John Price revisits the fundamental principles of good corporate governance.
In recent years, discussions about corporate governance seem to have been dominated by executive remuneration.
However, as most directors appreciate, there is far more to corporate governance than that.
The Australian Securities Exchange (ASX) Corporate Governance Council’s recent consultation on updating its Corporate Governance Principles and Recommendations has focused attention on corporate governance more generally.
In its preamble to the OECD Corporate Governance Principles, the OECD says: “Corporate governance is a key element in improving economic efficiency and growth as well as enhancing investor confidence...
“Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.
“Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.”
While corporate governance is not solely a board’s responsibility, directors clearly play a role in key aspects of governance.
The role of the director
Fundamentally, the principles of good governance are familiar to all good directors.
Good governance goes hand in hand with a director’s role. It may be a manifestation of how a director’s duties are fulfilled and a framework to support directors in fulfilling these duties.
Corporate governance is concerned with issues such as:
- The quality of information flow within the company – this supports the board’s oversight role in the company.
- Dealing with conflicts of interest, transparency and accountability to shareholders – a director has a legal duty to act in good faith and in the company’s best interests.
In practical terms, it is easier for a board to make a decision about the costs and benefits of a particular strategy if the company already understands its risk appetite and has processes in place to assess strategic risks.
ASIC encourages directors not to regard corporate governance as mere compliance box ticking.
Rather, good governance should be part of a director’s mindset when discharging his or her functions.
In short, directors should ensure any company they are involved with has a culture of good governance.
Corporate governance principles and recommendations
The Corporate Governance Principles and Recommendations rightly recognise that for boards the oversight of risk is an important function.
The ASX Corporate Governance Council is proposing that Recommendation 7.2 be revised to state that boards review the risk framework with management at least annually.
It is also suggesting that listed entities set up risk committees or otherwise disclose their process for overseeing risk.
Being able to set the company’s risk appetite and oversee the management of risk are skills that all directors should possess.
The council is also proposing, among other things, that the principles and recommendations relating to the criteria for a director to be considered independent be changed, including the addition of a tenure criterion.
These principles and recommendations help provide guidance that has been developed through a broad industry-based forum, in which the Australian Institute of Company Directors has a role.
Corporate governance practice and expectations will always evolve and it is important for the capital markets, and society more generally, that there is continuing discussion about what good corporate governance means today in Australia.
Of course, it is not only regulators who are interested in companies’ governance practices.
Investors are also interested in how companies are governed, with institutional investor expectations playing a role in the development of governance practice.
In the UK, a Stewardship Code was introduced imposing obligations (on a “comply or explain” basis) on institutional investors to exercise their vote and disclose their voting policies and activities.
This code was introduced to encourage a dialogue between these investors and the company.
The current Corporations and Markets Advisory Committee (CAMAC) reference on The AGM and Shareholder Engagement has raised the role of institutional shareholders in Australia for discussion.
In Australia and overseas, there has been an increased focus on corporate governance in recent years.
But the fundamental concepts of good governance – such as integrity, transparency, accountability and acting for a proper purpose – have changed little over the years.
ASIC encourages directors to keep these concepts top of mind. They should continue to think carefully about these concepts and to promote a good governance culture as a way of enhancing effectiveness
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