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Chapter 9 - Corporate Governance Board
Listed companies should be required by law to establish a corporate
governance board
9.1
During debate in the Senate on the Company Law
Review Bill 1997, amendments were moved to the Bill relating to the requirement
that listed companies must establish a corporate governance board.[1]
9.2
Under the amendments a corporate governance
board would be required as follows:
- It would be required for all companies which
become listed after the commencement of the section;
- All other listed companies must propose a
resolution that a corporate governance board be required, and if the resolution
is passed, it cannot be changed.
9.3
A corporate governance board would be a body
that is:
- separate and distinct from its company’s board
of directors, and
- elected by shareholders on the basis of one vote
per member.
9.4
The functions of the corporate governance board,
to the exclusion of the main board, would be as follows:
- To determine the remuneration of company
directors;
- To appoint auditors and determine the
remuneration of auditors;
- To review the appointment, remuneration and
functioning of independent agents, such as valuers, who provide material
information to shareholders;
- To appoint persons to fill casual vacancies of
directors;
- To determine whether amendments should be made
to the company’s constitution, whether on the request of the company’s
directors or on the board’s own initiative;
- To decide issues of conflict of interest on the
part of the company’s directors and determine how those conflicts will be
managed;
- To control the conduct of general meetings and
determine voting procedures.[2]
9.5
Few submissions to the PJSC supported a
requirement for listed companies to establish a corporate governance board and
generally the support for the amendments was qualified. The majority of
submissions opposed the amendments and favoured retaining the ASX Listing Rule
which requires listed companies to set out their main corporate governance
practices in their annual report.
ASX
Listing Rule 4.10.3
9.6
In the UK, Canada, Hong Kong and Australia,
securities exchanges have introduced listing rules which require companies to
make annual disclosures about their corporate governance practices. In the US,
listing rules prescribe certain particular governance practices such as the
appointment of audit committees but do not require the disclosure of governance
practices.
9.7
ASX Listing Rule 3C(3)(j), now Listing Rule
4.10.3, was introduced on 1 July 1995. It requires each listed company to
disclose its main corporate governance practices. More specifically, the Rule
states that a listed company must include in its annual report “a statement of
the main corporate governance practices that the company has had in place
during the reporting period. When the statement identifies a corporate
governance practice that has been in place for only part of the reporting
period, the part of the period for which it has been in place must be
disclosed. Note: to assist companies, an indicative list of corporate
governance matters is set out at Appendix 4A.”
9.8
Appendix 4A is meant as a guide for listed
companies in preparing a statement of corp orate governance practices. The
matters listed include the following items:
- The main procedures for establishing and
reviewing the remuneration arrangements for directors and senior executives;
and
- The main procedures for the nomination of
external auditors and for reviewing the adequacy of existing external audit
arrangements.
Arguments in favour of a statutory requirement that a listed company
establish a corporate governance board
Good corporate governance increases
shareholder value
9.9
The Australian Investors Association Ltd (AIA)
commended the requirement in so far as it was not inconsistent with the stated
policies of the AIA and the Australian Shareholders’ Association Ltd (ASA). The
policy position of the AIA and the ASA in relation to corporate governance
issues is that listed companies have failed to respond adequately to the
corporate governance Listing Rule 4.10.3 of the ASX.[3] Companies with no corporate governance
practices were not obliged to make a statement for the purposes of the Rule.
