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Towards good governance in the financial system of Aotearoa

Deputy Governor Christian Hawkesby gave a speech about the path towards good governance in the financial system of Aotearoa at an online event hosted by the Institute of Directors New Zealand.

Past Event
Thursday, 07 September 2023 to Thursday, 07 September 2023
7:30 am - 8:30 am

About the speech

Following on from the publication of the joint Reserve Bank of New Zealand (RBNZ) – Te Pūtea Matua and Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko Governance Thematic Review report on 5 September, RBNZ Deputy Governor Christian Hawkesby gave a speech on the path towards good governance in the financial system of Aotearoa.

Mr Hawkesby's speech:

  • explains the role of governance in our approach to prudential supervision and regulation
  • looks back through history to reflect on past governance lessons learned
  • discusses how these lessons have shaped governance guidance, and
  • shares the outcomes of the RBNZ and FMA thematic review on governance.

Watch a recording of the speech

Towards good governance in the financial system speech by Deputy Governor Christian Hawkesby, followed by a Q and A facilitated by Guy Beatson, General Manager - Governance Leadership Centre for the Institute of Directors in New Zealand.

Christian Hawkesby: So thank you very much, Guy, for that introduction. I loved your karakia. It's the same one that we use at our board, actually. So it sets the scene really well. Really pleased to be here both in my role at the Reserve Bank, but also as a fellow member of the Institute of Directors, and today talking about a topic that we are all passionate about, which is good governance. I should acknowledge also the input of the Institute of Directors and the help that they've provided for us in this review. And once again, thanks for bringing us all together here this morning. The other thing I just wanted to acknowledge was that we've been undergoing quite significant governance changes ourselves as an organisation here at the Reserve Bank, first with the establishment of the Monetary Policy Committee four years ago, and more recently over the last 12 to 18 months the establishment of a fully empowered board, corporate board.

But today, as Guy mentioned, I'm here to talk about our role as a prudential regulator, in particular this governance thematic of the financial industry that we've undertaken jointly with the FMA. So that's the main course this morning, as you have your breakfast and have your coffee within reach. And the entree is just a little bit of background really about the role of governance in financial stability, which is the critical role of governance, and a few of the past lessons that we've learned as we moved into the actual thematic itself.

So here at Reserve Bank - Te Pūtea Matua, our purpose as set out in the Reserve Bank Act as to enable economic wellbeing and prosperity for all New Zealanders, Toitū te Ōhanga, Toitū te Oranga, and you'll be most familiar with that through our two operational objectives effectively, which is one is around monetary stability, setting interest rates every six weeks to achieve our inflation target, and the other is around our role supporting and promoting financial stability, which is what we're here to talk about today. And the rationale for our role in financial stability is quite simply like any other critical piece of infrastructure for society. Financial stability is a public good. It is one where the costs of financial instability are felt much more broadly than a narrow set of stakeholders, shareholders, and the like. And that really prompts the role for a public policy agency to have that focus on the public costs and benefits of financial stability and how to maintain that.

A couple of pictures from my scrapbook of time at the UK, at the Bank of England. I didn't take these pictures myself, but on the left is the run on the Northern Rock Bank, September 2007. And on the right is the riots outside the Bank of England in early 2009 when London hosted the G20 meeting. So I guess two images that as a student of economics and financial crises, I didn't expect to see in my lifetime, something that we thought was relegated back to the 1930s.

So how do we promote and support financial stability? One way to think about it is these three pillars to prudential regulation that we've often spoke about in the past, and many on the call will be familiar with this. One pillar around what we call regulatory discipline. And you'll be familiar with that through the form of things like capital requirements, liquidity requirements, our role as a prudential supervisor with close engagement with entities, market discipline, which is around disclosure, transparency, the types of information that we make sure is available to the public so that depositors, investors, other stakeholders, rating agencies can have scrutiny on the stability of the financial system and create all those strong incentives for management and boards.

