Content uploaded by Clive Smallman
Author content
All content in this area was uploaded by Clive Smallman on Oct 15, 2015
Content may be subject to copyright.
199
Copyright © eContent Management Pty Ltd. Journal of Management & Organization (2010) 16: 199–203.
A professional director’s view
Interview with Kerry McDonald, President of
the New Zealand Institute of Directors
(2009–2010)
C
LIVE
S
MALLMAN
Lincoln University, Faculty of Commerce, Christchurch, New Zealand
Thomas (Kerry) McDonald BCom, MCom (Hons), DCom (Honoris Causa), AFInstD,
FAICD, FNZIM is an accredited Fellow of the Institute of Directors, Chairman of Opus
International Consultants Limited and i-lign Limited and a director of Leighton Con-
tractors Pty Limited. He is deputy Chairman of the NZ Institute of Economic Research, a
Life Member of the Australia New Zealand Business Council and a board member of
WWF-New Zealand.
Kerry was previously Director of the NZ Institute of Economic Research before joining
Comalco (now Rio Tinto) in Melbourne in 1981. He had various Senior Executive roles
with the Group in Australia and New Zealand, including as a managing director and
member of the Comalco Group Executive Committee from 1988–2000 and responsibility
for New Zealand from 1988–2003.
He became a director of the Bank of New Zealand in 1991 and was Chairman from
1997–2008 and chaired both the New Zealand–Japan and Australia–New Zealand busi-
ness councils and was the New Zealand Chairman of the Australia–New Zealand Leader-
ship Forum. He was a director of a number of other companies, including National
Australia Bank, Carter Holt Harvey Limited, Ports of Auckland Limited, Gough Gough
& Hamer Limited, Owens Group Limited and Chairman of GRD Macraes Limited and
OceanaGold Limited. He also chaired a number of audit, remuneration, risk and other
board committees and is a former trustee and board member of the New Zealand Business
Parliament Trust and Director of Antarctica New Zealand.
He has been on and chaired a number of State Sector boards and committees and was
involved in a range of trade and public policy related activities and organisations includ-
ing: chairing the State Sector Standards Board and the Department of Conservation Over-
sight Committee after Cave Creek; the APEC Business Advisory Council (co-chairing the
trade committee); the e Government and Foreign Direct Investment advisory committees;
an Australia–Japan trade issues study group; and numerous electricity reform committees
and processes. He has been closely involved with the Kakapo Recovery Project and has had
a particular interest, over 30 years, in developing high performance organisations.
Volume 16, Issue 2, May 2010
JOURNAL OF MANAGEMENT & ORGANIZATION
C
live had the privilege of speaking with Kerry
in late March 2010. They covered a number
of governance issues, and here are Kerry’s thoughts.
What for you are the major issues in corporate
governance right now?
From a New Zealand perspective, but also with
an eye on the US and UK, and to a lesser
extent Australia, for me the overriding issue is
that boards and Directors are not providing
consistently strong leadership that adds value
to businesses.
Underneath that I think that there are three
specific issues. Firstly, there is a real shortage of
directors with a strong business background.
These are the sort of people who have been sen-
ior executives or chief executives. They under-
stand strategy and leadership in the broadest
sense of the word, and they can lead people and
organizations. They have been well trained to
make decisions and understand how business
decisions are made. Critically, they know about
sustained business improvement and creating
high performance companies – how to lead peo-
ple and to use systems to increase productivity.
So, if you are trying to recruit directors now in
New Zealand, there is a very limited pool of peo-
ple who have that real depth of business back-
ground. There are a lot of people who want to be
directors and who are trained in accounting, law
and other professions, but there is an increasing
shortage of people with the real depth of business
experience that is required.
The second major issue is weak boards and
poor board performance. A strong chairman, as a
good leader of the board, won’t accept a weak
board and poor performance, but there are too
many examples of boards destroying value or not
adding value. A good chairman will put together
a good team. A good board team usually func-
tions well, so if you have a weak board and poor
performance, the root cause of that is almost cer-
tainly the chairman, unless they are being pre-
vented from putting together a strong team. This
can happen in the public sector, where you may
not get to choose, or in the private sector, with a
dominant shareholder.
The third major issue is weak regulation and a
lack of consequences for poor performance. It
may sound surprising for a company director to
say that we need stronger regulation, but if there
are no real consequences for poor performance,
then you have a weak environment in which to
ensure good performance, and effective regula-
tion has a vital role in discouraging incompe-
tence. I do not think that shareholder control is
particularly effective, because shareholders are
often too fragmented and it is hard for them to
work together effectively. The finance company
debacle in New Zealand underlines the fact that
corporate regulation in New Zealand is, in some
key respects, not very effective.
What is it that distinguishes the best directors
that you work with?
My view is that the board is a team, and that such
teams need to be carefully ‘crafted’. The best
directors can come with many different capabili-
ties but I think that there are important qualities
that need to be represented in any board.
