Simon McKeon: ‘The boardroom is not spared from poor competence and occasionally a bad apple.’

Dean Newlan talks to Simon McKeon about corporate governance in Australia. Supplied

Welcome to the latest in our In Conversation series, between Australian of the Year Simon McKeon, and Fellow at the Centre for Accounting and Industry Partnerships, Department of Accounting, University of Melbourne and partner at McgrathNicol, Dean Newlan.

As well as his academic credentials, Dean is a senior forensic accounting specialist with a wealth of experience in corporate governance - dealing first-hand with the often fatal consequences of poor business decisions.

He was a perfect choice to talk to Simon McKeon, who in addition to his well-known philanthropy roles, is the part-time Executive Chairman of Macquarie Group’s Melbourne office and Chairman of the CSIRO.

The lively discussion includes:

  • How business has been on the nose in Australia for a long time - and how business have themselves to blame.

  • Why it’s getting harder to become a company director – and why it should.

  • The Occupy movement has a point – and business should listen. “Any senior businessperson ought not say, "Ah, you know, look it’s some rabble from the bottom of society’s pile.”

  • The two-strikes executive remuneration law: “Boards just need to understand very carefully what their constituents are saying to them.”

  • Chief executives deserve their big bonuses – at least the good ones do. “We expect them to be brilliant in many, many different things. And they will be a rare breed, the successful ones, so they ought to get paid a lot.”

  • On poor corporate governance: “The boardroom is not spared from poor competence and occasionally a bad apple, you know, someone who just shouldn’t be there in the first place.”

  • A sustainable planet is a business problem. “We all need to put our shoulder to the grindstone to work out what are our individual contributions to deal with this issue.”

Watch the full interview between Dean Newlan and Simon McKeon here.

“Business has been on the nose”

Dean Newlan: Simon McKeon, Investment banker, business person, company director; philanthropist, social entrepreneur, Australian of the year, thanks for your time and welcome to The Conversation.

You recently quoted Professor Michael Porter of Harvard Business School and agreed with him when he said that “business has been on the nose for a long time”. What do you think Professor Porter meant by that?

Simon McKeon: I think Michael Porter is repeating very succinctly what survey after survey after survey after survey has said both in this country and around the world for years. These surveys are asking different questions but their conclusion basically is that while we the community rely on business for basically 95% of what we consume, we don’t like it. We distrust it. We think it’s a bit on the nose and take many opportunities to say so.

Dean Newlan: Do you think it’s a case of the haves and the have-nots, or the gap between the haves and the have-nots getting wider? Do you think big business has contributed to that in any way?

Simon McKeon: I think that is part of it. When one has a vibrant economy, the potential for someone entrepreneurial and who just comes up with the great idea and executes it perfectly to become wealthy, in the material sense, is obviously there.

To me though, I don’t think that is the central issue. I think it’s the way business conducts itself. I think there is room for a bit of public philanthropy for those who have done very well, materially, out of the system, but I think this divide between the haves and the have-nots is an issue, but not the big issue.

Corporate governance

Dean Newlan: Australian corporations are subject to some of the most rigorous regulatory controls in the world and yet things still keep on going wrong. How well do you think Australian corporations measure up against their global peers in a governance sense?

Simon McKeon: In the governance sense, and boy that’s a very general question, I think we’re relatively well-wired into what’s going on around the rest of the world. I think it’s pleasing, although we’ve taken a long time to broaden the diversity of our boards. There’s still a long way to go but we’re getting there.

I think the focus on what is governance versus management, I think that’s as well debated in this country as I’m aware of anywhere else. I think probably one of the biggest challenges for governance in this country, and perhaps some of our counterparts in the US, are a step or two ahead, is understanding what is expected of the modern corporation and how it can be more sustainable by connecting with the community. Coming back to Michael Porter, I think that’s something that we have a tiny way to go yet.

Dean Newlan: Do you think the job of the Australian company director has been made more difficult in recent years – is it getting harder to be a company director?

Simon McKeon: Yes, and I hope so – in a sense that business continues to develop. What I was taught back at university I hope has changed a little bit today in the curriculum. Again, one of the challenges today is to make business judgments form the government’s perspective, looking over the shoulder of management and debating with them as to whether they got it right on what I would call many decisions that aren’t necessarily easily transferrable into dollars and cents, value and propositions. Measuring the health and wellbeing, the loyalty of a workforce, a large workforce – that doesn’t come easily out a computer model anymore.