And then finally, self-discipline, which is really around the role of management and boards to provide stability. And it's really hard to overstate the importance of governance in this self-discipline when you think, to a large part, the board is the financial institution. It sets the strategy, sets the risk appetite, it ensures that there are all the resources, systems, frameworks to achieve the objectives of the organisation. So governance is absolutely critical and a key component of financial stability.

And that's a lesson that's been reinforced through time. I've just a short-potted history that I wanted to touch on briefly in terms of some of the lessons that we've learned over the last 20 years, really just reinforcing that point around the importance of governance for financial stability. So the GFC, about 15 years ago now, was I guess a real watershed moment around the importance of boards being capable of managing financial risks and really having that both understanding and being able to absorb a lot of information in a digestible way to really lead that strategy and that risk management. The Royal Commission in Australia five years ago was a bit of a watershed in terms of the ability of boards to manage non-financial risks, and particularly around conduct, culture and behaviours, reputational risks that boards needed to manage and focus on.

In New Zealand, we haven't been immune to learning lessons ourselves. And I've noted the collapse of South Canterbury Finance and the collapse of CBL on the timeline there. And those lessons were very much around the dynamics between management and boards and the importance of having a strong board, independent board voice as part of that. And I've also noted there the two, what we call section 95 reviews that we requested of ANZ in 2019 and Westpac in 2021. And I do that for completeness, but also just to recognise and acknowledge the really strong uplift in governance that that's brought about.

And then finally the failure of Silicon Valley Bank earlier this year. And I know that the Institute of Directors have done a webinar on that as well. Once again, a handy reminder of the importance of strong governance along with strong market discipline and regulation to avoid those types of collapses and the implications they create for the broader financial system. So I guess the prudential regulatory environment that we are familiar with has been about for about 40 years now, since the globalisation of the financial system, the banking system and insurance markets. But it's really only since the GFC that governance has had a really strong place within that framework. So it took until 2020 for the Basel Banking Committee to put out guidelines and principles for banks' governance as a centrepiece of the regulatory environment, and I've noted here on the slide the guidelines that we've put out, both for banks and insurers, the principles and guidelines provided by the FMA, and also wanted to acknowledge the four pillars of governance publication from the Institute of Directors, which I know is literally a bible for many directors and trustees in the market, a much more detailed and practical and thorough guide for governors and directors.

So that's all by way of background leading into this governance thematic that we undertook. Just to give you a slight sidebar into where thematic reviews sit within our supervisory toolkit, we obviously have our regular engagement with the individual entities at various levels of the organisations. Then once every one to two years we'll undertake effectively a thematic deep dive across the whole industry on a particular topic. And so that's where this governance thematic sits. And the scope of the thematic, knowing the importance of governance and financial stability, just really understanding how boards were fulfilling that role, how they were meeting these guidelines and requirements. And really just taking the opportunity to get a sense of what current practise is in New Zealand and where that sits relative to good practise.

One of the biggest challenges in these types of reviews is identifying the scope of the review. And as you all know, governance is a tremendously large topic. So where we fell was to focus on governance frameworks, policies and processes. And that was really just acknowledging the importance of those fundamental pieces of the puzzle and the things that are really the foundations for a lot of other components of governance. And we've outlined some of those there on the diagram on the left, ultimately leading into the tone at the top, the conduct and culture and behaviours around the board table. There were 29 entities in the sample across the different parts of the financial industry that both the reserve bank and the FMA regulates. So that gave us a really rich flavour of practise across the industry, which I think is one of the main benefits that the review has provided.

So just getting into some of the findings now, they're outlined in the report, just I guess stepping back before we pick out some of the key topics here. At a very high level, we had no material concerns that we found in the review. We were pleased by where the industry was in terms of governance and the focus that it was provided. Practise did vary across the industry. And I'll talk a little bit later about how we are following that up with each individual institution, but at a high level, no material concerns, some very good areas of good practise that I'll just pick out here and that are covered in the report, the independence of boards both in form and in substance, which is an absolutely critical element of our framework, the time that boards are putting towards strategic planning, as I mentioned, it's such a core part of governance, that ownership of strategy. And what we were observing was that boards were putting a lot of deliberate time and energy and planning and follow-up around the formulation and execution of strategy, which was very encouraging.

