A personal view Editorial

A disturbing element in the sagas of the HIH, One.Tel, Harris Scarfe and even the NRMA is the apparent disconnect between the board, the chairman and the CEO. 

When directors complain about being uninformed or misled about the actual state of a company’s affairs, the government, investors and shareholders have a right to question their role.

A disturbing element in the sagas of the HIH, One.Tel, Harris Scarfe and even the NRMA is the apparent disconnect between the board, the chairman and the CEO. When directors complain about being uninformed or misled about the actual state of a company's affairs, the government, investors and shareholders have a right to question their role. That the different roles of management and boards is little understood is evident in the French Revolution-style outcry occurring in the media where the subtleties of what actually happened are obscured by the populist cry of "off with their heads". Madame Defarge is alive and well. If the breakdown in communication between the board and management and corporate governance processes were restricted to just a few isolated incidents, it would be easy to dismiss them as aberrations. However, the common thread running through the corporate failures or near corporate failures over the past 10 years suggest otherwise. There is a growing belief that governance power has moved beyond the control of the board as a whole and now resides with the CEO or chairman.

In Capitalism for Tomorrow: Reuniting Owner-ship and Control (Capstone, Oxford, 2000), Allen Sykes, a former MD of Consolidated Gold Fields, says that the essence of any system of governance is that those to whom major powers are entrusted must be accountable to those whom they serve. "Management is not effectively accountable either to individual shareholders or to financial institutions and fund managers who are the intermediary agents of the ultimate shareholders," Sykes says. "As a consequence managements are essentially self-governing and self-perpetuating. Most governance power has passed to executive directors, particularly chairmen and CEOs.

"The latter effectively choose the non-executive directors, largely from their peers in other companies ... They also choose the auditors, the consultants for executive remuneration committees, and the fund managers for the corporate pension schemes which now own over a quarter of all equities ... This has led to ... abuses by executive directors, too often huge remuneration packages poorly related to performance and to takeover and mergers frequently driven by managements' motives rather than shareholders' interest."

A recent OECD study into the future of governance in the 21st century says that "two of the primary attributes of today's governance systems - the usually fixed and permanent allocations of power that are engraved in the structures and constitutions of many organisations; and, the tendency to vest initiatives exclusively in the hands of those senior positions in the hierarchy - look set to undergo fundamental changes". And it is the global market that is driving this change. Global stock market capitalisation is around $US35 trillion. More than 45 percent of all Australians own shares directly and almost all own shares indirectly through super funds. Australia has become part of what is termed the equity culture in which the health and well-being of corporations and capitalism is of immediate concern. This in turn puts pressure on governments to adopt appropriate and workable regulatory regimes and it puts pressures on boards to act in the interests of all shareholders. This immense shareholder growth has led to increased shareholder activism and broadening of director and board responsibility to include the interests of stakeholders as well.

However, the accepted basis of the board/management relationship is predicated on the assumption that directors are the company's "stewards" who look after the interests of shareholders and stakeholders by monitoring and guiding management. This arrangement may have been appropriate when shareholder interests were restricted to one or two large shareholders but the modern-day shareholding make-up is far more diverse. When this relationship fails then it is inevitable that the voluntary code of conduct that binds this relationship between boards and management together will come under greater scrutiny. Parliament has already expressed concern on the level of shareholder activism of institutional shareholders. Excessive executive remuneration is a constant refrain. There are suggestions that recent corporate failures may have been partially due to the lack of auditor independence. If the old forms of corporate governance are proving ineffective then it is time to revisit the models upon which they are based and revise them to bring them into line with 21st century practices.

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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.