It is the dream of many executives at the end of their corporate careers to pick up a neat portfolio of non-executive directorships. Who wouldn’t want to be on the board of the Commonwealth Bank (annual director’s remuneration about $320,000, Chairman’s remuneration $856,000) or BHP (directors earn about $300,000, Chairman about $1.2 million)? These ASX20 companies all have lawyers and experts who specialise in compliance, hundreds of staff compiling reports and following regulations, and there is negligible personal liability. It is prestigious and interesting work, and can last a decade or more if done well.
The other end of the scale, however, is a different ball game. Join the board of a small private company, which might have a handful of staff and a couple of senior executives, and the board member on $30,000 a year has nowhere near the same level of support. These businesses do not have the same ‘economic moats’ or competitive advantages of the big boys. Non-executive director roles at that end of town require more hands-on involvement. Inspecting the mine, chatting with the customers, knowing the staff and really understanding the business are all part of the role. If there’s a problem, there may be only one or two directors around to sort it out.
And then there are the cosy directorships which look comfortable at the start …
I sat in on the Independent Commission Against Corruption (ICAC) interviews of Senator Arthur Sinodinos on 3 April 2014. It was amazing to see a Senator of the Australian Parliament shredded by counsel assisting the inquiry, Geoff Watson, who said things like, “Listen to me … Let’s just focus” and “Will you concentrate!” and “Oh, just answer my question”. It has been well documented in the media that the Senator was unable to answer many of the questions. He admitted to being busy ‘transitioning’ to the Senate in 2011 when he should have known the extent of the dire financial straits of the company while paying $17,000 a month to Liberal Party lobbyists.
The full five hours of transcripts, covering 146 pages, are here from the morning and here from the afternoon. I’ve extracted some interesting passages below (lines show where the interview is discontinuous).
You be the judge, but before condemning the Senator, any director should consider how well they could answer the same questions about their company. The Senator was a Director of Australian Water Holdings from October 2008 to November 2011, including either Deputy Chairman or Chairman for the whole period.
Questions by Geoffrey Watson (GW) to Arthur Sinodinos (AS). Mr Bannon is the Senator’s SC.
GW: Well, I’m so sorry, Senator, but I’m going to go on. Let’s just put it this way. Did you think that the idea of your appointment as Deputy Chairman and a salary of $200,000 per annum would require you to have a close knowledge of the financial condition of Australian Water Holdings?
AS: Yes.
GW: And in terms of having a close knowledge of those financial conditions at Australian Water Holdings, what did you do?
AS: Well, I attended diligently at board meetings ah, read the material before us and where necessary asked questions at the meetings.
GW: Did you ever make an appointment to speak to the Chief Financial Officer, Bruce Chadban?
AS: Ah, not separately to the CEO.
GW: Well, what do you mean by that, did you or did you not- - -?
AS: Um- - -
GW: - - - make an appointment- - -?
AS: A separate appointment with Mr Chadban?
GW: Yes?
AS: No.
GW: Did you ever make an appointment for you to meet with the subsequent Chief Financial Officer, Robert Groom?
AS: No, but they came to board meetings. I didn’t have to make an appointment to see them.
GW: And did you ever ask to look at the primary material which lay behind the accounts?
AS: Can you define the primary material?
GW: Well, books and records of Australian Water Holdings, the company of which you were successively Deputy Chairman and Chairman?
AS: Are you talking now about ledgers or are you talking about um, invoices?
GW: I’m talking about ledgers?
AS: No.
THE COMMISSIONER: Or profit and loss statements, or documents of that kind that were part of the CFO’s?
AS: Commissioner, thank you. CFO reports included profit and loss statements, balance sheets, and that was the form in which I expected the information to come forward. And that was the information on which I relied. If you’re asking me did I go through individual invoices or check the ledgers - - -
GW: All right. So you made no commitment beyond reading the board papers and listening to what was said at the board meetings?
AS: And examining the papers therein, exactly.
GW: Did you ever go to the site to see where the excavation was occurring and the pipes were being laid?
AS: Yes.
GW: And how many times did you go there?
AS: Um, before I started there I did an inspection just to verify what they did and how they did it, the dual reticulation, the sewage treatment plants.
GW: I think you must have misunderstood my question. How many times did you go to actually look at the place where Australian Water Holdings did its work?
AS: Ah, only that time in terms of physical location.
GW: That was once, once ever?
AS: At, at the beginning, yes.
GW: And I think that may have occurred before you were even a director?
AS: Yes, that’s right.
GW: That was part of a promotional tour to encourage you on-board wasn’t it?
AS: Well you could also call it an information and education tour, yes.
GW: All right. Okay. Well, I think we’ve got the position. With knowledge of the dispute your position as a director you did nothing to ascertain the facts behind the escalation of Australian Water Holdings’ costs?
AS: But even if I had would I be - - -
GW: No, just answer the question. Did you or did you not do something?
AS: Not specifically, no.
GW: Well, when you say not specifically what non-specific thing did you do?
AS: Only through the discussions we had at the board level.
GW: And so did anybody at board level reveal why the costs were escalating?
AS: No.
GW: Why didn’t you ask a question, let me just frame a simple one for you. Hey, Mr Di Girolamo, why are the costs escalating? Why didn’t you ask that?
AS: Because we’re working in a world where the issue was what costs were properly attributable to the contract as opposed to what the costs might otherwise be.
GW: Well, can I just remind you that we’ve had evidence in this inquiry from Dr Kerry Schott, you know of her don’t you?
AS: I do and I admire her.