9.10
According to the ASA and AIA, research conducted
in the US demonstrated “a clear correlation between sound corporate governance
practices and good financial performance.”[4]
Implementing good corporate practices was, therefore, in the interests of
shareholders. While the AIA and ASA acknowledged that the Rule is “a step in
the right direction”, there was no requirement for companies to implement such
practices.[5]
The ASA and AIA contended that an appropriate government authority should be
tasked to:
- Review company reports to ensure compliance with
the ASX Listing Rule;
- Require listed companies to implement corporate
governance practices;
- Advise companies that compliance with the
Listing Rule is a ‘minimum position’; and
- Ensure that companies are aware of the
correlation between sound corporate practice and good financial performance.[6]
9.11
At its hearing on 18 August 1999, the Australian
Shareholders’ Association Ltd (ASA) took an alternative position to the AIA/ASA
joint policy statement regarding the ASX Listing Rule, preferring the present
corporate governance model:
In regard to the corporate governance board and audit committee,
again it is an alternative model. But I think the concept of a majority of
independent directors and an independent chairman, the ASX requirement for an
audit committee, really provides an at least effective corporate governance
model. I am concerned that the introduction of a separate board is likely to
lead to more complication and confusion than benefit. The present model is
efficient.[7]
Corporate Senate
9.12
M.A.I. Services Pty Ltd which initiated the
proposed amendments argued for the establishment of a corporate governance
board or Corporate Senate for all public companies.[8] The functions of a Corporate
Senate would encompass the roles of an audit committee, remuneration committee
and nomination committee. Specifically, the supervisory Senate board would have
responsibility for the appointment and control of auditors, the remuneration of
management and its disclosure to shareholders, and the extent of disclosure of
all other information. A system of voting for electing the Corporate Senate on
the basis of one vote per member, as opposed to one vote per share, would
ensure the protection of minority interests. M.A.I. Services Pty Ltd contended
that the establishment of a supervisory board with defined powers will avoid
the need for detailed prescriptive laws and regulations and restrain the
excessive power of a unitary board and its inherent conflicts of interest.[9] Mr Shann Turnbull, Principal of
M.A.I. Pty Ltd Services told the PJSC that the impetus for a Corporate Senate
was simplification of the Law:
The whole purpose is to simplify your corporate law. You could
reduce many parts of your corporate law and listing requirements because you
could delegate decisions, which might otherwise go to shareholders, to your
corporate governance board, and some of the listing requirements. If you are
looking at costs and benefits, it is back in the context of how to get less
prescriptive law and that is to set up processes in place for shareholders to
look after themselves. The reason a lot of shareholders do not vote is that
they feel they do not have any power.[10]
Qualified support
9.13
Arnold Bloch Leibler supported the concept of a
corporate governance board but not for every listed company:
The matter of a corporate governance committee should be left to
the directors of the listed company and, ultimately, to its shareholders.[11]
9.14
Similarly, it was suggested that such a
requirement was appropriate only for large listed companies and that smaller
companies could hire consultants and make their own decisions.[12]
Arguments against a statutory requirement that a listed company establish a
corporate governance board
Company board is responsible for
corporate governance
9.15
The Australian Law Reform Commission (ALRC)
advised that responsibility for maintaining and monitoring corporate governance
is the responsibility of the board. It noted that this responsibility should
not be delegated or dissipated to any significant degree through the
establishment of a separate corporate governance board. The ALRC stated:
It is concerned that this particular proposal could lead, in
practice, to the undesirable bifurcation of board responsibilities.[13]
9.16
Where appropriate, the ALRC suggested that an
audit committee could provide guidance in ensuring that corporate governance
obligations are being met. Similarly, the Henry Walker Group Ltd argued that
corporate governance is the responsibility of the board and the requirement is
in part satisfied by current audit committee structures.[14]
9.17
The Australian Institute of Company Directors
(AICD) submitted that directors as a group are responsible for corporate
governance matters and beyond mandating the bare structures, it was not the
function of the Law to prescribe particular governance structures for
companies.[15]
9.18
Arnold Bloch Leibler considered that it was
unnecessary for every listed company to have a corporate governance board. The
requirement would add to the administrative costs of running the company while
not necessarily providing any real benefits to shareholders. The establishment
of such a board was a matter for the directors to determine:
After all, responsibility for all of the day to day management
issues affecting a company rests with its directors. The directors should be
free to determine how they will deal with these issues and not be obliged to
delegate responsibility for corporate governance to a sub-committee in
circumstances, where it might otherwise be inappropriate or unnecessary for
them to do so.[16]
9.19
Several submissions referred to the
responsibility of company boards to be independent. For example, Mr John Wilkin
stated:
