Scourge of ‘Short-termism’ for NFP Boards

Excessive “short-termism” is the scourge of the modern boardroom and pervades all organisations including Not for Profit boards, a national governance summit has been told.

The CEO of the Australian Institute of Company Directors (AICD), John Brogden, told the inaugural Australian Governance Summit in Melbourne that short-termism pervaded decision-making and inhibited the positive outcomes of board deliberations.

“Not for Profits constantly struggle with short-termism in the form of unpredictable government funding,” Brogden told the AICD summit.

“No listed company would be expected to operate efficiently if it couldn’t predict its income from one year to the next, so it’s unfair that Not for Profits, which provide critical services to the community, are expected to do so.

“Financial sustainability is highlighted each and every year as the number one concern for Not for Profit directors in our annual NFP Governance and Performance Study.

“It’s confounding that a sector that employs over one million Australians is subjected to such a difficult operating environment. It’s not only important services that are constantly under threat from unstable funding. NFP directors incur considerable risks when funding arrangements are changed, withdrawn or delayed and organisations are exposed to the risk of insolvent trading.”

“This all helps to foster an environment in which Not for Profit board decisions are coloured by factors which work against long-term strategy in favour of hand-to-mouth decisions which ensure only the short-term survival of an organisation.”

Brogden said the AICD had launched a Not for Profit Chair’s Forum with 29 members from charities, sporting organisation, the arts, schools, health, aged and disability services to ensure the sector is better heard by government.

AICD CEO John Brogden at Governance Summit, Melbourne

He said public sector boards could also fall victim to the consequences of short-term thinking by governments just as easily.

“Any government’s blanket refusal, as seen in recent years at the national level, to reappoint directors appointed by the previous regime is appalling governance. It stifles the stability that boards of government authorities require to perform their duties satisfactorily – and it considerably narrows the pool of candidates interested in serving in these important positions,” he said.

“As directors we must change our own behaviour to overcome short-termism and the impact it can wreak on our organisations.

“One of the biggest contributors to short-termism in our boardroom is the creeping tendency towards groupthink among directors – the temptation to all go along with the majority course of action.”

He said “groupthink” was defined as a “pattern of thought characterised by self-deception, forced manufacture of consent, and conformity to group values and ethics”.

“There is a difference between groupthink and teamwork. Groupthink can actually fatally undermine teamwork. Real teamwork instead fosters true collaborations that allows the skills and knowledge of each member of a board to be utilised to their true potential,” he said.

“Diversity can be an important antidote to groupthink, and that is one reason we argue for it so vigorously. It can help to ensure that boards are composed of directors who have complementary attributes and offer a range of perspectives, insights, and views in relation to issues affecting the organisation; that is, they provide diversity.

“If we as the country’s leading directors can commit to abandoning the short-term focus that risks becoming endemic in our boardrooms then we will help not just our organisations prosper, but also Australia-at-large.”

Brogden told the audience of almost 1,000 delegates that there was “mind-numbing short-termism of national policy debate on the economy in the face of genuine international instability and threats”.

“Excessive short-termism can be a real issue for public policy makers as it reduces the capacity for innovation and can crimp competitive advantages in global markets,” he said.

“The ideal of transforming Australia into an ‘innovation nation’ risks failing if our business decision-makers persist in favouring short-termism over bolder long-term planning.”