Directors too deferential to their CEOs, says APRA

Independent directors of ADI boards are often too deferential to chief executives or allow chairs to be too domineering, Australian Prudential Regulation Authority deputy chairman Ian Laughlin suggested at an industry conference yesterday.

In his speech at Macquarie University in Sydney, Laughlin surveyed his and APRA's experience in their periodic meetings with boards of regulated entities.

"By and large the boards that I have dealt with (mostly insurers, mostly the larger companies) are competent, have a diversity of skills, take their responsibilities seriously, and generally carry out their duties well," Laughlin said.

"These meetings give APRA insights into the board's thinking about the business - strategy, operations, people and so on," he said.

"It is also an opportunity to exchange views on the industry, which again is of benefit to both parties.

"We form a view about the board itself based on experience at these meetings. This might be anything from a feeling of unease to quite strong positive or negative opinions based on objective criteria.

"These views are obviously important in a subjective sense in that they consciously or otherwise influence our attitude to the institution.  Also, they feed into the formal assessment of the board under the 'PAIRS' process."

"These meetings are not inquisitions or examinations by APRA. They are about an exchange of views and opinions, and an opportunity to gain deeper insights for both parties. In the great majority of cases, the meetings reflect this broad intent.

"However, there are occasions when the discussion is stilted or not as open as it might be.  

"This immediately causes our antennae to vibrate, and will therefore influence the way the meeting then plays out. On other occasions, we may need to convey clear and direct messages about concerns we have, and of course this too influences the tone of the meeting.

"As is the case more generally, the chair of the board has a strong influence on proceedings at these meetings, and that can manifest itself in both positive and negative ways.

"Sometimes the chair will dominate the contribution by the board to the discussion. They might tend to answer each question from APRA, without seeking views from their colleagues.  

"While it is important that we hear the views of the chair, it is every bit as important that we hear from the other directors.

"In other situations, we sometimes see too much deference to the views of the CEO, and that is always a concern.  We can and do meet with the CEO separately from the board, and so we don't come to a meeting with the board to hear opinions from management.

"When this happens, we will try to redirect the discussion so that we hear the views of individual non-executive directors.

"Sometimes, the meetings appear a little orchestrated. It looks like each director has been assigned a task or a topic on which they will comment. Now this may not be a bad thing - it's to be expected that the board will discuss how to best approach a meeting with APRA and so it is not surprising that some boards will choose a disciplined and structured approach."

Laughlin said APRA was occasionally accused of expecting too much of boards, expecting them to take responsibility for tasks that would normally belong to management.

"There is no intent that any additional responsibilities would, in the normal course of events, lie with management. The APRA requirements for boards are about strong governance," he said.

"ADIs and insurers make financial promises to their customers which the community expects will be honoured. And because of this APRA imposes requirements on these institutions and their boards that go beyond what might be required of an industrial company."