1. VIEWPOINT An Australian Institute of Company Directors thought leadership initiative
Many boards become so
obsessed with expanding revenue
that they forget or ignore the many
risks of growth and destroy value in
their businesses.
Toyota’s shift in priority from
being No. 1 in automobile quality
to becoming No. 1 in global sales,
for example, led to major quality
problems and millions of recalled
vehicles. And, Starbucks’ drive to
open hundreds of new stores led to
the commoditisation of its customer
experience and falling sales.
Professor Ed Hess, the author of
Smart Growth: Building an Enduring
Business by Managing the Risks
of Growth, says: “Most business
executives accept without question
the belief that growth is always
good, that bigger is always better
and that the healthy vital signs for
a public company include growth
that is continuous, smooth and
linear. The problem with those
presumptions is that there is no
scientific or business basis for
them.” So, as companies begin
preparing for better prospects
following the years of tight
market conditions after the global
financial crisis (GFC), we ask what
growth is all about. We examine
the risks it creates for business
and importantly, how boards can
manage these better.
In February, a panel event
hosted by the Australian Institute of
Company Directors and Georgiou,
a fast-growing family owned
construction group headquartered
in Perth, met to discuss these
issues. An edited extract of the
discussion follows.
Smartening up on growth
A recent panel event hosted by the Australian Institute of Company
Directors and Georgiou examined the issues and risks around growth
and how boards can manage them better. Zilla Efrat reports.
MODERATOR
PARTICIPANTS
MICHAEL ANGHIE
Office managing partner,
Perth, and managing
partner, resources, at Ernst
& Young
DR ERICA SMYTH FAICD
Chairman of Toro Energy
and the Diabetes Research
Foundation of WA. Director
of Emeco Holdings,
the Australian Nuclear
Science and Technology
Organisation (ANSTO), the
Deep Exploration Targeting
CRC, the Royal Flying
Doctor Service (Western
Operations) and the Harry
Perkins Institute of Medical
Research
NEIL HAMILTON FAICD
Chairman of Oz Minerals
and director of Metcash
GRAHAM BURDIS MAICD
Director of Burdis Marsh
Partners
JOHN GALVIN MAICD
Executive general manager
of Georgiou Group
ISAAC RANKIN FAICD
General manager, WA,
institutional, corporate &
commercial banking, at
Australia and New Zealand
Banking Group
SUZANNE ARDAGH
MAICD
WA state manager of
the Australian Institute of
Company Directors
JENNIFER SEABROOK
FAICD
Special advisor to Gresham
Partners. Director of lRESS
Limited, Iluka Resources
and the Export Finance and
Insurance Corporation
34 www.companydirectors.com.au

2. Graham Burdis: As a young
finance director, the CEO of our
UK parent company told me it was
impossible for a company to have
record growth every year. Later,
others said there had to be growth
every year. I still haven’t worked out
what the right path is. But smart
growth, I think, is probably the
important part of this discussion.
What has growth been like at
Georgiou Group?
John Galvin: The company
has come a long way. The owner,
a plumber, started out with seven
guys doing stormwater and sewer
pipelines, but later bridged into
urban development. I have been
with the group for seven years.
When I joined, the revenue base
was $170 million, but it will be
circa $650 million this year. We’ve
had good growth, but we have made
some mistakes along the way. You
have to learn what your embedded
capability is and how failure can
stretch that capability from a
growth perspective without that
elastic band breaking. We’ve grown,
but we’ve also invested heavily
in capability, whether that be our
systems, technology or people and
then back into maintaining our
values and culture. Unfortunately,
there are many examples in the
construction industry of “not smart”
growth – companies struggling
financially have taken on jobs that
overstretched their capabilities or
their balance sheets, or companies
have got into situations that were
wrong, where things were done that
most people would not accept as
right, but because of growth, this
was not controlled.
Burdis: Is growth the driver for
business all the time?
Neil Hamilton: No. It should
not be. There are times in
the cycle when just standing
still and surviving is a good
outcome. Anyone who is just
driven by growth will inevitably
suffer on occasion. I have dealt
with emerging companies that
performed spectacularly and then
decided to go down the corporate
path and list. There have been
some successes, but in the main,
the single biggest cause of failure
has been a lack of investment
in capability. Often, a lot of the
knowledge, risk management and
real understanding of the business
is embedded in one or two people
in the organisation. When it is lost
or a person is too busy, the business
fails. Often, too, some people are
good at getting a business to a
certain stage, but are probably not
the same people who can take it
to the next stage. Getting them to
understand that is important.