A good director must have a very good general
knowledge of the business world, strong specific
industry knowledge, and a very good skills base,
including strategy, risk, judgement about people
and decision-making. They have to be genuine
leaders with excellent interpersonal and commu-
nication skills. They must know how to best to
contribute to the board team – in other words be
an astute team member. By this I mean judging
when to lead in a debate, because they are the
best equipped to do so, or when to play the
devil’s advocate or when to help to build consen-
sus. In other words, they are not only a very
good leader, but they also have the ability and
the experience to fit into the rest of the board
team and add value, and they are respected for
that ability. For a person with the right knowl-
edge, skills and capabilities, the element of
200
Clive Smallman
JOURNAL OF MANAGEMENT & ORGANIZATION
Volume 16, Issue 2, May 2010
respect is a powerful adjunct. A person is con-
strained if other people around the board table
switch off when they talk.
What about poor board performance? Where is
that rooted?
One key reason is an ineffective Chairman. This
might be someone who is very plausible, with
good style and interpersonal skills, but who will
not face up to important issues and lead the
board in dealing with them. There might be real-
ly important business issues that management
(particularly the Chief Executive) is not handling
well. In these situations, boards have to act deci-
sively. But there are too many instances where,
even with a majority of directors pressing for res-
olution, the Chairman prevaricates again.
Dealing with a poorly performing Chief Exec-
utive can be a critical test.
Weak Chairmen are often reluctant to under-
take board performance reviews, which I think
are critical. They should be done every year in
one form or another. Chairmen may, subse-
quently, have to discuss performance with some
of the Directors, pointing out that they are real-
ly not adding value to the team. They need to
agree with Directors how they can improve
their contribution, and also require a positive
change within an agreed time. Inadequate
improvement should mean that their future on
the board is in doubt. It’s a defining characteris-
tic of a Chairman as to whether or not they are
willing to have these conversations and follow
this process.
I am interested in the number of substantial
New Zealand companies that have lost value or
had poor shareholder returns over some years.
That, to me, really raises fundamental questions
about the performance of the board and that
inevitably has to raise the question about quali-
ty of the chairing. The dark side of board per-
formance for me lies in poor leadership by the
Chairman of the board and consequently of the
business.
How would you characterize the role of the
board at the moment?
I think that it is somewhat dependent on the
business and state of the economy... However,
the core role of the board is to lead the business
and to be accountable for it. So, one of its core
tasks is to select the Chief Executive, to manage
their performance, delegating most of the opera-
tion of the business to them and then holding
them accountable. In difficult times doing this
well is vital.
Next, I would focus on strategy. The global
financial crisis is serious, but over the last one to
two decades a group of economies, including
China and India, but also parts of Africa, Asia,
parts of South America and parts of the Middle
East, have had sustained average growth rate twice
as high as the so-called developed economies.
This shows a real shift in global growth rates. In
addition, many of these economies are becoming
much more active in thinking about economic
growth, the role of the G8, the World Bank, the
International Monetary Fund and so on.
This shift was illustrated in the Copenhagen
meeting on ‘Climate Change’ and the way the
USA was treated, by China and India for exam-
ple. These are rapidly developing economies say-
ing you are not acknowledging the way our
economies are growing and our aspirations in the
world. This was a pretty sharp message, probably
the thin end of the wedge as emerging economies
aspire to a much stronger leadership role on
everything affecting the global community
including environmental and trade issues. The
change in emphasis from the G8 to the G20
reflects this. The G20 is a much broader club.
Meanwhile, many of the developed economies
are recording very large public deficits and
sharply higher debt levels and there are serious
risks for them in bond and other markets.
This is really a lot to think about and a lot to
keep in focus at the present time. This means that
the strategic focus of the Board right now is really
very critical.
201
Interview with Kerry McDonald, President of the New Zealand Institute of Directors (2009–2010)
Volume 16, Issue 2, May 2010
JOURNAL OF MANAGEMENT & ORGANIZATION
What, if anything would you do, to reshape board-
room practice?
Good boardroom practice copes with challenges.
If you go through cycles and different situations
you may put a bit more emphasis on one thing or
another, but a good board has a very sound foun-
dation in good practice. Good risk management,
good strategic planning and, generally, good prac-
tice means that there should not be too many
damaging surprises.
If there are genuine shocks, and these things
do happen in even the best-run business, their
impact will be managed well by a good organiza-
tion. In these days your team has to be strong.
You cannot afford to carry passengers..
What is your view on how boards are currently
constituted?
I think in New Zealand the balance is pretty
good because of the substantial dominance of
non-executive Directors. I think that this is the
way a board needs to be constituted. My
approach is to have key members of the senior
management team in Board Meetings for much
of the meeting, with the ability to engage, discuss
and comment. They may not be Directors, but
they can genuinely engage and should feel free
respectively to test the views of Directors. I think
a board functions best with close engagement
with senior executives, which is better than hav-
ing more executive directors, although one or two
– a small proportion of the board – may be ok.
To me the major issue with board constitution
in New Zealand is too much focus on selecting
the individual and not enough in building the
best team. You need to think about what indi-
viduals bring, not only in individual capabilities,
skills and experience, but also in terms of their
ability to function effectively and powerfully in a
team.