The Board is responsible for the management and control of the
company. There is no demonstrated need for the Board to adopt any particular
system for compliance with any particular philosophy or any particular law. [17]
Concern for small listed companies
9.20
The West Australia Joint Legislative Review
Committee of the Australian Society of Certified Practising Accountants, The
Institute of Chartered Accountants and the Chartered Institute of Company
Secretaries expressed concern that the requirement would pose difficulties for
smaller listed companies. The Review Committee noted that in Western Australia
there are a large number of junior exploration companies with only a minimum
number of directors. According to the Review Committee, these small companies
would have difficulty in dealing with “wider governance issues”.[18]
9.21
The Association of Mining and Exploration
Companies Inc submitted that most companies are not large enough to have a
separate corporate governance board and audit committee. In small companies
corporate governance and audit issues are addressed by the board due to
resource constraints.[19]
Roebuck Resources NL told the PJSC that the requirement is not “appropriate for
the smaller listed companies which may only have a small number of executive
and non-executive directors, thus making the requirement to set up separate
committees or boards inappropriate.”[20]
9.22
The PJSC was told how in practical terms smaller
listed companies dealt with corporate governance matters:
Mr Crabb-In the case of smaller listed companies, it is
really not practical. I sit on a few company boards where we only have four
directors. We meet once or twice monthly, if not more than that informally. It
is basically run by the board. You know what is going on at all times. The
thought of having a separate corporate governance board or audit committee is
superfluous because two directors-the independent directors-would sit
separately and, as an independent director, you have the obligation to consider
those factors anyway.[21]
9.23
The Australian Stock Exchange (ASX) was strongly
opposed to the introduction of a requirement for listed companies to have a
corporate governance board on several grounds including that:
For small to medium sized listed entities, it could impose a
substantial cost burden (we note that each board must have at least 3 members
with a majority of them “external members”).[22]
Costs of compliance
9.24
The PJSC was told that the introduction of a
statutory requirement would add to costs and efficiencies.[23] The Law Institute of Victoria
submitted that the requirement should not be introduced without a proper
analysis of the need for such a requirement and its implications for small
companies.[24]
9.25
Coles Myer Ltd submitted that the estimated
total annual cost of compliance with the proposed amendments was $1.2 million.[25] To establish a separate
corporate governance board with the same level of service and entitlements as
the main board, Coles Myer Ltd would incur the following annual costs:
Fee to chair the corporate governance board ($120,000)
Fees of the three independent directors ($240,000)
Standard retiring allowances for those directors ($360,000)
Board papers, meeting costs, video conferencing, electronic
presentations, reports, accommodation, airfares etc ($100,000)
Remuneration experts fees to determine the fees of directors and senior
management independently from management and the main board ($250,000)
Management costs to prepare reports, present that to the board and to
provide secretarial services ($100,000)
Total costs
estimated to be $1,170,000
Present arrangements are adequate
9.26
The PJSC was told that the ASX Listing Rule
provides for details of corporate governance practices for listed companies.[26] It was submitted that the
requirement is unnecessary because the present arrangements of corporate
governance are adequate:
A majority of companies already have an Ethics or Conduct
Committee, which covers much broader issues than simply corporate governance.
The Institute is not aware of any shortcomings in the present reporting of
Corporate Governance as required by the ASX Listing Rules, and believes this is
a more appropriate regulatory approach.[27]
Two tier model not appropriate to
Australian companies
9.27
GIO Australia Holdings Ltd (GIO) opposed the
introduction of a two tier model for corporate governance on the grounds that
it would add a separate layer of responsibility for corporate governance to
that of the main board. Such a model would be similar to that in Germany which
is unlike any other model of corporate governance. GIO described it thus:
If it is intended to promote the addition of a separate
supervisory or governance board along the lines of the German model then there
is no justification for this imposition on Australian Boards at all. The German
model is peculiar to the German economy, German share ownership structure and
German culture and has not been adopted anywhere else in the world for listed
public companies.[28]
9.28
GIO advanced four arguments against a two tier
model. The proposed model would create confusion as to which board was
responsible for a particular policy, give rise to conflicts between the two
boards, establish two sets of decision making processes and inhibit clear and
decisive direction for companies.[29]
The Accounting Bodies also expressed concern that a two tier model would create
an unwieldy and divisive structure:
Mr Parker-The problem with separately elected body means
that there is the potential for dispute, for gridlock, between the corporate
governance board and the board of directors. You have mentioned corporate
governance boards being set up in some parts of the state. I must admit I am
not familiar with how successful those boards have been, but I just have this