Jennifer Seabrook: There are
some large examples of where
growth has worked very well and
some where it hasn’t – for example,
some acquisitions and expansions
by resource majors in overseas
companies. There are also some
smaller ones, particularly those
providing construction services
to the utilities sector in Western
Australia, that have gone wrong.
This can happen in the wake of an
acquisition, or through projects
or construction activity where the
customer is different and deals
with you in a different way to what
you are used to, exposing you to
new risks.
Burdis: Is it up the board to
provide the counsel?
Seabrook: Usually you have
some grey hair on the board with
some experience of things that have
gone wrong and these directors
can provide some counsel. In the
end, however, management drives
the company and if it has a vision
of where it is going, all you can do
is provide a path and an alarm bell
every now and then.
Isaac Rankin: Often with
growth, you see strong pre-
acquisition due diligence and
rigour, and the deal is executed
well. Then you see rather weak
post-implementation and a less
developed grasp of how people’s
roles will change.
Michael Anghie: That is
changing. Large companies are very
focused on integration and how the
culture, people, systems and clients
are going to be integrated. But at
the smaller end, it’s all about selling
the deal to the board, funders and
the market and nothing about day
two. And then, on day three there is
a problem to fix.
Seabrook: In my experience,
companies look at how they are
going to integrate a deal and have
a 100-day plan, but you do need
different people to take on that
role. Is the person doing it the
right person? Is she or he driving
it correctly? Are you getting good
reporting? You need people in your
business who live it, because they
have to make decisions quickly all
the time.
Anghie: You need to take
people out of your business and
say to them: “Your day job is now
integration and ensuring this
acquisition works. It can’t be your
part-time job.” You can’t tell the
finance director or managing
director to make sure they get it
right, because they still have to run
the company. Companies that do it
well have a team taken out of the
supply chain, HR and other areas.
Erica Smyth: Often, there
is a slowness to respond to the
changes in the external world. Most
acquisitions are made with a set
of assumptions and we don’t go
back often enough to see whether
those assumptions are still valid
and if they are not, what needs to
be done to shift the strategy. The
strategy tends to get locked in at
the start or at an annual review and
there isn’t enough reviewing going
on all the time. You need to keep
looking at what’s happening in the
outside world – with customers, the
competition, prices and so on.
Anghie: Corporates have learnt
a bit from the way private equity
approaches transactions. There is
no emotion. Private equity firms
look at the whole business, who
the customers are, how they will
exit – and everything in between.
The numbers are important, but
there is a lot of other detail they go
into. Corporates are adding these
35Company Director | MARCH 2014

3. VIEWPOINT An Australian Institute of Company Directors thought leadership initiative
skills to their due diligence and
processes.
Seabrook: The pendulum is
swinging away from private equity
because businesses understand
they are just going to be churned
and that the focus is on finance and
not the business. Most corporates
looking at an acquisition in
competition with private equity
know they won’t compete on short-
term financials, but will in terms of
getting long-term gains out of the
business.
Rankin: Listed companies often
envy their private counterparts.
Private companies can often pick
the contracts they want, get them
right when they execute them and
whether their turnover is up or
down, they will deliver the profit.
Listed companies always have to
grow. There is that pressure, but the
board is there to moderate.
Seabrook: In the listed space,
you understand that desire of
investors to see growth year on
year, but I think in most sectors,
they understand the cycles and
can see them. So as long as you are
relating to your investors and they
appreciate where you are in the
cycle and that you are managing it,
they will mark you accordingly.
Hamilton: You try to attract
shareholders and investors that
understand the journey. Provided
you continue paying dividends, they
will understand you go through
growth cycles where you do
nothing for five years and then find
something.
Anghie: As long as there is
transparency and no surprises.
Hamilton: Growing just to react
to investor pressure, particularly on
the sell side, is a recipe for disaster.
A good CEO in a growth phase is
someone who has said “no” before
because the deal was wrong.
Anghie: Should a CEO have
some personal money invested in
the company or should there be
incentive plans? What’s the best
balance?
Hamilton: If you have to rely
on people having significant equity
invested, then I believe you are
starting at the wrong place. You
need a better alignment than that.
It’s more about the quality of the
people than the reward structure.
Seabrook: The reward structure
can also drive the wrong growth or
strategy or it can stop growth. So
you have to be very careful.
Smyth: The assumptions are
always that growth is good and
massive growth is better. I was
on holiday in New Zealand this
year and I went to Queenstown.
