Size does matter when its comes to dealing with corporate governance issues
Over a two-month period Ernst & Young surveyed 600 members of AICD to measure progress on a number of corporate governance issues. Directors were asked to rank how well their audit, nomination and remuneration committees meet best practice on several criteria.
The results were separated by size of companies, according to revenue (Revenue >$1billion, Revenue $101m - 999m, Revenue $0 - 100m).
Ernst & Young partners have evaluated the AICD members' responses and noted many striking differences and some surprising similarities across the range of respondents.
What is not surprising is that large companies can handle any new regulations or rules while smaller companies struggle and complain about the extra costs involved.
While the results are predictable they are also a wake-up call to the Federal Government that the one-size fits all attempts at corporate regulation and corporate governance rules are inappropriate.
Inevitably any legislation is framed by lawyers from the big end of town to suit the practices of the larger companies and the rest of the business sector has to play a costly catch-up game. The compliance surrounding the GST is a prime example.
The results of the survey show that larger companies are more in tune with what is currently regarded as best practice, in regard to audit, nomination and remuneration committees.
Having the same people on several committees has implications for the workloads of smaller companies' board members. However, a move towards recruiting more independent directors will raise the costs of running smaller companies.
The board very often sets non-executive directors' remuneration on the advice of the remuneration committee (75%). For organisations with market capitalisation above $1 billion, 58% of committees obtained independent advice from remuneration consultants, compared to 33% of the organisations below $1 billion market capitalisation.
Overall, almost 50% of the companies in this survey have a strong business continuity plan with 42% describing themselves as adequate. Clearly there is room for improvement for a number of companies in this important area of risk management.
Overall, having relevant skills is seen as much more important that background, or longevity - time spent on boards. New and aspiring directors with the right skills will nevertheless need to understand the business.
Under-performing board members are finding it harder to hide. Merely having been on the board for a number of years, or holding a number of board positions does not seem to be influential in calculating non-executive directors remuneration.
Companies are starting to look for people with expertise, rather than from a particular background.
At the same time existing directors believe they are not being paid enough for the risk associated with the role.
It is almost inevitable, given these pressures that non-executive directors' fees will need to increase.
One of the many marked differences in responses between the largest and smallest companies is in the area of audit committees.
For example, 100% of large companies responded that they had at least three non-executive directors on their committee, and a majority were independent directors.
The response for small companies (47%) raises the question of whether larger companies have a better understanding of requirements, or whether it just a matter of having the resources to appoint non-executive directors on to committees to get the balance that is needed to meet best practice criteria.
However, it should be noted that above might also point to the fact that the concept of "independent" is subject to potentially variant interpretations and can mean different things to different people.
Overall, it can be said the findings indicates that smaller companies are struggling with independence issues. The quandary for smaller companies is how to get access to potential new non-executive directors. Consequently, word of mouth is a common option for smaller companies, unwilling to pay executive search firms' fees.
The chairman must get involved in ensuring the company gets the right mix of people to ensure a functional board. There may also be a dilemma of a cost-benefit trade off in having a large number of directors for a small organization.
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