A lot of focus on and thorough appointment processes, particularly around the appointment of CEOs, very thorough and deliberate succession planning for senior management, a really strong awareness and focus and documentation of conflicts of interest being something that boards have been very familiar with for a long time now and have been able to hone their practise. And also it was quite apparent that boards put a lot of effort into regular training and development of board members.

In terms of areas for improvement that are outlined in more detail in the report, and which motivate some of the recommendations outlined in the report, the selection of chair, the chair and committee members was probably less thorough and robust than we had expected to see. Again, board succession planning, not as well documented, not as well owned collectively by the entire board than we expected to see. Performance evaluations were part of practise in the industry, but they probably didn't have the same thoroughness, the same amount of independent input into those evaluations, quite informal, so an area that we saw thought that there could be significant uplift.

Capacity assessments were undertaken when board members started in the role, but there wasn't nearly as much evidence that that was something that boards deliberately thought about through time as the demands on board members changed through their various roles and activities. And then finally the one that I'll mention is diversity, where all of the organisations in the sample had strong policies around diversity of their organisation, but often that didn't apply to the board itself. And so in three quarters of the entities in the sample didn't have a diversity policy for the board itself.

Just touch on a couple of reflections, having been part of this process, and one of them is really around the benefit of having Dr. John Laker review our report. And many of you may have come across John Laker, former chair of APRA in Australia and the author of many independence governance reports through time, including the Royal Commission back in 2018. We had some great conversations with John as the report was being drafted and refined, and one of those was really around best practise versus a good practise. And I think in some of the early draughts of the report, we talked about best practise and he reminded us that actually that changes through time. That's never constant. Governance, there's no finish line here. Practise is continually evolving and will shift through time. So the best we can do is to identify what is current good practise and that's what really motivates the title of this report and speech. It's not a slight on the industry that we're moving towards good practise, it's just an acknowledgement that that will change and evolve through time.

Second reflection, having been involved in the report, is just this point around again around the environment that we operate in as governors and trustees and directors is forever changing. Changing economic developments, geopolitical trends, structural factors, climate change, new technologies and markets, changing expectations on our organisations, on us, on the way that we're interacting with society more broadly. And that changing environment that we all operate in really underlines the importance of continually learning from learning our lessons, embedding those, being ready to change and evolve into the future. So really having that future focus and that driving some of these key findings around boards needing to spend effectively more time on themselves, thinking about the collective skills around the table, thinking about the diversity of perspectives that's required now into the future and thinking about that succession planning that's required to be successful not only now but into the future as well.

Next steps, with the terms of the regulated entity world, for those entities that were part of the sample, we have gone back to each of those with individual letters, setting out not only the findings for the sample as a whole, but also our findings about our interaction with them as participants in the review and follow up actions. For entities that weren't part of the sample, we're encouraging them to self-assess versus the recommendations, and we'll be following up with conversations around that. At the Reserve Bank and the FMA ourselves, an opportunity for us to reflect on what the findings mean for the regulatory environment that we've set and the guidelines and policies that we have in regards to governance. And for us, the implementation of the Deposit Takers Act is going to be one avenue where that will be a key consideration. And then finally, just sharing the report more broadly outside the financial industry, we understand that many of the lessons I'm sure will be pertinent to other board members as well.

So nearly coming to an end, Guy, but just to finish with a whakatauākī - Kotahi te kōhao o te ngira e kuhuna ai te miro mā, te miro pango, te miro whero. So this is a whakatauākī from Kingi Pōtatau, the first Māori king back in 1858, and he was talking at the time around the importance of Māori and Crown relations and the importance of connection, collaboration, and a common vision. And so he spoke of this idea of needing to, through the eye of the needle must pass the white thread, the black thread and the red thread. And the idea is that those three things really needed to come together and be bound very close to provide that strength of those three things in unison. But also what this proverb tries to emphasise is that that's not an easy thing to do either, trying to put three threads through the eye of one needle. And the thing I like about this whakatauākī is its versatility. When I think about us as a prudential regulator, I think perhaps it's time to retire our three pillars analogy and replace it with this, the threads of regulatory discipline, market discipline and self-discipline need to be tied together strongly to provide financial stability.