The most successful business
there, during summer and winter,
is Fergburger. It makes a huge
hamburger for adventure-hungry
tourists. It has grown from a tiny
back store to a large shopfront on
the main street. Now, you might
say its vision would be to grow
5,000 Fergburgers all over New
Zealand. Well, it won’t work and
it’s not its vision. Its vision is to be
based in Queenstown, where its
owners want to live. And it doesn’t
appear they will open a second
store in Queenstown. Now, let’s
look at a company like Woodside.
It’s got a guaranteed flow of money
for the next 20 years. Its contracts
are all written. It does have to
keep replacing its resources base
because it’s a producer, but how big
should it try to get? Should it try
to be a mega oil and gas company
and deal with all the hassles that go
with that, or should its shareholders
just be rewarded with dividends?
Seabrook: You get into that
mature zone where your executive
team is doing well, but where’s
the next challenge for it? That’s
when it usually contemplates a
transformational step to give it
another challenge. But does it
have the expertise to take the next
step? Some do, but some don’t.
As a board, you need to support
employees’ growth as long as they
have a clear vision. But if it’s just
growth for growth sake, to create a
career plan, it doesn’t work.
Galvin: In our construction
business, we will look at
opportunities that stretch our
capability or ones that extend
our location, but if we see the two
coming together, we get quite
concerned. We’ve made this
mistake before, luckily on a small
scale, but we learnt the hard way.
For example, we went up into the
Pilbara with a new client to do
marine work. We learnt some very
valuable lessons about contracts in
that job.
Rankin: When you go for high
growth, whether it’s organic or
not, you have higher strategic
and operating risks. This has
to be balanced with the capital
structure. People who have done it
well had that financial flexibility. I
think it’s always harder for private
companies because, quite often,
your capital structure is a bit more
dictated than it is devised.
Anghie: It adds value for
boards to get external views from
other people. New insights and
ideas around the table are part of
achieving growth. You will learn
something you didn’t know today.
Galvin: There are dangers in
that, though. I know of a case where
a company accepted advice because
it was an expert’s view and as a
result, lost a lot of money and staff.
Seabrook: If you have people
on your board who are also on two
or three other boards, they bring
with them a wealth of information
and insights. Their contribution is
usually better than someone who is
just on one board because they see
different situations all the time. I
would prefer that input rather than,
say, that of an investment banker or
economist or so on.
Burdis: How can an experienced
board help mid-sized companies?
Hamilton: When they are
contemplating growth, they should
have people on their boards who
have been through some successes
and some disasters. That’s the key. If
people have been through this and
have chewed up some money, they
have learnt some lessons. You can’t
have a strategy that has growth as
a starting point. It has to be about
value creation. Growth might be a
way of achieving that, or it might
not be.
Galvin: People talk about
growth, but what does it mean?
Burdis: According to the
academics, growth is basically
change. Many businesses aren’t good
at change, so they won’t be good at
growth.
Hamilton: Australia has a lot of
businesses that are very mature.
We have big retailers, big resource
companies and our four banks can
carve the country up. As a bank, the
base has to be holding your position
and maintaining your share of
market growth. That’s still growth.
With competition, people move. So
usually there has to be a winner
and a loser. You have to be realistic
in terms of circumstances. ANZ,
for example, wouldn’t say: “We
will take half of Westpac’s market
share and half of the others.” But
it may consider whether it could
gain a bigger share of the wealth-
management market or a bigger
exposure to Asia. But the core
business should have reasonably
modest aspirations to grow, because
realistically that’s all it can do.
Seabrook: Often people ignore
opportunities to improve their core
business because of some other
new exciting business. Yet, if they
focused on their core business,
there would probably be more
growth they could drive out of
it. Banks are a perfect example
of where there are plenty of
opportunities.
Hamilton: In fairness, every
now and then they go through a
restructure and revise things. They
have to. They have to take costs out.
Rankin: If you look at growth
as aimed at delivering “value”,
then looking internally and
extracting returns is as helpful
as growing the top line and is at
least as achievable. It isn’t like it
just happens. You have to make it
happen. But it’s a safer route.
Hamilton: If you ignore your
existing business, someone else
won’t. It’s how you deal with
that existing business while you
36 www.companydirectors.com.au

4. are distracted by other growth
strategies. A mistake is to think
acquired growth is easier than
making a business better and
ripping costs out. It’s a bit of a short
cut. Boards have not been very good
at controlling this in general. More
deals have been unsuccessful than
have been successful.
Anghie: Discipline is important.
The board may see the CEO has a
vision and back it. Its role is also
to ensure people are disciplined
around that vision. Sometimes you
see the discipline fall away when
it gets to the crunch time of a deal.
