Boards need to build their level of international skills and connections to run with optimum success, but there are challenges involved, writes Tony Featherstone, Consultign Editor of the AICD Governance Centre.
Dr Sarah Ryan MAICD knows the 24-hour flight from Brisbane to Oslo well. She has taken it more than 40 times in the past eight years to attend board meetings for Akastor ASA, the Norwegian oil services investment giant. Ryan, also a non-executive director of Woodside Petroleum, Viva Energy Group, Central Petroleum and MPC Kinetic, usually arrives in Norway a day before the Akastor board meeting and leaves the day after. “I head off just before the jet lag sets in,” she jokes.
“Australian directors who avoid international boards are missing out,” says Ryan. “Working with directors who have global careers exposes you to new perspectives, skills and networks. The experience makes you more effective on boards.”
Governing Akastor keeps Ryan current with global trends in oil and gas, a different governance model and international directors. The Akastor board includes a former central banker, a director of Volvo Cars and Ikea Group, energy experts and employee-elected directors. Its directors have served on boards of companies in Germany, Finland, Denmark, the US, UK and China.
Australian listed companies, particularly those outside mining, energy or technology, typically have no — or few — offshore-based directors. Most have directors who live in the country. Often, the constitution of listed companies requires the majority of board directors, including the chair, to be Australian residents.
Travel, time zones, cultural differences, board collegiality and extra costs can be challenges with directors who live overseas and serve in Australia, or vice versa. Many Australian boards find it easier to nominate local directors they know rather than risk recruiting an offshore director who must fly halfway around the world for board meetings. Ryan has heard these and other excuses.
“Quite frankly, I don’t believe them,” she says. “International travel for board meetings can be draining, but you get used to it. The Akastor board is very experienced, professional and collegial, and we are regularly in contact through email and phone calls. The logistical challenges of serving on an international board are, in my view, overstated.”
Like many in the energy industry, Ryan had a global background before joining her first board in 2011 — for Aker Solutions, which became Akastor. She lived and worked in almost 50 countries during an executive career that spanned energy companies, investment firms and startups — and loved the nomadic lifestyle.
”It’s not until you live and work in lots of different countries and experience different cultures that you start to think internationally.” Dr Sarah Ryan MAICD
Ryan says some Australian boards misunderstand “global experience”.
“These boards talk about international skills, but in truth, they are limited,” says Ryan. “An Australian director who spent two years in London or Singapore on a secondment with an Australian company has modest international experience, in my view. It’s not until you live and work in lots of different countries and experience different cultures that you start to think internationally. I left Australia early in my career and didn’t come back to live here until almost 20 years later.”
Ryan’s global perspective was the foundation for her Australian governance career. She joined the Woodside board in 2012, less than two years after her appointment at Aker Solutions. Other Australian board roles soon followed and in the past few years, Ryan has declined directorships for two UK companies — both of which appealed — because of the challenges of attending 12 board meetings for each company, every year.
“There is a point where it’s impossible to attend overseas board meetings every month without neglecting your Australian board duties,” says Ryan. “But it’s manageable for Australian directors to have at least one international board role.”
Ryan lives on Queensland’s Sunshine Coast, flying to Perth, Brisbane, Melbourne or Norway for her board meetings.
“It gives me space to think and time away from what can be a directorship echo chamber. Oil and gas people are, by nature, energetic, logical and get on with the job, regardless of where they live.”
Board skills and strategy
The issue of offshore-based directors is about more than director skills or having a larger pool to source candidates, particularly women, with CEO experience and those with cultural diversity. It goes to the alignment of board composition and strategy.
For companies operating only in Australia, with no plans to expand overseas, locally based directors make sense. For those with international operations or eyeing an offshore acquisition, a lack of genuine global skill on the board can be problematic. Australia has a long list of companies that have failed overseas because they misread consumer needs, competition or regulation. Often, their boards were stacked with Australian-based directors, despite embarking on aggressive international expansion.
Governance expert Dr Ulysses Chioatto says board composition is lagging the renewed push by Australian listed companies to expand overseas. “One company after another says international expansion is part of its strategy, yet nobody on the board is based overseas. Or the board says its directors have international experience, but those skills are limited or unclear.”
Chioatto, an adjunct associate professor in law at Western Sydney University, says a lack of international skills on boards is a failure of risk management. “Boards that govern companies that are expanding overseas yet lack genuine international skill are failing in their duty. It’s incumbent on them to have some directors based in the market where the company is expanding, particularly if it is a major part of the strategy.”
Boards too often overestimate international skills of Australian directors, he says. “It’s good having directors who have worked overseas for part of their career, but nothing beats a director in the market where the organisation is expanding. You cannot replicate that director’s knowledge and networks of an overseas market from Melbourne or Sydney.”
Chioatto says Australian companies that want to expand in Asia should have at least one director based in the region. “Two-thirds of the global middle class and half of the world’s infrastructure will be in Asia by 2030, yet Australian companies generally have very few Asia-based directors, or even local directors who are Asian or have worked extensively in the region. They lack the right board skills for an Asia-focused strategy.”