In the world of governance, it could also be applied in different ways. The threads of the past, the present and the future need to be tied together to provide strong governance, not only now but into the future. I mean, perhaps it's the threads of culture, behaviours and frameworks that need to be tied together. And I invite you all to reflect on that and maybe throw a few of your thoughts in the comments for Guy as we move into the Q&A. Kia ora koutou katoa.

Guy Beatson: Got it, Christian, and I think you've bought the report alive and it's a pretty accessible report as well. It's not running to hundreds of pages, which is great. We've really enjoyed contributing to this, both at the beginning and the end of the process. And as you've pointed out, there's a level of commonality with other parts of governance, not just the financial sector. If we can just remind our audience this morning, if you want to ask questions, and I'm sure there's lots of them, if you use the Q&A button at the bottom of the screen, we will pick those up after we've just had a bit of a conversation between Christian and I.

We've also just put in the chat the link to the report, so if you want to see more detail of what's in the report, you can look at that as well. So just a reminder of the Q&A button at bottom of the screen. Really, really want to hear those questions and we'll get to those in a moment. But just to start off, Christian, this is a really important report. What's the biggest surprise for you and the team, positively, in this review of financial sector governance and why was that?

Christian Hawkesby: Yeah, I think many of the findings aligned with our expectations given the ongoing relationships that we have and have built with boards and directors. I guess one of the positive surprises has been the positive attitude that the industry has taken in being part of this review, and that was very much welcome from our perspective, it is one that we were looking to do collaboratively with the industry, and it perhaps picks up on some of the findings, which is the growing importance that boards recognising the importance of independent, external evaluation and their openness to that. Also boards acknowledging the importance, or increasingly acknowledging the importance of strong frameworks and policies and actually investing the time to document those.

Another positive surprise, or positive aspect of the report, was the way that we work together with the FMA, and I want to call them out and acknowledge their part in all of this is a joint partner, and just it's really consistent with the approach that we're looking to take across the Council of Financial Regulators is collaborate really strongly with other regulators. The industry itself, they want to have that united front. They don't want to be having to deal in an inconsistent, incoherent way with us as regulators. So the fact that we are able to learn a lot off each other as regulators and work collaboratively with the industry was really a positive aspect.

Guy Beatson: Yeah, it's great, actually one of the questions we've had from the audience as well. So that was a good start, right? The other interesting thing for us, and certainly intriguing me, is you've got a review that actually points to generally good practise. So you say you don't have any particular systemic concerns around this, but you then point to what I think you're saying is that it's not, the boards actually aren't effectively documenting what it is they're doing in some senses why they're doing it. Why do you think that is? How do you think boards should actually go about that and what's going to motivate them to do it? Because you talked before about incentives as well in your presentation.

Christian Hawkesby: Yeah, and it's a great question. I don't want to become an amateur psychologist around what's holding things back here, but there is an element of sometimes the urgent gets in the way of the important, and we would've all experienced that through our involvement with boards through time. It really is something that requires that investment and that investment of time, and time is the thing that is most precious for us all. It's the resource that's the most constrained. So really just putting aside, recognise the importance, putting aside the time to do this, having that future focus. One of the red flags for us is that if we meet a board and they're doing a lot of this stuff, but it's just in the head of one person around the table, that is a sign that this is... Even if practise is good at the moment, it doesn't give us a great deal of confidence that practise is going to remain good into the future and for the evolving environment into the future.

Guy Beatson: Which raises some interesting questions though, which is what you're pointing to almost is inconsistency. Presumably some of what you observed was a situation where it might be you might see good practise governance in the way you've described it for a period of time. Perhaps the chair changes or board members change. Is that something you observed and do you think that some of what you've just described would address much of that?

