance: A Review of Fred Hilmer’s ‘What’s Wrong with Boards’

Book review and discussion of ‘What’s Wrong With Boards’ by Fred Hilmer

Are you a non-executive director grappling with the intricacies and challenges of corporate governance? “What’s Wrong With Boards,” penned by Professor Fred Hilmer AO, might just be the guiding light you need.

Our comprehensive review of this eye-opening book will leave you armed with valuable insights for enhancing your board’s success. Fasten your seatbelts; it’s time to revolutionise your leadership approach!

Key Takeaways

• Fred Hilmer’s book ‘What’s Wrong With Boards’ talks about problems in corporate governance. It tells how directors can improve decision-making and leadership in boards.
• The book stresses on the role of legal and societal pressures on directors. It teaches that tackling these pressures helps make better decisions.
• Critical appointments like CEO or Chairperson have a big impact on how a board works, as per Hilmer. A wrong choice can harm the company’s performance.
• The book has sparked fresh thinking in corporate governance, encouraging people to work for improved leadership and decision-making in boards.

Key Issues Addressed in the Book

Fred Hilmer dissects flawed governance within corporate boards, highlights the limited power directors often hold in significant decision-making situations, and brings attention to how critical appointments can drastically affect board effectiveness.

Failures of performance

The governance challenge is to consistently strive for excellence, not settling for the merely acceptable. Dealing with a CEO and top executive team who are modest but not top tier performers is one of the most challenging situations boards face. Is  going through the time-consuming selection process to find a new CEO worth the risk?

The book also explores the evolving definition of performance. Historically return on equity as been the primary measure of performance, Hilmer explores how this is changing.

Acceptance of poor performance also includes the persistence of strategies that are attractive in the short term but are unsustainable. These strategies include those that exploit market failures, regulatory failure or information asymmetries at the expense of the customer. The book explores this dynamic through the lens of the Australian banking sector.

Conformance matters are crowding out performance discussions from Board agendas more than ever.

Flawed governance in corporate boards

Corporate boards often lose sight of their primary objectives due to flawed governance. This issue can manifest in several forms including ineffective leadership, lack of accountability, or conflict of interest among board members.

From poorly made decisions to inadequate oversight, these pitfalls disrupt the smooth functioning of a corporation and potentially its reputation in the market as well. The lack of diversity on most corporate boards further enhances this problem by limiting varied perspectives and ideas.

Additionally, insufficient communication within the board results in a failure to address risks timely which could have disastrous consequences for the company’s stakeholders.

Furthermore, directors are finding it increasingly difficult to fulfil their roles owing to mounting legal and societal pressures resulting from flawed governance practices identified with their boards’ operations.

Hilmer points out that “Australia’s default public company governance model is now competing against strong and well-established alternatives such as private equity, direct investments by large pension (superannuation) funds and sovereign wealth funds. If it is to survive into the next century as a vibrant part of a sophisticated and dynamic market economy, it need to become a more efficient and effective means of marshalling financial and human capital.”

The book explores the failure of the board of Theranos to penetrate the deception of the CEO, Elizabeth Holmes. For example, “A determined CEO and Chair (Holmes) was able decide numerous senior directors for 15 or so years.”

Such situations may be avoidable if directors are not so often concerned of developing a reputation of being “difficult”, and thus limiting their future potential to be invited to join other boards.

Critical appointments and their impact on board effectiveness

Critical appointments dramatically affect board effectiveness, as highlighted by Professor Fred Hilmer. Major decisions such as the selection of a CEO, chairperson or nomination of directors hinge upon the board.

These choices carry significant weight because they shape governance direction and influence major policies.

Any flaw in these critical selections can undermine the overall functioning of the board leading to poor performance.

Lessons for Directors and Corporate Governance

The book offers insightful guidance on enhancing decision-making processes within boards. It emphasises the need for effective leadership, underscoring its pivotal role in driving board efficiency.

How to improve decision-making processes

Understanding the need to improve decision-making processes in corporate boardrooms is essential. Here are some ways to enhance the board’s functioning:

1. Directors must recognise and tackle societal and legal challenges proactively. This approach informs better decision-making.
2. Acknowledge flaws in current governance practices. Accepting these as significant contributors to inadequate decisions may prompt necessary changes.
3. Emphasise on importance of accountability in board governance. A culture of answerability ensures transparent and ethical decisions.
4. Understand the difference between contribution and participation in corporate governance. Focusing on meaningful contributions can elevate the quality of decisions made.
5. Address flawed governance as a critical issue impacting decision – making processes, This helps set the stage for substantive improvements.
6. Pay careful attention during critical appointments like CEO or Chairperson. The right leadership can significantly affect overall group decisions. Based on extensive leadership interviews, if only one change in governance was possible, it would be to clarify the role and improve the functioning of the chair.

Importance of effective leadership in boards

Effective leadership in boards has a pivotal role in navigating the legal and societal challenges faced by directors today. Professor Hilmer’s book underscores this point, suggesting that better corporate governance is achievable with strong board leaders at the helm.

