Building a High Performance Organisation Through Effective HR and Corporate Governance Alignment

1. Building a High Performance Organisation Through Effective HR and Corporate Governance Alignment Garry Willinge (MD Cbridge Limited and Professor of Business Studies, Curtin University of Technology) 1

2. Agenda • What is a High Performance Organisation (HPO)? • Current Times – the Bad and the Good but perhaps some Optimism about the Future • What Do Stakeholders Want? • Characteristics of Effective Boards • Building Trust and Transparency: Management with the Board • ‘Very Good’ Practice Remuneration Committee Experience + 3 Challenges for the RC • Role of Executive Coaching • Three Things to Take Away Today 2

3. “High Performance Organisation” Attributes 3

4. A Business Leadership Model - the original Harvard HPO model - • Competencies • Styles Leadership 70% Strategy Execution Climate & Culture 28% Marketplace Insight Market Results Brand Elements Critical Tasks Business Design Strategic Intent Formal Organisation Gap Innovation Focus Talent • Performance • Opportunity 4 Adapted from Tushman, Michael L. & Charles A. O'Reilly III. "Winning through Innovation"; Harvard Business School Press, Boston, MA. 1997.

5. Current Times – Bad • Extremes and Volatility Peak Date Previous 12m Dec 6, ‘08 % Down growth %from Peak Oil 145.31 3/7/08 104 40.81 72 Dow Jones 14093 8/10/07 17.83 8635 39 Gold 1011.55 17/3/08 54.81 755.25 25 $A v $US .9849 15/7/08 13.29 .6461 34 • Last Recorded CEO Compensation (US$m) – Broken Companies • Merrill Lynch 29 • Bear Stearns 40 • Lehman Bros 34 • Fannie M 14 • Freddie M 18 • AIG 15 • Ford 23 • GM 23 Source: Executive Paywatch Database 5

6. Current Times – Good /Optimistic • Good • Unprecedented intervention from central banks • Lots of cash in sovereign funds, pension funds and from oil proceeds during speculative boom • Asia has great fundamentals – foreign reserves US$23TR, CAD low, public debt low, household debt low, Chindia growing at >6% pa • Optimistic / Opportunistic • Obama inauguration 20 January 2009 • Quality companies valuations have been punished by illogical sentiment – banks wrote down US$700B, but stock markets lost US$27TR • Oil prices may even get regulated somewhat, such as using futures only for hedging purposes • Confidence is the key thing missing! 6

7. China’s Urban Growth Projection • "In 20 years, China's cities will have added 350 million people—more than the entire population of the United States today.“ • "By 2025, China will have 221 cities with more than one million inhabitants—compared with 35 in Europe today—and 24 cities with more than five million people.“ • "By 2030, 1 billion people will live in China's cities…170 mass-transit systems could be built…40 billion of square meters of floor space will be built in five million buildings—50,000 of which could be skyscrapers.“ • In other words, as China transforms itself from a nation of farmers to a nation of urban dwellers, the equivalent of 10 New York cities will need to be built to house the huge growth of corporate and residential China. Source: McKinsey Global Institute 7

8. Corporate Governance (1997) – barren landscape Source: ACGA research 8

9. Corporate Governance (2008) – lush forest of rules & guidelines Source: ACGA research 9

10. What Do Stakeholders Want? • Boards, executives and shareholders share huge challenges in today’s environment. But ultimately they want the same things:- • The best executive team • Improved corporate governance • Some alignment of financial incentives / rewards for owners and managers 10

11. Characteristics of Effective Boards • Independence (and diversity) • Trust and transparency between management and the Board 11

12. Building Trust & Transparency – Management with the Board • CEO = Chief Personnel Officer • HR is a direct report • Accountable for talent management; the 3 key issues being building:- • A high performance culture • Organisational capability • A learning organisation • Two effective Board Committees • Audit Committee and Remuneration Committee • Executive Coaching 12

13. ‘Very Good’ Practice Remuneration Committee Experience Background:- Chinese company, listed on London Stock Exchange, new CEO & CFO appointed, my role as NED included Chairman of the Remuneration Committee. Process of Remuneration Committee • Appoint willing directors on RC. • Hire remuneration consultant to benchmark ‘total reward model’ and formulate options. • Agree on overall design, philosophy, principles – Board review/decision. • Draft executive compensation contracts, with attention to termination provisions. • Deploy full organisation review and design – organisation structure, job descriptions and titles, KPI’s, performance appraisal, salary bands, incentive/bonus plans – gain Board approval for overall design. • Hire HR Director – commission her to lead implementation project – RC Chairman participates as member of Steering Committee. • Communicate and continue to communicate to shareholders. • RC writes Annual Report remuneration report based on a very good remuneration framework that has no surprises to shareholders. 13

14. 3 Key Challenges of a Remuneration Committee (from the Chairman’s point of View) • Building an effective and committed RC together with a strong HR function to advise and implement • Complexity of remuneration solution options – properly aligned with business performance, competitive in market place and with peer group • Shareholder engagement and communication 14

15. Why Do Leaders Fail? • An increasing topic of discussion at Board meetings • Key issues (Asia Leadership Survey 2008 – NBO Group) • Lack vision and ability to give direction • Cannot build teams • Leadership style • Poor communication • Poor interpersonal skills • Individual results – fail to execute • Do not relate to customers 15

16. Need for Executive Coaching • An increasing role for non executive Directors with executives • Move to accreditation • HR must also assist in training internal coaches to support transitioning managers at multiple levels e.g. supervisor, 1st line manager, function manager, business manager and group/enterprise manager. “Boards need to be ready to invest in diversification programs, to bring in leadership coaches, ..” (AICD Boardroom Report 19 November, 2008) “We see executive coaching at all levels now including middle managers responsible for keeping talent in the company” (Peter Cappelli “The Talent Hunt” May 2008) 16

17. Three Things to Take Away Today • Surveys suggest that institutional investors will pay as much as 28% more for shares of well-governed companies in emerging markets (McKinsey) • Everything we do today is a people management issue (McKinsey survey of 20 global corporations based in the UK) • For years, we have always said ”results through people” – now we clarify this with the notion “we build high performance organisations through effective alignment of HR and corporate governance” 17