Christian Hawkesby: Certainly what we observed opens boards up to that risk, absolutely. And the findings are really around how to address that and give that confidence and embed things in. And as I mentioned earlier, when we looked at good practise, there was a spectrum there across the industry, across the different dimensions that we observed. And those at the frontier were the ones that really acknowledged and recognised that importance of documenting things well and investing time in the board itself.

Guy Beatson: Interesting. Just picking up your frontier point, to what extent do you think that some of those boards that were at that frontier as you've described it, were they sharing that experience with others or was there any evidence of that sharing of experience?

Christian Hawkesby: We didn't pick that up. I think that is one of the benefits of this report that we have the luxury of being able to see right across the industry. And that's not what individual board members always have that ability to do. So in some ways we know that if we put all this effort into this report, all this effort into the review, and the participants spend a lot of time with us on this, we need to add some value here and for them to get some benefit out of it. And that is one of the key benefits that we can provide is just letting people know what good governance looks like across the industry. Many board members are on multiple boards, as you know, so they will see different practise in different parts, different boards, different industries, different parts of the economy, and you would hope that that gets shared across and the best bits gets transferred and embedded into those areas that need to uplift.

Guy Beatson: And it occurs to me part of the role of the Institute of Directors and this is providing for this kind of conversation. Hopefully webinars like today's and some of the other material we'll produce for our directors will prompt that conversation. I want to move to diversity, but first if I can just prompt the audience, if you do have questions, can you put them in the Q&A button at the bottom of the screen? I'm sure Christian would be delighted to answer those questions. But moving to diversity and succession planning, you've talked about succession planning processes, and part of those being a bit informal I think is the interpretation I've taken out of that, you want those succession processes to encourage diversity and capability and background. Can you talk a bit about how you see that working and almost the gap between what you'd like to see and what you're seeing now?

Christian Hawkesby: Yeah, I think again, it comes back to that collective ownership around the board table for that succession planning and for that diversity, and thinking about it... Often in these reviews or in our interaction with entities, they say, well, what's the answer? Tell us what the answer is and we'll do it and we'll tick it off. But actually it's more about thinking about those outcomes and the importance of succession planning and diversity in those outcomes. And then for boards to collectively own thinking about what that means for them and how they can deliver that for themselves and thinking about things like diversity. It's not just the next individual incremental appointment that needs to be made in the context of the skills around the collective table and how they all fit together. And for me, it really underlines the importance of governance being a team sport. It's not an individual sport, it's a team sport and it's really around how that team fits together and being really deliberate about that.

Guy Beatson: Yeah, it's interesting too. The other theme in all of this is around inclusion. So diversity is one point or diversity of capability background, that kind of stuff is one part of that. There's some work that's been done by the UK Financial Reporting Council, or at least for them by the London Business School, which talked about some things that then go to the heart of how do you promote inclusion, and one of those things is around the role of the Chair. I don't think in terms of your remarks today or in the report, there's necessarily that much about Chairs apart from the appointment processes. Do you have a perspective on that? I mean, how you see the role of the Chair in terms of this inclusion piece. As you said, it's a team sport, they're a bit like the captain. What role do you see Chairs playing in this?

Christian Hawkesby: So as you mentioned, not narrowly part of the scope of the review beyond the appointment processes for Chairs. But look, as part of my day job, I go around and meet the boards of the different regulated entities that we're involved with, and it's just spending an hour, hour and a half with a board is very insightful to observe the dynamics and the importance of the Chair drawing in other board members and really utilising the full resources capacity perspectives around the table. So that role of the Chair directing traffic and drawing in and utilising that full capacity is something that I notice when I go around and visit these boards. And there's a spectrum of practise there across the industry.

Guy Beatson: Which you're also saying should be documented too, of course.

Christian Hawkesby: Precisely. Yeah.

