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Lack of scientific and technical representation on Australian company boards is hindering the manufacturing sector as companies fail to develop ideas

KARON SNOWDON: Today, developing the brand name with worldwide

recognition - Australian companies are yet to achieve it; and company directors in the firing line again.

RICHARD BECK: There are a lot of boards in this country where there is no board member with the specialist skills of what that company is all about. And you've only got to look at some of our major organisations and you see that happens quite frequently.

KARON SNOWDON: Ask most people to name just one prominent scientist associated with business in Australia and I wonder how many could nominate Sir Gustav Nossel, even though he's one of our most distinguished scientists and about the only one on the board of a major company.

The absence of scientists, even engineers, but certainly technologists of all sorts on the boards of Australia's companies is worrying Stephen Coates. He's a consultant in telecommunications, and has made a study of who's who on the boards of Australia's top 50 companies. He says not only are directors part of an exclusive club, too many are accountants and lawyers, creating a bias and a conservatism in corporations which sees some of our best ideas sold overseas and keeps the manufacturing sector weak.

Stephen Coates believes too often company growth is achieved through takeovers, not production, and part of the failure, as he sees it, is the low status of scientific and technical skills in the business world.

STEPHEN COATES: Well, I see an imbalance where we have too many people from professions that could broadly be called "paper-shuffling"; in other words, accountants, actuaries, people with commerce degrees, and an imbalance, a lack of people with science and technology backgrounds.

And I contrasted a situation in some European countries where West Germany, for example, or former West Germany, have what they call a 'supervisory board', which exists below the board of directors, and have on most boards a scientist, an engineer, a lawyer, a marketing person, an information technology person. The entire gamut of skills is on that supervisory board. And they make the major internal decisions for that company. Because all the skills are there, they can make a decision that takes into consideration all possibilities, much more so than a board that we have in this country which has this imbalance of skills.

KARON SNOWDON: What effect do you think that has on our business and industrial landscape in Australia?

STEPHEN COATES: On the business landscape, it makes takeovers more attractive because the members of these boards are more able to comprehend the implications of a takeover, and much less able to comprehend the implications of investing in a new manufacturing plant, new RD, or getting into new business ventures where they have to grow the business rather than purchase it.

KARON SNOWDON: So, you're saying that in Australia most business expansion is occurring through takeovers, rather than growth through innovation?

STEPHEN COATES: I think there's a lot of that in Australia, and this is exemplified by the number of innovations that have come out of Australian science, that business in this country will not pick up and run with because, as David Suzuki puts it 'You need to have the seat at the table'. It's fine to call in the outside expertise, but someone has to ask the questions. So there's a need for that sort of expertise on the board level.

KARON SNOWDON: But perhaps most companies in Australia could be classified as non-manufacturing, and they don't have a need perhaps for the technologist, the scientist, or the engineer.

STEPHEN COATES: It's a bit of 'horses for courses' and I wouldn't see the need for lots of scientists and engineers on the board of, say, a banking or insurance company, but certainly in companies that are mining or manufacturing, telecommunications, transport and the like. There's certainly a need for those skills to be on the boards of those companies.

KARON SNOWDON: Do you think it's urgent to change this situation?

STEPHEN COATES: Well, some of it stems back to the government, the regulatory environment, where we have takeovers being fairly financially attractive because of the ability to buy a company that's lost money and save those tax deductions for future profits; and it makes tax takeovers more attractive to a company compared to investing in new business ventures.

KARON SNOWDON: You seem to have a bit of a set against accountants.

STEPHEN COATES: Not accountants per se, but I've a set against their disproportionate power, which they have in this country.

KARON SNOWDON: And what do you mean?

STEPHEN COATES: By having first of all their over-representations on boards and, secondly, that we have per head of working population more accountants in this country than in any other in the world.

When countries like Sweden, Korea, Japan can be very successful with one-tenth, one-one-hundredth the number of accountants per head of working population that we have, we've got to wonder how can they do it, why do we need so many accountants. Certainly in the Anglo-Saxon world, which isn't just of course Australia, the engineering profession is not as well regarded as it is in other countries, including Western Europe and the Asian countries.

But I think if you look at the composition of the workforce of Australia and Japan and Asia, they have more people that are adding to the GDP; we have more people that are calculating it than adding to it.

HUGH NILE: Biota Holdings is a small biotechnology company. It was formed over 10 years ago to capitalise upon some excellent work done by the CSIRO and the Victorian Pharmacy College, and this work centered upon the development of a treatment for influenza.

KARON SNOWDON: Dr Hugh Nile is CEO and a Director of Biota Holdings, which has teamed up with the pharmaceutical multinational Glaxo-Wellcome to develop its flu treatment.

Biota isn't one of the top 50 companies that Stephen Coates studied, and besides there's an obvious reason for having a medical scientist on the board. However, Dr Nile says even in Biota's case, it's important to have a balance of skills represented.