As I said earlier, when you have got a good
team and people know how to engage in a team
context, you have got a much more powerful and
effective board. An issue for me in composition
of the team is that diversity can definitely help
the team, but diversity for its own sake can be
destructive. It has to be diversity linked with
building an effective team.
What are your views on the recruitment and
training of Directors?
Again, I must emphasize that there is not enough
focus on building a strong team. This links back to
my earlier points especially about the best Direc-
tors I have known. It is important that at the core
of the board you have people with a real depth of
experience, knowledge and skills in business.
Much is made in the media of Directors’ pay.
What are your views on this?
My view is good boards add enormous value to a
business and that they should be rewarded and
vice versa: poor boards destroy value, and ‘rewards’
should reflect this.
Generally, directors should be better paid but
linked with an absolute requirement for effective
performance reviews. How we are doing as a
board? How is the business travelling? What is
the total shareholder return over the last year,
three years, five years, etc? Are we adding value or
not? If we are not adding value, we had better
take stock and think about changing the board.
It may be that the business is beyond help. You
are doing the best you can and your board per-
formance review and engagement with investors
and other shareholders should illuminate the
underlying issues of concern here. One metric I
use sometimes is, if a board is good and capable
and really adding value then it is not unreason-
able that its total remuneration is equal to half
the Chief Executive’s total remuneration. That’s a
very arbitrary approach though.
The test has to be what is happening to the
value of the business, to which I would add that
there are not enough consequences for poor per-
formance.
202
Clive Smallman
JOURNAL OF MANAGEMENT & ORGANIZATION
Volume 16, Issue 2, May 2010
What does the future hold for boards?
Right now, that is a critical question. Ten years
ago it might not have been so important but you
now have had Enron, World.com, Tyco, etc. – all
those US companies associated with the debacle
of the late 90’s – leading to Sarbanes-Oxley.
Then there was Long Term Capital Manage-
ment, which went belly-up in 1999 and was so
big in the financial sector that it just about blew
up the global financial system. And now we have
the Global Financial Crisis. When you get into
the detail of what happened, what were the Man-
agers thinking about and what were the Direc-
tors thinking about as they went down their
paths to disaster. There were plenty of people
that were alert to the risks, but a lot of very big
corporations basically drove their business over
the cliff. So that’s got to raise really fundamental
issues about business in the form that we know
it, with professional management and sharehold-
er-appointed Directors. The failures were on a
huge scale.
Then you come back to New Zealand with
many non-bank finance company failures, with
potential losses of many billions.
All of these firms had Boards of Directors.
They had a Chairman and other Directors who
made their decisions. I think the public at large
is entitled to be skeptical about the business
model and the role of boards; hence the need for
standards to rise, substantially and quickly.
The Capital Market Taskforce has highlighted
the loss of confidence in markets in New Zealand
as a result of the poor performance of finance
companies, and the Directors have got a lot to
answer for here – and the regulators.
In the US the Federal Reserve – the SEC –
seems to have really missed the bus, based on var-
ious hearings and enquiries. I don’t think it needs
more regulation; it needs more effective regula-
tion. The New Zealand Government, at the time,
also had responsibility but did not react to the
developing financial crisis.
So, unless that regulatory framework can be
sorted out, and unless there is really good and
effective accountability structure for Directors,
then I think the current model is at risk. It’s hard
to justify it, based on the performance in the US,
NZ or in UK, and the number of corporate fail-
ures, particularly based on poor business practices
and excessive risk-taking.
203
Interview with Kerry McDonald, President of the New Zealand Institute of Directors (2009–2010)
Volume 16, Issue 2, May 2010
JOURNAL OF MANAGEMENT & ORGANIZATION
N O W A V A I L A B L E
eContent Management Pty Ltd, PO Box 1027, Maleny QLD 4552, Australia
Tel.: +61-7-5435-2900; Fax. +61-7-5435-2911; subscriptions@e-contentmanagement.com
www.e-contentmanagement.com
THREE
DIMENSIONAL
ETHICS:
* Personal
* Corporate
* Social
by Attracta Lagan
(KMPG) and Brian
Moran (Managing
Values)
ISBN: 978-0-9757422-3-5
viii + 176 pages s/c 2006
'You have in your hands an important
tool for raising ethics awareness and
new organisational standards to meet
rapidly mutating social requirements.'
John Elkington (Author:
Cannibals with
Forks: The Triple Bottom Line of 21st
Century Business
)
ORGANIZATIONAL
JAZZ
– Extraordinary
Performance
through
Extraordinary
Leadership
by David Napoli,
Alma M. Whiteley,
Kathrine S. Johansen
ISBN: 978-0-9757710-6-8
xii + 244 pages (2005)
Drawing on the science of complex
adaptive systems, this book offers a
lens through which we search for new
ways of thinking about, and working
with, the unpredictability of our
dynamic complex world.
SOULWORK:
F
i
inding the
Work You Love
Loving the Work
You Have
(Revised edition)
by Deborah P
Bloch and Lee J
Richmond
ISBN: 978-0-9775742-3-0
iv + 204 pages (2007)
This book helps to connect career to
the spiritual values that give life
meaning. The revised edition places
career choices in the context of
holistic, personal, spiritual
development and internal change.