And yet boards, I think, are required; there’s a competition for talent, the best talent and how we actually grapple with those sorts of issues. It is expected of us, we need to do it; just because it’s a hard thing to do, we have to make judgements every now and then, doesn’t excuse us from having to get involved.

Dean Newlan: Now over the last ten years, we’ve seen a lot of examples of poor governance, we’ve seen a lot of things go wrong in Australian business. Some examples that I’m thinking of – questionable business practices locally and internationally, shareholder protests about executive remuneration, in relation to bonus arrangements, unresolved and continuing conflicts of interest, and so on. To what extent do you think poor governance is a function of the external pressures that directors are currently facing, and what might those pressures be?

Simon McKeon: I think we can overstate that, I think that poor governance is just poor governance. There’s incompetence in all aspects of society, from politics, to running the local church and all I’m saying is that the board room is not spared from poor competence and occasionally a bad apple – someone who just shouldn’t be there in the first place.

And yet I think that what I look for is what is the relevant industry body doing about it? The company directors associations in this part of the land now I think are by and large running a fabulous process in relation to educating directors, reminding them what are the hot issues of the day, providing opportunities for them to continue to upgrade their skills.

We can make up a whole heap of reasons why it’s become harder but at the end of the day, its just like any other aspect of life, you’ve got to set aside the time, you’ve got to be passionate about it, make sure that you’re continually being kept abreast of what’s relevant.

Can market expectations put unreasonable pressure on boards? AAP

Dean Newlan: Now what about the issue of market expectation? The market does put a lot of pressure on boards these days. Do you think that market expectation sometimes can be unrealistic?

Simon McKeon: That’s the case again with so many. I’m unrealistic about my expectations of a politician – I’ve never been a politician so it’s easy for me to be in my armchair and say “do something better”.

But sure, I think the points to take note of when one is a director is that when the comment is informed and if our peers are saying that wasn’t good enough, if the informed financial press are saying that’s not good enough, if someone like Michael Porter is saying that’s not good enough, that’s what you listen to, then obviously we’ve got to listen to all criticism. But in truth, when the criticism comes from a quarter that might be angry and bitter and resentful about something bad that’s gone on, but actually not really in the best place to be properly informed about what could have been credibly done about it, then it’s not that you take it with a grain of salt, but you can’t really ascribe the same signifcance to it.

Managing relationships

Dean Newlan: You’ve been in business in this country for many, many years in very senior roles. How would you describe in a general sense the relationship between the board and executive of Australian corporations. Do you think there’s some work that could be done to improve the relationship there?

Simon McKeon: Of course there is. And I actually think that’s an area that someone in your position will be asking me in 50 years time as well. It’s going to be a perennial contest.

What is governance? What is supervision? What is setting strategy? And then that dividing line between day-to-day management. And of course, one of the problems is that many of us in governance have come through the management process anyway, and we can’t help ourselves other than to trip over the line inappropriately and be consuming governance energy which we really out to leave to management.

What’s the solution? I think the solution is to continually have opportunities to be reminded of what governance is about, what management is about and how it’s inappropriate to actually mix the two. But as I’ve said, I think we’ll be talking about this one for a long time.

Dean Newlan: That’s right. Now, Australia’s operating in the global environment more so – more so than ever before and increasingly so. Does that bring new pressures into the boardrooms of Australia corporations and how are boardrooms coping with that pressure?

Simon McKeon: I think one of the strengths if you like that we have here in corporate Australia is that by and large trade barriers were opened up quite some time ago. We’re not cushioned like other economies are and that has forced us in a way to be far more aware of global competition and perhaps some industries in other parts of the world.

That’s a good thing and that trend I don’t think is going to stop at all. Things can literally be imported into this country from vast distances on a per-unit cost and do it quite cheaply – we’re required to be aware of what is best practice not just in this country but around the world.

Dean Newlan: And demonstrate the best practice.

Simon McKeon: Very much so.

The Occupy movement

Dean Newlan: Now, you recently commented on the Occupy movement and the validity of the movement’s concerns in relation to governance generally and corporate behaviour. Do you think the movement speaks on behalf of a broad community base?