Everyone is getting excited. The
market is calling for it and the
pressure comes on. If you look back
at some of the failures, discipline
would have fallen away at some step
in the process.
Ardagh: Do you remember
those Wesfarmers guys in the
1990s? They had this model called
logical incrementalism. You take
steps forward in an incremental
way. If it doesn’t work, you withdraw
and go in a different way – a classic
example of discipline.
Galvin: The company’s culture,
whether it’s one of risk taking or
more conservative, and how it
mixes up its board and its executive
team has a big effect. Effective
boards have directors who come
in from other industries, to avoid
silo thinking. This is somewhat
linked to key performance
indicators (KPIs) and performance
incentives. I know a company that
is struggling. It has a real risk-
taking, high-flying culture. Things
are happening there that we just
wouldn’t allow. So you wonder if
it relates to how its remuneration
and KPIs are structured and
whether this drives its culture.
Corporate governance gets lost, or
certainly loosened, because it’s all
about delivering those KPIs. When
Georgiou talks about KPIs, we
look at revenue growth and, more
importantly, profit growth, as well
as safety and people development.
Our KPIs are fairly broad.
I have been involved in some
acquisitions where the strategy
wasn’t sound in terms of bringing
in businesses that were culturally
close and synergistic. There were
some synergies obviously, but the
multiplier was the core driver.
At Georgiou, we have looked at
acquisitions, but have never done
one. We are focussed on organic
growth in order to develop a
professional culture.
Smyth: In big companies, where
they have different divisions, it’s a
challenge to bring them together at
the top and to encourage a balance
between a division’s growth and
a vision that looks to optimise
the entire business. There are a
lot of egos and set KPIs that can
even encourage a division to be
destructive towards another. A lot is
about how you reward your senior
people – do they have all their skin
in the game of their particular
division? Or some skin in the game
of the total company? It’s about
creating a culture where the senior
team looks at the very big picture.
Seabrook: We have spoken
about KPIs and related them a bit to
culture. But I would probably drive
down one more level – to value
set – because if you don’t have a set
of values that people understand
at the grassroots as to where your
heart is, they don’t understand
where they are going. Before one
of the companies I am associated
with made a large acquisition, we
did culture surveys of both groups.
The cultures were quite different
because one had been associated
with private equity for a long time.
Its management could not work out
where it was going because every
three years it knew the company
was going to change owners. But
the values of the individuals in the
business were actually very good,
and similar to those in the other
group, so we just had to re-engage
the staff in a cultural sense.
Smyth: How does a board
ensure it understands the culture?
What gets presented upwards can
often be quite different from what is
presented downwards.
Burdis: Is it important for
directors to get out and about to meet
different levels of staff?
Galvin: Our board regularly
has breakfast sessions with 60 to
80 of our employees, from workers
in the field through to engineers
and a couple of executives. These
sessions give the board and
employees an opportunity to catch
up and connect. It’s a simple tool,
but is has certainly generated some
questions at a board level. We have
being doing this for around a year
and a half. As an executive in the
business, I must say the advice and
support I am getting from the board
has improved over this time. The
board has the same members, but
it is perhaps a little closer to the
business and understands its issues
better. My people really enjoy the
opportunity to meet the board.
Prior to these sessions, the board
was this mysterious group that
met once a month. Now it’s more
personalised.
Seabrook: Alarm bells
certainly ring when management
closes off contact, but I think most
management teams are now very
welcoming of boards going to sites
and roaming their organisations
because they understand that it’s a
two-way stream – that individuals
within the organisation will also
learn quite a lot about the board
and values are driven both ways.
Seabrook: It isn’t only about
meeting employees, but also
customers and other stakeholders.
37Company Director | MARCH 2014

5. VIEWPOINT An Australian Institute of Company Directors thought leadership initiative
The interchange with all these
groups is very helpful, especially
in the context of growth. When you
are talking about strategy you need
to bring these into the discussion.
Anghie: That access to
customers has opened up a lot more
in recent years.
Hamilton: There is a growing
acceptance among directors that
you have a broader stakeholder
base than just shareholders. It is
important to also note that growth
is cyclical. It’s fashionable for
a few years and then we tip all
those CEOs out and bring in Sam
Walsh [Rio Tinto] and Andrew
MacKenzie [BHP Billiton] and we
say “no growth” for the next three
years. And then slowly it comes
back. That is true across lots of
markets. It’s also driven by the
investment community. Investors
are demanding more regularity of
returns and yield, and that might
put growth in a different context for
some time.