Guy Beatson: Hey, the other thing that's fascinating about your rapport is the focus on, and you mentioned this in your remarks this morning, that boards increasingly need to see themselves as kaitiaki or stewards of their companies, and being responsive to the list of rapidly changing circumstances you outlined. For the Institute of Directors in our top five issues, we call that board agility. And within that you point to Te Ao Māori as one of the areas of change. And I know that the Reserve Bank in New Zealand has been working pretty hard in that area itself, let alone working with some of the entities that you regulate. How do you see that playing out for boards, given you mentioned that in the report as one of those rapidly changing pieces, the situation that people are working in?

Christian Hawkesby: Yeah, so something that we've thought about a lot. Again, it wasn't within the scope of the review as such, but you do make observations in the sidelines. We are really encouraged by the increased focus on Te Ao Māori across the financial industry and some of the efforts that we're seeing. We've seen Te Ao Māori strategies being published by organisations and seeing a real focus there. Some actions recently such as the, you would've seen Kiwi Bank's announcement around its approach to business lending to Māori businesses and how they're evolving their practise to both manage the risk but also increase access. So we're seeing some concrete things in those organisations and that's really encouraging and that's something that we've collaborated with the industry a lot. What you're seeing, but then when you ask the staff that were part of the review and interacted with the boards, much less traces of a Te Ao Māori perspective around the board table.

So it's there in the organisation and some of those outcomes, but less signs of it are having a strong prominence around the board table. And I think that's an important observation because these things do have to be led from the top and set the tone and the culture. And just to give you a concrete example of that, I've been meeting boards for a couple of years now, and it was only this week was the first time that I was in a board with a karakia being recited. So that seems to me like some of the basics, and even when we get to a stage where boards are thinking about karakia and whakatauākī and trying to integrate Tikanga Māori into their practise, that's really just getting to the start line in terms of embedding a deep Te Ao Māori perspective across governance more generally.

Guy Beatson: You've said an interesting thing actually in your remark just then, which dovetails with some of the findings in the report around diversity, which I think is a really important lesson for everyone on the call today, not just in the financial sector, which is if you've got a bunch of policy for your organisation, for your company, that's being followed through, whether that's in terms of diversity, Te Ao Māori and Tikanga and so on the way you've described, it's pretty important that that gets demonstrated by the board table. So more do as I do as opposed to do as I say, I think is a pretty important lesson out of what you've talked about. We've got a few questions from our audience and I'd encourage others if you have burning questions to put them in the Q&A function at the bottom of the screen. So one of them, Christian, is did you assess how well conflicts are managed for executive director conflicts and were there any good practise lessons?

Christian Hawkesby: Yeah, so conflicts of interest was one area of the report where we thought practise was pretty good actually, and somewhere where it's something that's been front of mind for boards for a long time. It's something that's reasonably well documented, something that is regularly reviewed and updated because those conflicts do evolve. For the executive directors, the key one for us is around independence, and that really comes from the fact that a large part of our financial industry is foreign-owned and will have parents overseas and those parents will appoint executives as board members on our boards.

And so those conflicts are really crucial for us when we think about how those boards, the dynamics around those board tables, the key one being if there's a shock that puts the financial stability of both the New Zealand entity and the parent entity at risk at the same time, how are those executives going to manage that conflict at that point? And that's really crucial because it's why we have a focus on financial stability is for those rare extreme events that can put stress on the financial system. So that's something we put a lot of focus on, and it's probably why in terms of our guidelines and policies and things, independence is the one that's probably articulated the most fully and has some particular metrics around it.

Guy Beatson: Yeah, which goes to the heart of what you were trying to do with the entity separation and the capital requirements for the domestically-focused subsidiaries, even if they're owned offshore. And as you've said that it really does reinforce the point you made in your remarks, which is this governance stuff actually matters for financial stability because if some of those capital requirements and so on were undermined by some of those conflicts, then we are actually no further ahead in terms of achieving that wider financial stability objective. It's interesting. I mean, I guess the other dimension to this is some of the financial sector firms are not-for-profits, and so we've got a question from one of the audience members, which is about how have you thought about, or did you even see in terms of this review, a difference in the governance approach, possibly even the quality of that governance, between those for-profit and not-for-profit financial institutions?