Simon McKeon: It’s worth watching where this movement goes. It’s an unusual one in that it has not come with a single message. It’s almost sprung out of very broad resentment on a number of different categories.

The best I can do is say that a whole bunch of people who are really grumpy and bitter nowadays because there seem to be have been some kind of corporate-induced recession that we had three years or so ago. Governments responded with enormous bailout packages and today we’re seeing government tighten their belts and ordinary people who have expected some more government assistance in various areas of their lives are being told “well, we can’t afford to – for the public purse to pay that” and they’re all being really, really grumpy. And from Wall Street to London too – we’ve had a smattering of it here and in Sydney – people are expressing their displeasure.

Now, I guess all I’m saying is watch this space – whether it’s riots in the UK, whether it’s the Greeks being fed up with what they have. Any senior business person ought not say “Ah, you know, look it’s some rabble from the bottom of society’s pile.”

I’m saying spend a minute or two understanding what they’re saying. Is there actually a place for business, without compromising profit, to at least reach out and say “Ok, the world’s not perfect. We’re here in business. We’re happy, as Michael Porter says, to be part of the solution. We can’t turn ourselves into a charity – that’s for another sector again. But, we’re aware that you’re bitter, you’re grumpy. What can we in business actually do without compromising profit?

On the Occupy Movement: “All I am saying is watch this space.” AAP

Executive remuneration

Dean Newlan: Of course, one of the concerns is about executive remuneration and opponents to that would say that executives are paid what they are worth by the company. Who’s right between the two? Do you have some sympathy for the "Occupy” position?

Simon McKeon: My view is very clear on this. I’m not doing much entertainment this year, but I am going to a concert with an international celebrity in a few days time, and they get paid a lot of money. Now, I’d rather my ticket price was lower and they didn’t get paid less. But at the end of the day, that’s not a big issue for me.

It’s not a big issue for me how much an incredibly successful CEO gets. And by successful, I define that very broadly as well because actually I think we don’t have enough successful business leaders in this country. Those that can reach out beyond the narrow definition of, you know, a quarterly profit and loss statement, etc. Those who can really bring a whole organisation along in a very sustainable and powerful way in the future.

When we get those rare people that can do that, I think they ought to get paid a lot. However, I would also say that whether we own businesses, whether we’re well paid as CEOs, it’s also appropriate to think of ways which we can give back as well.

I think the issue of executive pay – CEO pay – is actually much more complicated than just the fact that they got a lot of money. I think it’s performance, I think it’s incentive, the way in which the pay is actually constructed, the giving back of themselves as well. And you know, when we can tick each of the boxes and say, you know, the market is right, the performance is good, they’re actually part of the community as well and giving back, we wouldn’t have the outrage that we see on a regular basis today.

Dean Newlan: So it is a question of a lack of a talent pool of quality executive people in this country?

Simon McKeon: I think being a CEO, and I’ve never been a CEO, is one of the most challenging positions that we have. It doesn’t surprise me that the average tenure is so short.

We expect them to be brilliant in many, many different things. And they will be a rare breed, the successful ones, so they ought to get paid a lot. But I have to say that I am fully supportive of every business school that is trying to actually cultivate, grow the many, many different competencies that a CEO needs.

You need to be a people person, you need to be a number person, you need to be – you need to understand what growth is, you need to be entrepreneurial. You know, there’s so many things we are expecting of this person and it’s very rare when it actually manifests itself.

Dean Newlan: There’s been a lot of talk in the last week or two on executive remuneration during the current AGM reporting season. The two strikes rule has become law just recently. Do you think that’s a step in the right direction? Do you think we needed a law like that? Do you think stakeholders will make use of that rule?

Simon McKeon: It’s a good question, Dean. I’m probably not the best person to ask in the sense that I’ve watched it, I’ve not been an active part of that particular debate. I’m more active in another part of the debate being that boards just need to understand very carefully what their constiuents are saying to them.

And whether it’s in the area of remuneration or it’s in the area of just corporate performance generally, IR relationships. Whatever it is, I think this is a bit of sore wound in a way.