HUGH NILE: Many technology companies - in fact, probably most - start out with a very scientific orientation because they're based on a scientific discovery. However, it rapidly becomes apparent that business and commercial skills and a sophisticated understanding of the market are all crucial, and therefore the board of such companies needs to reflect that.

KARON SNOWDON: In a company such as Biota, is it important to retain something of the scientific expertise at the board level, or does it not matter?

HUGH NILE: I think it's important to have scientific experience and expertise represented at the board level. The expertise at the board level perhaps doesn't have to be necessarily extensive in the field that the company is working in; but wherever it comes from, I think it's very important, and the reason is that the key decisions made by a technology company, particularly a growing one in its early phases, the decisions are really involved judgements on the technology: How good is it? How competitive is it? And what steps should be taken to develop it further?

KARON SNOWDON: So often Australian companies are accused of ignoring good research, or not seeing a good idea when it's staring them in the face, and new inventions or developments having to find offshore companies to see them through. Is that the view from where you sit?

HUGH NILE: Well, I think there's a lot of interest in scientific development in Australia. In the area I'm involved in, which is that of biotechnology - however this hasn't really translated into a lot of commercial activity. There are not a lot of discovery-based biotechnology firms in Australia. The vast proportion of these is found in the United States. In the United States there is such an acute awareness of the value of new discoveries in science, and that when one is made the path towards commercialisation is smooth. There is venture capital available for supporting companies in their early stages.

KARON SNOWDON: Dr Hugh Nile, Managing Director of Biota, which is looking for new projects in the treatment of cancer and infectious diseases, to add to the anti-flu drug it's currently developing. And two very recent board appointments includes senior executives from Foster's and I.C.I.

And it seems to me what we need is more technology companies - certainly, if anything is to be done about the still shocking level of unemployment.

KARON SNOWDON: The finance company Hambro Grantham takes a very active role in the companies it invests in, usually insisting on a seat on the board. Director Peter Wallace says typically the companies are medium sized, ranging from $10 million to $50 million in value and rapidly growing.

PETER WALLACE: Well, most of our investments are in unlisted companies, so typically the size of the board is a lot smaller than major listed companies. A typical structure would be to appoint an independent chairman, then there would be two or three members of the executive directors, as well as one nominee from Hambro Grantham.

KARON SNOWDON: By having several executive directors, you're obviously using people who are very close to the operational side of the companies.

PETER WALLACE: Well, I mean, they are people that are running the business. We normally supplement that with an independent chairman who can add value to the company rather than just being a figurehead, as well as the input from Hambro Grantham. Because we've been investing in medium-sized growth companies for 12 years, we've got a lot of experience in understanding the challenges of growing companies.

KARON SNOWDON: So why do you seek a board seat in most cases?

PETER WALLACE: Well, I think growing that businesses are very dynamic, and if you're not sufficiently close to them, it's difficult to make informed investment decisions. Also I think we can add value in terms of our input into helping the business grow. We normally don't get involved in day to day management; that's for the management team to do that. However, we get involved in strategic planning, helping them build the business, build the infrastructure, introducing additional talent to the management team, and ensuring that their systems and procedures are consistent with what will be needed in the future.

KARON SNOWDON: Peter Wallace is a Director with Hambro Grantham, and you're with Radio National's Business Report as we look at the composition of boards of directors.

The executive search firm, Korn Ferry, surveys the bigger end of town each year: the top 200 listed companies, the top 100 privates and the major government business enterprises.

This year's boardroom survey revealed 30 per cent of company directors are drawn from the accounting and financial services professions and another 9 per cent are lawyers. Korn Ferry Associate, Jan Buck, says given the amount of corporate regulation in Australia, it's not surprising to see a total of 40 per cent of company directors are from accounting, finance, or the law.

JAN BUCK: When you look at things like the new Stock Exchange listing rule that says that companies should have an Audit Committee, or explain why they don't have, you're pretty well obliged to have at least one person with a very strong financial background on the board who can chair that Audit Committee. Even if they were coming from a more specialist area, such as engineering, you would expect that they'd had some exposure to finance on the way through their career. It would be unusual to have directors on some of the, say, top 100 boards, who really didn't know their way round a balance sheet pretty well.

KARON SNOWDON: And what does the Korn Ferry survey say about what are the issues that company boards' directors place as their priorities?

JAN BUCK: Well, the critical factors that they see facing the board in the year ahead start out with financial results and the weighted average of that one - 25 percent of companies consider that to be the most important thing that the board is going to face over the next 12 months; followed pretty closely, on 23 per cent, by business strategy. The next thing comes in as productivity, and maintaining and increasing productivity of the company; then development of non-domestic business, and new moves by competitors.

So those are the things that the boards are thinking are going to be pretty strong issues for them over the next 12 months.

KARON SNOWDON: Do executive search firms such as Korn Ferry often get asked to do a search for a new board member, as opposed to a senior executive or a CEO?

