CEO Report: AICD Review

Corporate governance must be dynamic. Few would deny that the spate of high profile corporate collapses which we have experienced this year raise questions about Australia's corporate governance practices.

While there are questions to be answered as to whether these collapses were the result of bad corporate judgments, failure to read the market correctly, flawed business models or merely local or global economic circumstances, individual directors and boards will be increasingly scrutinised as to their role in protecting and enhancing the performance of the companies which they serve. At its simplest level corporate governance is the system by which organisations are directed and controlled. However, this definition does not adequately convey the dynamic nature of effective corporate governance. Contemporary corporate governance is a blend of legal, regulatory, board and management practices which interact to ensure long-term economic corporate value for shareholders while respecting the interests of other stakeholders and the broader community.

The principal characteristics of corporate governance are:

• transparency, i.e. disclosure of relevant financial and operational information and internal processes of management oversight and control;

• protection and enforceability of the rights and prerogatives of all shareholders; and

• directors capable of independently approving the corporation's strategy and major business plans and decisions, and of independently hiring management, monitoring management performance and integrity and replacing management when necessary.

Under the Corporations Law a director has a duty to :

• act in good faith in the best interests of the company

• act with care and diligence

• avoid conflicts of interests

• prevent the misuse of company information, and

• act in the interests of creditors if there is a risk of insolvency.

In all respects the duties of a director are shared by officers of the company, except the personal liability for trading while insolvent - a curious carve out. While directors have both specific and general duties and responsibilities under the Corporations Law, concepts of corporate citizenship and the "triple bottom line" also impact the way in which directors discharge their duties.

Corporate governance practices are constantly evolving to meet changing conditions. There is a danger that regulatory prescription of corporate governance will constrain the capacity of progressive organisations to be adaptable and flexible, within an overall regulatory framework, to achieve better corporate performance. The AICD supports the development of "best practice" guidelines to assist boards to utilise improved governance practices to generate long-term economic profit to enhance shareholder value. Our Best Practice Guide for Audit Committees and 50 Matters to be considered before signing a company's Financial Statements are excellent examples of how the AICD is promoting improved corporate governance standards amongst Australian organisations. The AICD is currently undertaking a review of all units in the Company Directors Course to ensure that the course material is meeting both practising directors' and aspiring directors' needs. The pages of Company Director are rich in information and advice on the current issues which directors need to consider in undertaking their role. By promoting greater professionalism among Australian directors the AICD seeks to ensure that regulation which is very prescriptive and rigid in its application is minimised to enable boards to adapt to rapidly changing local and global opportunities to create long-term wealth for shareholders.

Companies were established to enable investors (i.e. shareholders) to undertake ventures which entailed risk. By effectively managing risks successful management creates shareholder wealth. The processes of good corporate governance seek to improve company performance in managing risk while enhancing shareholders' wealth and value in the long term. The AICD accepts its role in encouraging greater professionalism of directors to support the current high standards of corporate governance which generally prevail in Australia.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.