The Trustees Plate
There are many lessons we can learn as Trustees from the daily revelations of the banking royal commission. One of the things made clear is that firms like AMP have been focusing on short-term sugar hits without enough emphasis on investing the effort and making the difficult choices that would have benefited their financial health and success in the long run.
For athletes on the track or in the field, sugar hits give them short-term bursts of energy, and that sweetness is also enjoyable in the moment. But sport nutritionists understand the benefits an elite athlete receives if they have the discipline to consume a tailored balanced diet over the whole year.
For financial institutions, a high sugar diet – one that is superficial, sales-focused or short-term - is a recipe for future underperformance. It usually only temporarily improves perceptions in the market, but makes little improvement to reality.
Shareholders suffer at the hands of an unhealthy sugary diet too. Every now and then the long-term reality catches up with the decisions the company has been making. A sugary diet will eventually catch up with us at some day of reckoning – for people it might be through diabetes, or maybe cardiovascular disease. For companies – that day of reckoning might be a short seller’s report or it might be a royal commission, or some other event that brings the company’s share price into sharp relief against the reality of the company’s value, as we’ve seen recently with AMP, CBA and Blue Sky. Reality will always win out – even if it does take a decade.
For AMP, the culture of short-termism has probably been happening since the deliberate culture change that occurred alongside demutualisation - way back in the late 1990s. Amazingly for AMP, its share price didn’t even benefit from these years of sugar hits, having fallen about 70% from demutualisation to 2017. And it certainly didn’t help it in the long run, with all these years of an unhealthy diet crashing down in 2018.
Stack on complex carbs and good fats
Another option to balance long-term and short-term interests is one we liken to stacking on some complex carbohydrates and healthy fats with your sugar-hits – like having a honey and nut muesli bar rather than a fizzy drink. This gives you the quick wins in the market, which is good for perception, and it also brings longer-term benefit, which is vital for reality. Of course this will be harder to implement than the pure sugar-hit, and it will usually cost more, but these reality-changers are necessary to develop long-term growth and sustainability.
We think likening fiduciaries to elite athletes is appropriate. Most institutional Trustees come to the role after building a significant portfolio of experience in other areas. Taking this a step further, we recommend the Trustees plate can include a few extra simple items such as:
- Streamline internal reporting so that Directors and Trustees can properly judge management activities against the board-adopted strategy
- Focus on compliance wins by recognising and rewarding desired outcomes
- Upgrade investment operations so that they ultimately become more efficient and useful to management and fiduciaries.
Healthy, balanced diet full of protein
There’s also the approach of taking a healthy, balanced diet that is full of proteins and applying this consistently as a lifestyle choice, and reaping the long-term health rewards. This might not have any market-pleasing sugar hits, but its depth and longevity delivers strength and vitality.
Here are the recipes we recommend for a healthy balanced diet for Trustees and Directors:
- Ensure the board can collectively drive the strategic direction of the organisation (otherwise someone else, such as a regulator will)
- Make the most of member and employer representative Trustees and Directors to oversee strategy development and regularly monitor and measure outcomes against that strategy
- Set incentives and KPIs that align with desired culture outcomes
- Encourage each Trustee or Director to excel in their review and challenge roles – perhaps by ensuring each board or committee member asks at least one question on each agenda item
- Rebuild relationships with Regulators need to know that you are just as genuine about member outcomes as they are
Trustees and Directors have a significant responsibility to ensure the health, vitality and longevity of the organisations they serve. They need to be aware of the short and long-term consequences of the items they have on their plate. Given the enormous pressure the superannuation industry is under right now – we feel it’s time to recognise how crucial it is to deal with the challenging long-term issues. The good news is, just as an athlete can influence their performance outcomes via thoughtful choices, so too can Trustees and Directors.