That’s why it’s percolated up, that’s why it’s become law. Clearly, boards are now told, you know, if you’re not putting up something that the shareholders endorse sufficiently well then twice in a row that the board is spilled. I don’t have a big problem with it. I’m actually not that passionate about it either.

What I’m passionate about is boards, through their chair, really understanding what the shareholders are saying. Largely that will be the big institutions but every now and then it will be, you know, those who the ASA represents as well.

Dean Newlan: You have talked a lot about business giving back to the community. How do you see the business making that contribution to the community? What can they do?

Simon McKeon: Well, I think firstly many people in the community sector expect businesses to give half their profits away, to become kind of quasi-charities. And I say to all my friends in that sector that it’s just not the way the system works.

Business has to fight for capital, do a deal with shareholders that they’re going to get a regular return. So you know, what’s developed in the Western world largely is that I think there is an acceptance that a very modest – it’s typically 1% of after tax or pre-tax profits – can be given away by way of cash; which collectively is a very large number. I say there’s a myriad of other ways in which the company can become stronger, more sustainable, more relevant – be, if you like, better equipped to make more money in the future by cleverly, creatively, intelligently connecting with the community.

Whether that’s actively organising its work force by way of volunteer days, or it’s going the extra mile and thinking “you know we have IT departments, we have marketing departments that are built to withstand peak loads during the annual cycle. But outside of those peak loads they’re still there in massive, well put together departments and creatively they can be used to community good”.

The community sector has a perennial need for that sort of expertise and every now and then it can be directly injected and not compromise profit. And again, the competency of a CEO includes how do you creatively think of ways to help solve community problems not at the expense of the bottom line. Takes an extra hour or two to think through it, but it can be done.

GE chief Jeffrey Immelt: business has a compelling role in sustainability. AAP

Developing a sustainable world

Dean Newlan: If I was to ask you to look into the future by say another 10, 15 years what do you see in terms of Australian business? Where are we heading? What do you think needs to change in order to create a sustainable business community for Australia.

Simon McKeon: That’s a big question and I’m going to make it even bigger by saying – you mentioned before the issue of how does – how is our business coping globally? I think we are very much part of a global economy and I think the big issue looking forward from my perspective, whether it’s 10, 15 years or even longer, is that no one likes to use the word, you know, population explosion.

We like to think about it in terms of insects or rabbits, but we’re undergoing a huge social experiment at the moment. Over the next few decades we will be up to 10 billion people on this planet. And I think the question – one of the important questions for any business leader is how is that all going to happen on a way that still allows society, the community to be settled and prosperous and peaceful and all that sort of stuff – because we haven’t done it before, and if we get it wrong it’s going to be huge fallout.

So, I think that business needs to be thinking as we – as the population - grows, there’s nothing that’s going to turn that around in a hurry. How does business focus on sustainability in a way that perhaps we haven’t had to do so before. How do we squash ourselves into this little planet dealing with things like food security, energy security what have you. What I’m trying to say is that it’s not just a government issue. It’s bigger than government. It’s huge a social experiment that we’re going through. And we all need to put our shoulder to the grindstone to work out what are our individual contributions to deal with this issue.

Dean Newlan: Are you saying that business has a responsibility to develop a sustainable world?

Simon McKeon: There’s no doubt about that. We were blessed in the country with a visit by Jeffrey Immelt, the Chief executive of GE, earlier this year and I spent some time with him because we have a close association between CSIRO and GE.

He unashamedly was saying thing like “GE is big on alternative energy because we know it’s something that the community is going to need more of in the future”. I was told he would say that by my scientists years ago and until the science changes then I know we’ve got to be there. And it may be that governments take a while to bring in the right measures to push that industry along further, etc.

And he said, “I can’t influence that politics, but the science is saying that this is one of many areas where wear going to need more products and services by businesses to sustain ourselves.”

Now, he’s the CEO of the world’s largest industrial conglomerate. I’ve been saying to Australian business leaders that I think he’s actually got it right. He’s actually starting from what the community is going to need and therefore injecting the research and development, and the corporate wherewithal to provide what we’re going to need.

Dean Newlan: Simon McKeon, Australian of the Year, thanks for your time.

Simon McKeon: Thanks, Dean.

Many thanks to the University of Melbourne media unit, which kindly allowed The Conversation to record this interview in their studio.