voice inside of me that says that, if you have two boards with different
responsibilities, you have the chance of heightening tensions rather than
trying to work smoothly.[30]
9.29
Similarly, the Law Institute of Victoria was not
convinced that a separate corporate governance board was necessary. The Law
Institute referred to the 1998 UK Hampel Report which found little enthusiasm
for the two tier framework. The preferred model in the Hampel Report was the
unitary board which offered flexibility and retained the power of the board to
delegate functions to board committees.[31]
9.30
The ASX noted that if Australia were to adopt a
requirement for listed companies to have corporate governance boards, it would
be viewed as a regressive step by the major international capital markets:
It is important that we remain compatible with major capital
markets (in particular the UK and the USA) – it is believed that such a change
would not be viewed favourably in this context. In an age where we are trying
to “globalise” our standards, this change would arguably represent a step
backwards.[32]
9.31
The AICD submitted that legislating the
requirement would result in the European two tier structure. Applied to
Australian companies the two tier model is “misconceived” and “probably
unworkable”.[33]
‘Outsider’ and ‘insider’ models of
corporate governance
9.32
A paper authored by Mr Trevor Robertson, an
executive and doctoral student in the area of corporate governance was
submitted for the PJSC’s consideration. The paper explored models of corporate
governance. It described the model of corporate governance in Australia, USA
and Britain as an ‘outsider’ model where managers are relatively unfettered by
board control but where control instead arises from the discipline of the
capital markets. The model presumes that information flows are good and the
regulatory system requires ample disclosure and listing rules are enforced. The
model is also based on liquid stock markets and diversification of investment
portfolios. Most OECD countries have the ‘insider’ model where board
representation of specific interests play a strong monitoring and disciplinary
role vis-à-vis management.
9.33
Mr Robertson referred to the regulatory
developments in Australia in the area of corporate governance. The paper noted
the development of a single, national Corporations Law framework in 1991 and
the Listing Rules of the ASX which were based on the UK Cadbury Code, a code of
Best Practice set out in the Cadbury Report. The legislative evolution of
corporate governance was an evolving and continual process with interested
parties debating whether the current legislative arrangements are appropriate
or whether they are too prescriptive.
9.34
Mr Robertson cited the OECD Economic Surveys
1998 Australia where it was reported that over the last decade attention
has focussed on instances of corporate misconduct. The OECD’s view was that
these should not result in the governance of all enterprises being unduly
burdened:
It would be unfortunate if the legacy of distrust that they have
left resulted in excessive burdens being imposed on the governance of
enterprises. ... By and large, the balance in Australian corporate regulation
appears to have shifted too far towards a prescriptive and intrusive approach.[34]
More disclosure of corporate
governance practices
9.35
The Investment & Financial Services
Association Ltd (IFSA) opposed the amendments, preferring that listed companies
explain to investors through annual reports and other publications what
corporate governance practices they have adopted and the reasons for their
adoption. In its July 1999 Corporate Governance, A Guide for Investors and
Corporations, IFSA recommended that:
The board of directors of a listed company should prominently
and clearly disclose, in a separate section of its annual report, its approach
to Corporate Governance. This should include an analysis of the Corporate
Governance issues specific to the company so that public Investors understand
how the company deals with those issues.[35]
9.36
The Guide also recommends that company boards
should appoint an audit committee, a remuneration committee and a nomination
committee for proposing new nominees to the board.[36] IFSA, however, stated that:
IFSA members acknowledge that companies may develop other
governance practices appropriate to their circumstances that are also sound.
The central aim for IFSA members and other institutional investors is that
listed companies explain their corporate governance practices and the reasons
for them and that these practices are transparent.[37]
9.37
The AICD submitted that companies should make
their own choices as to whether it is appropriate, given their individual
circumstances, for the company to appoint a corporate governance committee. It
argued that flexibility in corporate governance was essential and should not be
prescribed through legislation. There is already a range of guidelines for
companies to follow in this area and current references include Strictly
Boardroom, by Professor FG Hilmer, the IFSA Guidelines for Investment
Managers, the Corporate Practices and Conduct Booklet published by the
AICD and the ASX Listing Rules.[38]
Conclusions
9.38
In its March 1998 Report on the Company Law
Review Bill 1997, the PJSC indicated that it did not favour a prescriptive
approach to corporate governance and opposed detailed legislative prescriptions
of the kind recommended by shareholder groups. The PJSC noted that the Bill
improved corporate governance practices and provided adequate protection to
minority interests.[39]
As a consequence, the PJSC listened extremely carefully to comments on the
proposed amendments which would require listed companies to establish a
corporate governance board or Corporate Senate.