Smyth: For a long time the baby
boomers were hoping to see capital
growth. Now they want dividends.
It’s a simple change that can have a
huge impact on things.
Burdis: How does having a
diverse board affect growth? Does
diversity need to be pushed harder?
Smyth: It goes without saying
that we aren’t doing very well on
gender diversity. But for a country
that is working around the world
and moving into Africa and South
East Asia, we don’t have enough
international or cultural diversity
on our boards. Wherever you go,
they will think differently and we
need to understand that better.
Seabrook: It would be a rare
board that doesn’t look at its skill
sets around the table – that is, look
at its strategy and fill the gaps to
match the strategy. Probably 20
years ago that wasn’t something
widely done. It was a bit of the
old boy’s network. Now if you are
expanding into Africa, you have to
ask: “Who’s the person with African
experience”.
Rankin: How does it work when
you have one shareholder on the
board in a family-owned business
and the board moderating growth?
Galvin: I think that is about
integrity. John Georgiou is CEO
and the youngest child of the
company’s founder, Peter. Peter,
the founder, sits on the board and
is fairly passionate when you are
looking at shutting down one of
the original parts of the business.
Around 10 years ago, John decided
he needed an advisory board, which
I thought was fairly courageous
at the time. It’s one thing to have
an advisory board and another
to listen to it. And at the end of
the day, he doesn’t have to. John
has sought out diversity on the
board and he listens. He takes the
board meetings very seriously.
The board gives him – and us all
– a hard time sometimes too. It is
certainly not just turning up for
the sake of turning up. It holds us
to account. For example, we moved
into commercial building five
years ago. That was discussed for
probably that long, but the board
was unsure to start with. We had to
keep coming back with strategies
and analyses until finally it said:
“Okay. We think you have thought
it through well enough. Go off and
do it.”
Rankin: It’s always hard in a
private company, particularly if it’s
entrepreneur built, to hand over
some power to a board even if it’s
only an advisory board. The hardest
is when the founder is still running
the business.
Seabrook: One of the exit
options family business owners
need to think about is transitioning
from a private company to a listed
company. This means changing
the governance model on the way.
Forming an advisory board or fully
fledged board that has control
makes the transition much easier.
There is a rush of initial public
offerings and we will see more of
this over the next 12 months.
Burdis: How did Georgiou
manage that growth into the
commercial building market?
Galvin: In the same way we
opened a business in Queensland
and Victoria. It’s very much about
targeting the right individuals with
the right contacts and the right
background to start up a company.
We brought on board a general
manager who had extensive
building experience in the Perth
market and some other new staff
members, and we grew it from the
ground up.
Burdis: From your experience,
what tips would you give directors of
smaller companies about managing
their growth smartly?
Anghie: Know what your
embedded capability is. Sit down
and ask what you are good at. What
your core skills are and where you
can apply them. Then you will know
where to look for growth.
Smyth: Test your assumptions
constantly and keep your eye
out for what is changing. The
outside world can change without
you knowing, particularly with
what’s happening in the younger
generation. You need to have a way
of being close to it – for example,
through your own children.
Galvin: Visibility of the board
within the organisation is key.
Seabrook: You have to really
understand where you are heading
to and the steps you need to get you
there. If you don’t have that, you
may go out to left field and not get
where you wanted to go.
Smyth: Understanding the
“why” is crucial.
Rankin: So is being really
honest with yourself about
your management capability
and capacity and how that gets
developed.
Galvin: The person doing a
wonderful job today may not be
the person that is going to do a
wonderful job tomorrow. We have
seen people who have grown as
the company has grown and seem
to continue to grow. We have seen
people who get to a level and stop
growing and over the past couple
of years, we have had to make
some hard decisions in terms of
senior people because it was simply
beyond their capability.
Rankin: Similarly, are your
advisers still the right ones to take
you to the next step or have you
have outgrown them?
Hamilton: Don’t get sucked in
because something is becoming
fashionable. Having a vision that
is about long-term value creation
is important, but stick to it when
the cycle turns. You have to make
decisions for the right reasons.
Seabrook: Understand that
your shareholder base will change
through the cycle. There are those
that go on the up cycle and sell out
at the high and then come back in
when you are at the low. It doesn’t
mean they are disenchanted with
management.
Burdis: I like this quote from
Ed Hess: “The goal is continuously
making your organisation better.
When you achieve that, growth will
happen naturally in due course.
That is the way to achieve smart
growth.”
38 www.companydirectors.com.au