These leaders shape critical decisions, influence appointments, and generally steer the direction of listed companies.

The role of legal and societal pressures on directors

Legal obligations and societal expectations significantly shape a director’s role in corporate governance. It’s important to understand that directors face increasing pressures, both legal and societal, in performing their duties.

This often arises from regulatory compliance requirements, stakeholder pressure, ethical responsibilities, or shareholder activism. The heated debate around the value of independent directors enhances this tension within today’s challenged governance landscape.

With flawed governance leading major decisions astray in public companies, it becomes imperative for those occupying boardroom seats to navigate these pressures with skill and finesse.

Clear understanding of these factors helps boards not only meet accountability standards but also uphold transparency efficiently amidst the growing demand for impeccable corporate governance practices.

The book also touches on observations that Australian directors are more heavily regulated than in other jurisdictions. ‘Based on research in conjunction with the law firm Freehills, former Australian Institute of Company Directors (AICD) chair John Colvin argues that: “Directors are subject to too many criminal offences, and too many of those offences allow conviction on the basis of strict or positional liability without the ordinary protections of the criminal law.” Further, “This approach is not reasonable and is out of step with the regulation of others professionals and occupations within Australia and the regulation of directors in other similar jurisdictions.”

Literature Review of “What’s Wrong With Boards”

“What’s Wrong with Boards,” stands out as a significant contribution to corporate governance literature in Australia. Combining academic rigour with practical insight, Hilmer delves into the challenges that impede effective board functioning. Drawing on his experience in academia and corporate leadership, he navigates board dynamics and provides practical solutions.

Hilmer critiques ASX rules, highlighting their transformation from flexible frameworks to rigid directives. He argues that a one-size-fits-all model dominates governance, emphasising adherence over a foundational understanding of good corporate governance. This overemphasis on best practices may lead to a myopic pursuit of compliance, lacking a robust evidence base. Hilmer urges boards to reconsider their approaches, emphasising flexibility and a “best fit” mentality.

The exploration of the gap between documented values and behavioural change underscores the complexity of enacting meaningful change within boardrooms. Hilmer contends that values on paper do not always translate into tangible improvements, advocating for a cultural shift where principles guide the actions of board members.

Hilmer’s analysis of director independence challenges the focus on mechanistic definitions, urging consideration of social independence. He highlights the influence of social ties within the boardroom, emphasising a holistic perspective.

The examination of the relationship between advice and independence reveals the delicate balance independent directors must maintain. Hilmer observes that in cases with high knowledge acquisition costs, independence may lose some impact. He questions the independence of ‘career directors’ and contrasts them with semi-retired senior executives.

The concern about the extensive disclosure burden on boards emphasises the need for a balanced approach to information provision. Hilmer notes the risk of prioritising process over outcomes and advocates for a more efficient dissemination of critical commercial and strategic matters.

The discussion of stakeholder capitalism versus traditional shareholder capitalism reflects the evolving landscape of corporate responsibility. Hilmer warns against ‘greenwashing’ and explores different governance models, presenting a vision of Governance 3.0 with empowered directors and a data-driven approach.

Hilmer’s call for ASX guidelines to prioritise fit-for-purpose structures resonates strongly, encouraging context-specific solutions over rigid frameworks. Throughout the book, he emphasises the critical role of effective leadership, particularly in the chairperson position, dispelling the notion of the chairmanship as a mere accolade and rallying boards to prioritise leadership excellence.

Conclusion

In conclusion, “What’s Wrong with Boards” is an indispensable addition to the canon of corporate governance literature. Fred Hilmer’s masterful synthesis of academic rigor and practical wisdom provides a roadmap for boards seeking to navigate the complexities of contemporary governance. This book is a must-read for directors, executives, and anyone passionate about advancing board effectiveness and elevating corporate governance practices to new heights. It stands as a clarion call for boards to evolve, adapt, and thrive in an ever-changing business landscape.

FAQs

1. What is the main idea of ‘What’s Wrong With Boards’ by Fred Hilmer?

The main idea of ‘What’s Wrong With Boards’ centres on identifying problems in corporate boardrooms and offering practical solutions.

2. Who is the target audience for ‘What’s Wrong With Boards’?

Fred Hilmer primarily targets business leaders, managers, shareholders, and individuals interested in corporate governance with his book.

3. Is this book useful for people unfamiliar with corporate boards?

Yes, ‘What’s Wrong With Boards’ simplifies complex concepts about corporate boards making it accessible to readers without prior knowledge.

4. Can I get a hard copy version of ‘What’s Wrong With Boards’?

Yes, you can buy a hard copy edition of ‘What’s Wrong With Boards’, offered at various online or physical bookstores.

What's Wrong With Boards

https://www.booktopia.com.au/what-s-wrong-with-boards-fred-hilmer/book/9781761280214.html

5. Does this book cover international perspectives on corporate boards?

While the focus lies primarily on Australia-based corporations; however, many principles discussed are applicable globally.