9.39
A strong argument that was made to support the
establishment of a corporate governance board was that research in the US
suggested a correlation between good corporate governance practices and
increasing shareholder value. By implication, a similar outcome could be
achieved in Australia if governance measures such as a corporate governance
board were introduced in Australia. However, the PJSC was told that “there is
no evidence that the market [in Australia] is rating down those companies that
report little governance activity under the current disclosure regime”.[40] The PJSC is also wary of
comparisons with the US market without research having been undertaken in
Australia and conclusions suggesting that Australian companies should replicate
governance practices in the US. The PJSC believes that good corporate
governance alone does not lead to increasing shareholder value. There is also
the need to ensure that the regulatory framework and the Corporations Law work
consistently to promote longer term wealth.
9.40
The PJSC was told that most listed companies are
not large enough to have a corporate governance board which is separate from
the main board. It was therefore suggested that the requirement should apply
only to listed companies with a market capitalisation of $100 million. However,
as one witness told the PJSC, the alternative “is very much a moving target.
Depending on the flavour of the day, if you are a telco or something, suddenly
you have got one and, who knows, next year we might find some other high-tech
thing to get into and suddenly you are not. That is probably not by
capitalisation.”[41]
9.41
The PJSC has several concerns about the concept
of a two tier governance model and the specific amendments which codify the
method of election of members of the corporate governance board. As witnesses
told the PJSC, the proposed amendments will lead in practice to the bifurcation
of board responsibilities and the devolution of the board’s additional role
with respect to shareholder protection. The PJSC was told that the advantage of
a governance board is that it “delegates decisions which might otherwise go to
shareholders to the corporate governance board”.[42] In the PJSC’s view the
delegation of shareholders’ powers to a supervisory board will reduce the
rights and entitlements of individual shareholders. The most potent of these is
the shareholders’ power to dismiss a director at a general meeting. Further,
the amendments stipulate that the establishment of a corporate governance board
is irreversible notwithstanding a resolution by members to the contrary. The
amendments also deny property rights to individual shareholders because the
system of voting for election to the corporate governance board is on the basis
of one vote per shareholder and not on the basis of economic interests.
9.42
In the view of the PJSC a strong case has not
been made to support the amendments and the evidence before the PJSC does not
justify imposing on companies another layer of expense and the potentially
divisive structure of a two tier model. The framework of company management in
Australia is constructed on the basis of a unitary board. The introduction of a
two tier governance model would shift the emphasis of current corporate
governance developments from an ‘outsider’ model to an ‘insider’ model with
significantly reduced voting and property rights for individual shareholders.
The PJSC agrees with the ASX that such a governance model would be a costly and
regressive step in the context of the future progress of governance standards
and Australia’s compatibility with the major capital markets.
9.43
In the view of the PJSC responsibility for
corporate governance must fall squarely on the main board. The PJSC believes
that the responsibility of the board to shareholders should not be diminished
to any degree by the establishment of a separately constituted corporate
governance board. The majority of submissions endorsed the findings of the UK
Hampel Committee on Corporate Governance which stated that “We have found
overwhelming support for the unitary board of the type common in the UK. There
was little enthusiasm for a two tier framework. The unitary board offers
considerable flexibility. The board may delegate functions to board committees.
Audit, remuneration and nomination committees play an important role in
corporate governance. Some boards delegate operational decisions to an
executive committee, and so adopt some features of the two tier board. In our
view this is entirely a matter for the individual company.”[43]
9.44
The PJSC recognises that there are important
issues where independent judgements need to be exercised on remuneration
practices, selection of board members and company accounts for example. The
effectiveness of the board in maintaining and monitoring corporate governance
is enhanced by the sub-committee structures of the main board. The PJSC accepts
that committee structures will vary from board to board depending on the size
of the company and for this reason the PJSC fully supports the initiatives by
IFSA, the AICD and the ASX in promoting more disclosure of corporate governance
practices. In the view of the PJSC the proposed amendments do not help to
underpin future progress towards higher standards of corporate governance. The
PJSC concludes therefore that the amendments should not proceed.
Recommendation
9.45
The PJSC recommends that the Corporations Law
does not provide that listed companies must establish a corporate governance
board.
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