Opinion Escaping the straight jacket

Saturday, 01 November 2008


    Steven Cole warns against the growing trend of criticising companies that stray from strict “black letter” of the ASX’s guidelines.

    Escaping the straight jacket

    Corporate Australia has every right to be proud of its system of good corporate governance as reflected in the ASX Corporate Governance Principles and Recommendations (see breakout on p47). It is of recognised global best practice standing.

    The ASX principles are generally non-mandatory, accept the adage “one size does not fit all” and recognise the “if not, why not” explanation discipline. This is to be compared with the constrained rigidity (now under pressure for relieving policy reform) of the “black letter” approach of the Sarbanes Oxley regime in the US.

    Despite these key philosophies, an emerging groundswell appears to be developing, bent on denigrating and criticising any public listed company, and its directors, which stray from strict “black letter” adherence to the ASX guidelines. And, they are doing this without proper analytical assessment of the variation, or judgment of its merits, in the context of a particular company, its business, its people, its strategic objectives and its performance.

    Influential agents fuelling this groundswell include certain:

    • Institutional investor advisors that benchmark a company’s governance standards against the ASX guidelines, and downgrade, or at least qualify, their investment recommendations on any non-compliance, whether or not intrinsically relevant to the quality or outcomes of that corporation’s corporate governance;
    • Financial and corporate journalists prepared to pillory “miscreant” non-complying companies in order to grab headline attention, gain editorial approval or by-line attribution;
    • Business consultants promoting and purveying their “productised” services that are premised on strict ASX guidelines’ compliance;
    • Special interest groups that are either reactionary to change, or cynically driven in their belief that those elected to lead corporations are driven by self-interest at the expense of stakeholders generally; and
    • Politicians seeking to curry electorate favour by expressing critical populist comment of a generalised nature without informed regard to the particular circumstances in question.

    By their actions, and their influence, these people, through insufficient understanding, personal convenience, lax practice, vested interest or otherwise, have the potential to inhibit and constrain improvements in applied good corporate governance in Australia and the use of the most suitable governance practices to suit each particular company’s individual circumstances.

    Newspapers around the country have contained numerous letters or articles espousing the views of those fuelling this groundswell. Fortunately, however, there are some voices of reason and temperance seeking to penetrate this backdrop of populist opinion which is beginning to condition societal thought on the topic.

    The chorus of reason includes the likes of AICD chairman John Story, ASX director Trevor Rowe, Prime Minister Kevin Rudd and some newspaper editors. And, others need to join this chorus of reason to guard against the entrenchment of this errant groundswell.

    To suggest that the ASX guidelines already represent the Holy Grail of best corporate governance for time immemorial for all publicly listed Australian companies without scope for improvement is at best delusionary and flies in the face of Darwinist principles of evolutionary adaptation and growth.

    In this context, regard might be had to The Diagnostic and Statistical Manual of Mental Disorders, which defines a delusion as a false belief that is not grounded in reality and that is held with absolute conviction despite proof to the contrary. The manual lists a caveat that a belief is not delusional if it is something widely accepted by other members of a person’s culture or subculture.

    Care must be taken to prevent the conditioning of general public opinion in vogue promoted by these influential agents referred to above. Leaving these views unaddressed risks the potential of lifting them beyond a “delusion” to a widely held acceptance by members of a culture or subculture. Yet, despite their populist approbation,they will continue to retain all the other indicia of “delusions”.

    In terms coined by Edward de Bono, in his writings on “lateral thinking”, we should be open to deploying our energies seeking the “bvs” – the better view of the situation. This would be better than exhausting our energies seeking to justify our “pvs” – the present view of the situation – and seeking to distort the underlying key philosophies upon which the ASX guidelines are clearly premised.

    Notwithstanding the perceived merits and attributes of Australia’s generally accepted system of corporate governance, like any other system, if it is to survive and remain relevant, it needs to continue to develop and evolve to meet the challenges that it will continually confront. This is especially so in today’s ever changing, dynamic, e-enabled global market place.

    Corporate Australia, and those responsible for its integrity, development and performance, must remain receptive to innovation and change in corporate governance systems and procedures to meet and respond to legitimate evolving socio-economic and market needs, requirements and pressures.

    Some segments of our society may seek to condition our actions and stifle well founded distinctive corporate governance behaviour. But like Truman Burbank in the 1998 US film, The Truman Show, it is to be hoped that the human quest for better outcomes will prevail aginst those wishing to rigidly define and quarantine us to a delusional existence within the straight jacket of certain “black letter” prescribed corporate governance practices, many of which are more procedural than substantive in nature. As the accepted purpose of good corporate governance is the delivery of enhanced sustainable corporate performance, if the governance practices of Australian corporations are encouraged to develop and innovate to superior levels, rather than be held to unintended basic “common denominator” benchmarks, then all stakeholders of corporate Australia will be the ultimate beneficiaries.

    Australia’s good governance model

    In its simplest terms, corporate governance is the systems and processes by which corporations are governed, or in the terms of the ASX guidelines, “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.”

    In more refined terms, corporate governance comprises all the rules, systems, processes and relationships (formal and cultural), by which authority is exercised and controlled in corporations, and by which corporations and their people, assess and monitor risks and opportunities, and make decisions and implement action, to optimise performance consistent with the attainment of the corporation’s strategic objectives. This refined definition gives a greater “performance” focus to corporate governance than the more passive simple definition.

    Under the ASX guidelines, corporate governance manifests itself though a blend of principles, which are more substantive in nature, combined with a number of non-prescriptive recommendations, which are more procedural in nature, designed towards assurance of those principles, without prioritisation of either the more substantive principles or the more procedural recommendations.

    To tease out this blend of substantive versus procedural governance is instructive. In a business sense perhaps it is comparable to the difference between strategy and tactics.

    The primary substantive elements espoused within the ASX guidelines (howsoever described in the ASX guidelines) can be summarised to include:

    • Ethical and responsible decision making;
    • Transparency and accountability;
    • Integrity and timeliness in reporting;
    • Risk recognition and management;
    • Effective oversight of the executive or management; and
    • Reinforcement of basic fiduciary duties by directors (loyalty, no improper personal benefit, no unresolved conflict and no misuse of position).

    Most other elements espoused within the ASX guidelines, even some otherwise designated in the ASX guidelines as included in the eight principles, are more procedural in nature, including rules or recommendations:

    • Concerning the structure, composition and functionality of the board and board committees;
    • Drawing distinctions between executive, non-executive and independent directors, and their suggested roles;
    • As to principles and procedures for remuneration of directors and officers;
    • To assure independence of auditor engagement and service delivery; and
    • To assist in the delivery of the aforementioned substantive elements.

    No question is raised as to the primary substantive elements referred to above – these are fundamental and principled-based and are necessary to assure accepted notions of good corporate governance. Even they may not necessarily be exhaustive, or complete, as our society, and its continuing interface with the corporate and business worlds, may evolve over time.

    However, the procedural elements are considered less fundamental, and more tactical in nature, representing a means, but certainly not the only (or even preferred) means, by which the substantive elements of good corporate governance can be delivered especially in the context of a particular company, its business, its people, its strategic objectives and its performance.

    In particular, the introductory prefaces to the ASX guidelines clearly recognise the evolutionary and dynamic nature of good corporate governance practices: They state that:

    • Effective corporate governance encourages companies to create value, through entrepreneurialism, innovation, development and exploration, and provide accountability of control systems commensurate with the risks involved;
    • Corporate governance practices will evolve in the light of the changing circumstances of a company and must be tailored to meet those circumstances; and
    • There is no single model of good corporate governance.


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