Christian Hawkesby: Yeah, so in our world, banks versus non-bank deposit takers is a distinction in terms of that profit and not-for-profit. What we observed is that there wasn't a direct linear relationship between the size of the organisation and the quality of the governance. That was one thing that we observed. So that was one observation. We are conscious that a lot of the aspects of the financial industry, there are economies of scale, so everyone has to have good governance, and that requires an investment in the same way that investing in good systems and IT and processes and frameworks across the organisation requires a fixed investment. So we are conscious that it does create a tough environment for smaller institutions, and that's where some of the non-bank deposit takers fit in. As part of the Deposit Taker Act that's just been passed, we have a requirement to think about proportionality, so take a proportionate approach recognising that different entities are of different size and are of different systemic importance, so don't necessarily have to have exactly the same requirements.

That said, that proportionate approach might be able to provide some stability, sorry, some simplicity so we might be able to make it more simple, but we do still need to have strong confidence that it's going to provide that stability and soundness, and things like independent evaluations of boards is just going to need to be a fundamental requirement regardless of your size. We hope that things like this thematic report, it's free consultancy for smaller organisations if they want to see what good practise looks like out there. So we hope we can be helpful in that sense. We also every six months hold director and senior officer workshops, so that's an ability to get all the key decision makers in the industry together and again, just enable some of the smaller organisations to get that uplift of being close to that type of thinking.

Guy Beatson: Yeah, it's interesting the economy of the scale point you made, and it is one of those things. We get not-for-profit chairs, for example, together from a whole range of sectors and in most recent conversations they've reemphasized the point with us that actually there's a level of complexity in the not-for-profit side of that that you don't get some of its economies of scale, but some of it's ownership, some of it's membership, that kind of idea as well. There's a question from the audience, which is furthering the earlier part of our conversation about institutional memory. And we talked, and you've highlighted in the report the documentation of some of the good practise governance or the practises of governance in various of these entities, did you explore other ways of retaining that institutional memory or passing it on?

Christian Hawkesby: Yeah, not really within scope of the review, but just to say that that documentation of frameworks and practises and policies is going to be a good chance to do that and to review those regularly. And that's really that opportunity to make sure that they're fresh and that they've benefited from the lessons learned from those around the table. Also having exit interviews with those people who have been part of the board but aren't going to be part of the board as well. But I'm sure that there are a broader spectrum of ways to really embed that institutional memory, but just to acknowledge that it is absolutely part of being adaptive as you call it and being a good kaitiaki as I've mentioned.

Guy Beatson: Yeah, it's an interesting point in there. I think in terms of, and something I read actually recently which suggested that even experienced board members going to a new board can often find it difficult to be included in that board. And most often, I think that's because of the processes and the governance being used is just subtly different potentially between what those directors have been used to and what that new board that they've gone on to is actually doing, which seems like an odd thing. I mean, it seems like it's one of those things where you think governance was governance, but actually the practise of it, and I think you find this in the review too, is actually subtly different between these organisations, which in part goes back to the role of the Chair and the way that we were talking about earlier, but also things like induction.

Christian Hawkesby: And we did find that induction was pretty good across the industry. It was something that boards were pretty deliberate around and there were strong induction processes. So that is part of the solution that you're thinking about. I mean, to me also, just that point that every time you have a new member of the board or a member of the board changes, you have a completely new set of dynamics there. And just the importance of really doing that reset in terms of you almost need to do your... Part of the induction needs to be team building for all directors in that new environment, given that you are a new team, given you have a new member.

Guy Beatson: Yeah. We've now got a couple of questions on the observations you've made around board subcommittees, and I guess there's two parts to it. One is, what did you find and the team find in terms of that lack of robustness and succession and appointment? How did that affect the functioning of the committees? And how should these boards be thinking about the skill mix of those committees to keep them fresh and effective and so on?