Yet Australia’s star biopharmaceuticals company is a local exemplar in board internationalisation. Until recently, CSL had three offshore-based directors on its 10-member board: David Anstice (who retired from the board in October), Dr Tadataka Yamada in the US and Abbas Hussain in the UK.
Former CSL chair, Professor John Shine AC, says the board decided a few years ago to become more international to better support the company’s global growth strategy. Yamada joined the board in 2016 and Hussain in 2018. The CSL act and constitution requires two-thirds of its board, including the chair, to be Australian residents.
Shine retired from the board in October 2018 after 12 years of service, replaced by Brian McNamee, a CSL non-executive director and former CSL CEO.
“The desire to have more international experience and knowledge has been a theme on the CSL board,” says Shine. “Although we currently have an excellent group of directors and the right skills, I would expect the board to appoint more offshore-based directors in coming years.”
Shine says Australian companies should consider overseas directors if it fits their strategy. “You get directors who look at the world a little differently to their Australian colleagues, ask different questions and bring different insights to the table. Not all of it is applicable to Australia, but the CSL board is stronger for having three international directors.”
He acknowledges that recruiting such directors is challenging. “It can be hard to get interest from, say, a senior US executive or director. Flying all the way from the US to Australia for eight board meetings each year — and all the work that entails — is a big ask.” CSL looked for overseas directors with Australian connections. Anstice was an Australian expat and Hussain has family in Melbourne. Yamada’s connection was a deep research interest in CSL’s science and knowledge of the company through his Japanese heritage.
“It’s not just about the skillset with offshore directors,” says Shine. “We looked for directors who understood or could understand Australia and CSL’s culture — and it’s worked very well so far. Appointing a director with no connections to Australia or CSL would be challenging.”
He says international directors bring two main benefits to Australian boards. The first is industry-specific. For CSL, having directors based in the US and UK helps the board understand different regulatory frameworks crucial in pharmaceuticals. “Sometimes a director might flag an idea and one of our overseas directors will say, ‘we can’t do that in this market’, or ‘we will have to do it this way’. That’s really valuable.”
Remuneration is the second benefit. Shine says offshore directors have a better feel for different pay expectations in their market. “Australia tends to pay higher base salaries in our field, but fewer long-term incentives, compared to US companies. Having directors based in the US or UK who can help the board understand what is needed for CSL to attract the best people in a certain market, is a useful resource.”
Shine says there were few issues in leading a board that was spread across three continents. “We did have lots of early or late phone calls, but senior people in our industry are used to meeting at odd hours, and used to the travel. We ensured each board meeting had other meetings the day before or after, and opportunities for directors and executives to get together informally, to make it easier for our offshore directors.”
The CSL board meets in Europe and the US annually and Shine says that he preferred offshore directors attending each meeting in person. “Occasionally, someone attends via Skype, but generally all the directors are there at each meeting. For CSL, having international directors is business as usual.”
Incitec Pivot: US focus
Industrial chemicals, fertilisers and explosives manufacturer Incitec Pivot last year added its first offshore director, Joseph Breunig. The US-based director, a former chemicals executive with decades of experience, has bolstered the board’s knowledge of US markets.
Incitec completed construction of an ammonia plant in Louisiana in September 2016. The US$850m plant, which finished on time and below budget, is central to Incitec’s strategy to become a globally diversified industrial chemicals company. Chair Paul Brasher MAICD says Breunig’s appointment helped align board composition with Incitec’s US focus.
“Just over half of our business is now in the US, so it makes sense to have a director based there,” he says. “Joe’s been a terrific addition to the board and my expectation is that we will have at least one other director in the US in coming years — if we find the right person.”
Brasher says other Incitec directors have international experience from their executive careers. “The board has a good mix of skills for overseas markets, but that’s not the same as having a director based in the US who has deep experience and connections there.”
Recruiting a US director was challenging, says Brasher. “Most senior executives or directors in the US have not heard of Incitec. We spoke to some board candidates who knew of the industrial and mining explosives manufacturer Dyno Noble Americas (DNA) operation, but said Australia was too far to travel. Some, I suspect, saw an Australian board position as a chance to bring their partner on holiday here. In contrast, Joe had worked a lot outside the US and was used to long-haul flights to attend meetings.”
Brasher says the board focused on finding a US director with the right fit. “Experience and knowledge of the US chemicals market were a given. As important was finding a director who would work well with the current board and be passionate about Incitec and its potential.”
Breunig’s appointment had an unexpected benefit: Incitec’s US executives could gain from having a director nearby. “It’s positive for our US management having a director in the same available time zone, to bounce ideas off, if needed,” Brasher says. “Joe is not management, but like our other directors, he can share his knowledge, skills and connections to help the executive team.”
Brasher says offshore directors sometimes have questions their Australian peers do not consider, and appreciates them asking basic questions at the start. “Often, it’s innocent questions about why something is done that way that add the most value. There’s always a risk that directors assume knowledge or won’t ask the basic questions in front of their colleagues.”
Australian companies that are expanding overseas, yet have no offshore-based directors or limited international skills, should reconsider their board composition, says Brasher. “Every company is different, but if the organisation is getting heavily involved in the US, shareholders should know the board has sufficient US skills to govern that strategy. Our shareholders were supportive of Incitec appointing a US-based director. It was an obvious thing to do.”