JAN BUCK: It's increasing in frequency that that's happening, and what we're also finding where organisations such as government boards are being set up for the first time with newly corporatised or newly privatised organisations, the government is increasingly going to search to find an entire board all at once.

But within the private sector, particularly if the company's had a change in strategic direction, it's moved out of one area or into another area, and they need a different mix around the board table to what they currently have, then they are increasingly using search to find that balance for them.

KARON SNOWDON: How much is the old boy network - to use the old-fashioned term - still in operation when it comes to appointing new directors to boards? How widespread is that tendency that certainly was prevalent in the past, where word of mouth usually popped up a few names?

JAN BUCK: It's still fairly common, and we actually prefer to call it the 'mature persons network' these days. But what we're finding with that network is that in the old days, if you couldn't get a Knight, you'd be pretty disappointed; but there aren't very many of them around any more, and people are now starting to recruit to boards, maybe by word of mouth, but they're still looking at the skill base, and still looking at the balance on the board and who will work well with the board.

So where the word of mouth still operates, there is still considerably more thought given to who you're going to bring on, than with the case maybe 20 years ago where you certainly had a much greater sprinkling of Knights around the boardrooms.

RICHARD BECK: The old-style board has generally been a group of long-standing people who served the company well as was then required. But during the last twenty years, we've spent a huge amount of time and money in educating and improving management, but boards, up until recently, have been left fairly much alone.

KARON SNOWDON: Richard Beck heads the corporate governance section of accounting firm KPMG. He says the faces and attitudes around the board table are slowly changin,g largely due to international shareholder pressure; but most companies still fail the diversity test.

RICHARD BECK: I don't think we've yet seen Australian boards really dealing with diversity to go so far as to include minority groups, in other words, ethnic groups; nor necessarily as far as they should go with equality, which is getting women in boards. Quite a number of boards today do have a woman, but very few have one or two women on the board.

KARON SNOWDON: And from your own experience in a previous life, the question of ethnic representation on boards proved to be quite a crucial one.

RICHARD BECK: Yes that's very true. I was running a company which, when we did some research, we found that over 60 per cent of our customers in the Sydney metropolitan area went home and spoke a different language to English, we'd never picked that the change had come to that degree. And when we started advertising in Arabic in one area, and other languages in other different areas, it was with great effect.

Now our board would have been so much better had it been more diversified with the inclusion of some of these people on it.

KARON SNOWDON: What are the qualities that a board committee or a

chairperson would look for in a new director?

RICHARD BECK: Well, every time you'll find that one of the most important issues is compatibility, because clearly a board must get on well together in order to be effective. And the last thing anybody wants is an aggressive, split board, and we've seen examples of that in recent times with the NRMA.

In addition to finding compatible people, people with good commercial commonsense, good judgement, vision, a wide network of useful contacts, considerable intelligence with analytical minds, people who are prepared to delve deep and make their own inquiries behind the scenes, who are totally trustworthy and indeed tough where necessary, because business can be tough. They've got to be a good team player. Specialist skills are very important today for properly diversified boards, and I think most chairmen are looking for pro-activity from the contribution point of view of all their board members.

KARON SNOWDON: But I guess it's fair to say that specialist skills, say, academic qualifications, scientific skills or engineering - that sort of thing, are much, much lower down the list.

RICHARD BECK: Yes and no. They have been lower down the list in the past but they're becoming increasingly considered today. There are a lot of boards in this country where there is no board member with the specialist skills of what that company is all about. And you've only got to look at some of our major organisations and you see that happens quite frequently.

Now there is an awareness nowadays that companies should get somebody on board who really does have the specialist skills, and this is all in the area of increasing diversity of board membership.

KARON SNOWDON: It would be fair to say, I think, that Australian companies have at times been criticised, perhaps deservedly, for being a bit too focussed on profit, as important as that is, obviously, but not looking for longer-term growth or new ventures. Is that a fair criticism?

RICHARD BECK: I think it is. You're really talking about the Japanese approach to management as opposed to the wWstern approach: the Japanese of course taking a very long-term view of the company's long-term health and wealth. Whereas here, particularly in Australia, we tend to be looking at every six months reporting short-term profits. And I think that is a very valid question and one where a balance has to gradually occur so that we're looking not only for short-term profits, but long-term wellbeing of the organisation.

KARON SNOWDON: And the responsibility for that leadership in change, perhaps, will rest with the board, won't it?

RICHARD BECK: Ultimately, yes. And I think a lot of boards are now beginning to reconsider their basis of remuneration for the senior executives, which for many years have been tending towards more of a performance pay basis. But I think a lot of boards are realising that does tend to create short-term thinking, and again I think the pendulum tends to swing too far and needs adjusting a little bit more to the centre.

KARON SNOWDON: Richard Beck, National Director in Corporate Governance for KPMG. And the Business Report is preparing a program on executive pay scales for a few weeks time.