Christian Hawkesby: A more full-blooded fulsome review would've really got into the outcomes and measuring some of those outcomes. And the scope of this review was a more modest one, which was around frameworks, processes, procedures, just to give the best chance of that outcome occurring. So we didn't get into concrete evidence around how that lack of succession planning and lack of deliberate appointments had concretely created different outcomes, but absolutely gives it the best chance as possible to happen. Just having that deliberately... And once again, just thinking about how the skillset across the committee combines, and one of the findings was really a lot of this was being done in an informal basis by the Chair, not being well documented, and it didn't really seem to give the best chance to make those decisions and those appointments in a really robust way that gives the best chance of success into the future.

Guy Beatson: Yeah, it's interesting, isn't it? And it does matter. There's a related question, which I think has broader application, which is about boards seeking independent advice, and you can see boards seeking independent advice on some technical things, I guess, although I'm interested to hear your observations about that. But when it comes to things like performance and succession, I suspect that's even more of also ran in terms of seeking independent advice. So do you have a sense that boards are or aren't seeking independent advice in the financial sector? If they're not, what do you think drives that? And if some of that's about ego or nervousness or being shown up or something, what sort of ideas do you have to fix that, and how to get boards get over that?

Christian Hawkesby: So we encourage boards receiving external advice on matters. We acknowledge that even if a board has a responsibility and accountability for the functioning of the organisation, you can't expect them to have skills right across the piece that relate to every aspect of the running of the organisation. So there will be instances where they do need that technical advice coming in from the outside. What we observed with succession planning was often boards weren't even using third parties to go out and search, spreading the search beyond people in the governance world that they already know or have relationships with.

So just that simple point of using a third party to really open up the net much broader than their personal networks, encourage them and be part of that process of flushing out exactly the nature of the skills that they're looking for and giving the best chance of success for finding those. In terms of the inhibitors that can be, as I mentioned right at the beginning of the conversation, we were positively surprised and encouraged by the openness and how getting independent evaluation is becoming more accepted and more integral to the way that boards work. And I think that's possibly a maturity aspect of recognising that we're not all experts on every aspect of our jobs and taking advice is certainly not a weakness, it's a strength.

Guy Beatson: And that openness actually in terms of reflection and so on and so forth becomes pretty important. Just one final quick-fire question. You've talked a lot about that board evaluation, performance review stuff, and in some senses, governance reviews of each board. How often do you think boards, not just in a financial sector, but actually more broadly, do you think they should actually do some sort of fundamental review of their performance or evaluation of their performance?

Christian Hawkesby: Yeah, it's a good question. And it's striking that balance, isn't it, between these things are time intensive, they do require a lot of self-reflection, and you need some combination I suspect of lighter touch, regular self-reflection, even at the end of every board meeting, having that board-only time, how are we going? What went well? What didn't go well? How can we operate differently just to continually improve? Just some of those simple practises like that even, starts building that openness and then you pick a timeframe where it's appropriate that things have evolved or changed sufficiently that you want to do that deep-dive thorough evaluation.

Guy Beatson: Yeah, there's real lessons for everybody around that. Well, it's time for us to wrap up the session. The time's gone really fast. It's been a really, really useful conversation. There are lessons from this thematic review of financial sector governance that are useful for all directors and boards, not just those in the financial sector. Some of the major takeaways from the thematic review include directors and boards being kaitiaki or stewards of their companies, that good practise is important and so is documenting it and finding ways to ensure practises followed through with changes of board members including the Chair, and finally being deliberate about decisions on board member capacity, succession and applying corporate diversity policies to boards.

And that extends to Tikanga Māori from the conversation. It also highlights the importance of governance reviews, which is what we've just been talking about, and board evaluations, for which the Institute of Directors has a new set of tools which we'd encourage you to have a look at and try, tailored to each sort of entity. Worth going and having a look at the Institute of Directors website when you get a moment. And for all of us, I'd like to thank Christian and the IBNZ and FMA teams for their work on this thematic review, and to Christian particularly for sharing his knowledge and insights today. And to finish our webinar well today, I'd like to close with a karakia whakamutunga.

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