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Wise counsel or passing the buck? The role of board advisers

Board members don’t always have all the answers. Richard Rutter/Flickr, CC BY

Many employees and investors in large companies believe organisational leaders overuse consultants. Witness the latest broadside at the embattled David Jones board, accused of appointing advisers to take on “functions that should be performed by the board and management”.

Boards are often involved in making decisions that affect thousands of jobs and millions or even billions of dollars in shareholders’ funds. So surely we want them to have the best information they can. But when does seeking good advice turn into shirking or abdicating responsibility?

Legally, the board of David Jones has every right to appoint advisers and then rely on that advice under the Corporations Act. ASX corporate governance guidelines similarly envisage that boards will seek advice, suggesting boards should have “a procedure … to have access in appropriate circumstances to independent professional advice at the company’s expense”.

But the basic legality of appointing advisers doesn’t address the substantive question posed by Simon Marais, director and portfolio manager at major shareholder Allan Gray - are they really necessary? Or perhaps more generously, what are the “appropriate circumstances”, referred to in the ASX Principles, under which advisors should be appointed?

Can directors hide behind a veil of advice?

A string of recent court cases highlights directors will find it hard to abdicate their responsibilities. Whether relying on auditors (see the Centro case) or specialists such as actuaries (James Hardie), directors need to bring their own independent judgement to bear on the advice and information provided. Advisers do just that - provide advice and supporting information. The directors are still in the hot seat when it comes to making the decision.

When to call the advisers in

Turning to the question of proper engagement, there are three key dimensions to consider when deciding to seek independent advice: competence, independence and impact.

First and foremost, boards need to seek advice when they lack access to the necessary skills. Any reasonable person would accept that boards need advice in specialist, complex areas such as the law, accountancy and so on. It’s also easier to accept that a board will need advice when dealing with business issues outside the normal scope of operations.

Second, boards often need external advice when management are conflicted on the issue before them. Since boards are heavily dependent on information coming from the management team, there is good reason to seek a second opinion when there is a significant chance of self-interest, even unconscious self-interest, tainting the information provided by management.

Third, boards facing major decisions are more likely to seek assistance as a means of assurance. If you’re going to bet the company, it doesn’t hurt to have a second set of eyes to look over the decision you are taking.

Why David Jones needs help

So let’s go back to the facts facing the David Jones board.

The Myer merger proposal has the potential to be the most important decision this board will ever face.

The deal is also looking potentially complex with some investors calling for David Jones to spin off its real estate assets as part of any deal.

The board has undergone significant change with the resignation of multiple directors and the newly appointed Chairman commenting on the “unsettling time” faced by the company.

Any merger proposal threatens the security and interests of the management team involved, and at the same time, David Jones chief executive Paul Zahra is reported as having significant power given recent board ructions.

If ever wise counsel was called for, this would seem to be a prime situation. While there might well be questions as to the scope of engagement (something we can’t comment on) or the independence of advisers (again, something we can’t comment on), it would seem entirely appropriate to retain expertise for this important upcoming decision.

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