GW: Well, according to Dr Schott in early 2009 she had a meeting with you where she raised this very issue about escalating costs.
MR BANNON: I think she said they came down afterwards.
AS: Um, I think we discussed the matter in general terms. I mean, it wasn’t a very specific discussion, it certainly didn’t have paperwork or anything with it.
GW: All right. Well as a result of Dr Schott and Mr Brown’s attendance can you recall going back to the board and reporting on that meeting?
AS: I don't remember whether I did.
GW: Well what’s your best recollection? Did you or did you not report - - -?
AS: No, I don’t believe I did.
GW: Why not?
AS: It was a private meeting and I treated it as such.
GW: Who said it was a private meeting? I mean it was held in an office but they were from Sydney Water you’re from Australian Water Holdings. Is that right?
AS: Yes, yeah.
GW: Who did you owe your duty to?
AS: Well I had a duty to Australian Water Holdings but I’m an independent Director and I’d been approached I believe in that context.
GW: Well the point it’s no reason to keep what was said at that meeting private was there?
AS: Well it may have informed how I approach matters at the board level as an independent Director.
GW: Well what do you mean? If somebody came to you according to your version of this meeting and said gee, we’d like to encourage a better relationship between Sydney Water and Australian Water Holdings you felt that you had to keep that secret did you?
AS: Well that would have informed the approach I might take but it didn’t - - -
GW: Well I’m asking you why you wouldn’t raise the, the occurrence with the board?
AS: I don't know.
GW: Well just think about it now, think about your duties as a Director?
AS: Sure.
GW: And think about your obligations as a Director. You’ve just been approached by two pretty heavy people from Sydney Water, the sole client of Australian Water Holdings?---
AS: Yeah.
GW: Why wouldn’t you report on that occurrence with the, to the board?
AS: Because my duty as a Director is how I conduct myself on the board, that may be informed by meetings I have outside including with our major stakeholder but that doesn’t mean I necessarily have to disclose that to my own board.
GW: Are you aware that around that time, September 2011 Australian Water Holdings was in such dire straits that it needed to borrow money to pay its tax?
AS: In 2011?
GW: September 2011?
AS: No, I, I don’t remember. I was on - that was the, the time I was transitioning to go to the Senate.
GW: Well, you were still chairman and a director of Australian Water Holdings weren’t you?
AS: Yes, yeah.
GW: You still owed it a duty didn’t you?
AS: Yes.
GW: You still owed its creditors a duty didn’t you?
AS: Yes.
GW: All right. Well, are you not saying that it’s an excuse because I didn’t turn my mind to that because my mind was on other things?
AS: No but I’m, I’m giving you the context.
GW: All right. Thanks, you’re good at giving context but the point is that are you saying you did not know that in September 2011 things had got so bad that Australian Water Holdings had to borrow $400,000 to pay its tax?
AS: Who did it borrow it from?
GW: I’ve asked you a neutral question?
AS: No.
GW: You didn’t even know that. Just for your own info it was the Obeid family but there’ll be other evidence or there’s already been evidence of that. There was always while you were a director at Australian Water Holdings a question of its solvency, is that right?
AS: Not to the point of it becoming insolvent.
GW: That’s right. Because solvency was resolved by relying upon the word of two of the directors who said that in the event that the company became unable to pay its debts as and when they fell due they would meet those debts, is that right?
AS: Yeah, that was part of it, yes.
GW: Are you saying that you were under no obligation to look where you could cut unnecessary costs at a time when you couldn’t even put aside the superannuation for staff?
AS: And what I’m saying is the obligation as a director was to ask the CEO and the CFO to do that.
GW: So you’re saying you were under no independent obligation to have a look at where the costs could be saved. Is that what you’re saying?
AS: Towards the end of my time on the board - - -
GW: Oh really, that’s got to be answered yes or no doesn’t it?
AS: No, no, no, well can I give some context, Commissioner?
GW: Yeah, pretty good at that.
GW: Yes, but I’m, what I’m asking you is did you know and did you know at the time that you joined the board of Australian Water Holdings that due diligence is a, is a concept that is broadly, widely used in corporate circles to represent an examination of the health of a company for the purposes of determining whether or not it’s a company worth investing in or a company that is in financial health?
AS: I understand what you’re saying.
THE COMMISSIONER: I think what Counsel Assisting is asking is whether or not you undertook any such due diligence exercise when you joined the board?
AS: No, not, not in the detail that Mr Costa did.
GW: Why not?
AS: Well, because I was joining the board and I was going to learn about the company while I was on the board.
GW: Well, are you saying then that you attended to matters which might fall under the description due diligence while you were on the board.
MR BANNON: I object. I don’t see how this inquiry is related to what role one should take before one joins a board. I mean - - -
THE COMMISSIONER: But, Mr Bannon, I, I know - - -
MR BANNON: - - - due diligence has got nothing to do with 99.9 per cent of board appointments won’t involve anyone doing due diligence.
THE COMMISSIONER: Mr - I beg your pardon?
MR BANNON: 99.999 per cent of board appointments will not involve a board member doing due diligence on a company.
What’s the major lesson from all this?
You can read through all 146 pages but the most useful lesson is in the last line extracted above, from Arthur Sinodinos’s silk, Tony Bannon SC. He was admitted to the bar in 1982 so has a wealth of experience. He claims that only one potential director in 100,000 does due diligence on a company before accepting a board appointment. Unlikely, but that’s what he said.
Unless you’re invited onto the Board of the Commonwealth Bank or BHP, make sure you are in that 0.001%.