A key part of the value that an effective Director adds to a Board is an understanding of the external environment - an ability to 'bring the outside in' to deliberations on business strategy. External factors, such as the state of the economy, competitor activities, and so on, are routinely factored into any good Board's strategic thinking. But one critical external influence is too often overlooked - and it's one that has the potential to make or break a business.
Government decision making and public policy changes can and do directly impact on the fortunes of a company – sometimes positively, sometimes not. For example, recent government decisions that have limited the development environment for large-scale wind energy and coal-seam-gas exploration projects have added to the compliance and regulatory costs for companies. These changes, if they have not been factored into the strategic business plan, could seriously affect the viability of some projects. Conversely, there are examples of companies being able to make big gains by anticipating opportunities created by government decisions. For example, low emissions or renewable energy companies that have been alert to public policy movements will have strategically positioned themselves over the past couple of years to take advantage of the upside potential of a price on carbon.
Public policy shifts can also have a critical impact on mergers and acquisitions and on public infrastructure bids. I know of an Australian company that rejected an unsolicited offer from an overseas company, only to then suffer a serious adverse regulatory change that it didn't see coming, which significantly impacted the business and made the rejected offer look unbelievably good. In relation to large government infrastructure bids, I have seen an infrastructure company turn around a very long losing streak – with all the tens of millions of dollars of costs associated with that – through a determined 'understanding the client' focus in its engagement with government.
Despite the obvious implications, many Directors and Boards dismiss the notion that their business strategy should take serious account of the public policy environment as it relates to their sector and to the wider economy. Perhaps this simply results from a lack of understanding of the workings of government and of how best to align a company's strategic objectives with public policy imperatives. Or perhaps there is too much credence given to the view I have often heard expressed around Board tables – that government is irrelevant, even 'hopeless', and that public policy has no role in strategic business considerations.
Whatever the reason, it is worth pointing out that the best-managed companies in Australia and overseas are now routinely integrating government decisions and likely public policy shifts into their Board's strategy development processes. Many are also beginning to undertake serious and strategic engagement with government at senior levels – moving beyond what is generally seen as 'lobbying' to a significant and ongoing strategic consideration at Board level of the impact of public policy on the future of their businesses. Many of the best companies I have worked with routinely involve Directors – in particular the Chairman – in direct discussions with government. This allows the Board as a whole to hear and understand what government is doing – and may be planning to do – and integrate this into its business strategy.
In Australia, we're also seeing a trend towards people with significant experience in government and public policy being appointed as company Directors, and this is no accident. A very small number of leading private sector companies have for some time seen the value in appointing Directors with government and public sector experience, but it is now becoming more common. Former Treasury Secretary Ken Henry's appointment to the Board of NAB and former Reserve Bank Governor Ian MacFarlane's appointment to the Board of ANZ are just two examples in the banking sector, and former New South Wales' Premier Nick Greiner's appointments and accomplishments as a company director are so extensive I couldn't list them all here.
While all of these changes suggest a growing awareness among Boards that it's important to understand public policy and to anticipate the potential threats and opportunities created by government decisions, there is still a lot of ground to cover. Decisions taken by governments can and do impact directly on the fortunes of business. We see examples every day - the price on carbon, the resource rent tax, changes to superannuation, the regulation of particular industries, and the awarding of tenders for large public infrastructure projects, just to name a few.
Given this, a proper consideration of the public policy environment, and effective engagement with government, should be as routine as the consideration of any other external factor that has the potential to impact on the future of a company. However, this clearly isn't always the case in practice, and it's worth asking why something that seems so obvious still struggles to find a place in many Australian boardrooms. And why there is still, in some boardrooms, quite strong resistance to the idea that understanding and thinking about government is important to being an effective Director.
Over the years I've been fortunate to have provided strategic advice on government and public policy matters to some of Australia's largest companies and organisations. It's been my experience that many senior executives and Directors find government a bit of a mystery – its decision-making processes often anathema to their own business practice. As well, some clearly believe that the role and decisions of government are necessarily 'political' and, therefore, 'nothing to do with us'. This can result in public policy developments that impact the business not being addressed until they absolutely have to be – usually as a result of an adverse government announcement that 'no-one saw coming'. Without wanting to make the point too bluntly, if Boards and senior executives choose not to look in a certain direction then it will be impossible to see anything coming from that direction.
At the AICD's Company Directors Course I completed seven years ago, the importance of Directors being able to assess the external environment, and respond to it, was drummed into us. We were presented with numerous case studies of companies that had collapsed as a result of Boards failing to be alert to significant external threats that could damage their businesses. We were also told repeatedly, and in no uncertain terms, that as Directors it was our responsibility to seek advice on matters we didn't understand, not just leave them to someone else to figure out. This mantra – 'if you don't understand it, you need to learn about it. Or don't be a Director' – has been a constant theme in the AICD education programs, in articles in our journal, and in public commentary and advocacy by the Institute for many years.
This idea that, as Directors, we need to recognise the things we don't understand and take steps to learn about them is particularly relevant in the context of government and public policy. In the interests of better governance, and better Board decision-making, we need to challenge the idea that it's 'not our business' and encourage all Directors to improve their understanding of the potential impacts – good and bad – of public policy developments and government decision making.
Many Australian companies are making efforts to bridge the gap between government priorities and business strategy – and these are welcome developments. In the past ten years, for example, we have seen the creation of new senior executive roles such as 'Director of Public Policy', 'Manager of Government Sector', and so on. In fact, if a medium to large business, or even a small business that does a lot of work with government or is in a heavily regulated sector, doesn't have someone in this type of role you'd be asking why. While these developments are positive, they are not a substitute for Board-level consideration of government priorities and public policy direction. Without an overarching strategic approach by Board Directors, even the best government relations executive will struggle to make an impact.
An important practical step that Boards can take to incorporate public policy and government decisions into their strategy development processes include conducting an annual public policy 'scan' or 'review'. This can then become a critical input into business planning and strategy development. I have seen this work well, particularly where the consultant or company manager who has completed the review presents the findings to the senior executive team and the Board. This setting provides a great opportunity for Directors to learn more about the public policy environment as it relates to their business, and to then 'bring the outside in' by discussing how the company needs to respond. This can also help the Board to set the tone for how it wants to approach the management of these issues.
There is a clear trend - Australia's most effective Boards are beginning to think deeply about, and seeking expert advice upon, the potential impacts of public policy and government decision-making on the future of their businesses. Not because they think it's interesting, but because they know it is fundamentally important to the future of their companies. As Directors, we all need to take the professional development and attitudinal steps required to broaden this trend, so that Board discussions about the impact of government decisions become an opportunity for serious thinking about this very important input into business strategy.
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Christian Zahra FAICD is an Executive Director at Pacific Strategy Partners, a Director of the Regional Australia Institute, a Director of the Mary MacKillop Foundation, Chairman of the Federal Government's $1B Regional Development Australia Fund Advisory Panel, and a Member of the Federal Government's Ministerial Advisory Council on Regional Australia.
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