The upcoming release of the draft of the revised Principles of Good Corporate Governance from the ASX Corporate Governance Council (CGC) is a good time to reflect on the value of principles such as these. I had not seen the updated draft when this column was written, but it was due out by the date of publication.
Governance and the revised ASX Principles
Companies have boards of directors because someone has to be the boss of the CEO, and to oversee what the company does, on behalf of the shareholders. The shareholders themselves can’t possibly get together to do this on a regular basis, especially when there may be a million or more of them, as there are for instance with Telstra.
There is a crucial problem inherent in the regulation of corporate governance: would-be regulators know very little about what actually goes on inside the boardroom. At any board meeting, directors might consider a possible investment or a change of business strategy or might even be shaping up to replace the CEO. By their nature, discussions of matters like these have to be completely private. Consequently, the regulators fall back on externally visible factors like how often a board meets, what committees it has and whether the directors appear to have too close a connection with the management.
Despite the obvious limitations of trying to regulate what goes on inside the box by how it looks on the outside, some of the sets of principles of governance put forward by regulators like APRA and associations of major investors have become very specific and in some cases very detailed.
Disclosure by companies about how they meet the principles of governance ought to be seen as indicative of the trustworthiness of their stewardship of the shareholders’ investment. A company that scores poorly against the ASX Principles may well not have its house in order. On the other hand, one that complies with all provisions could still make poor decisions, or be overwhelmed in its business marketplace by a more powerful competitor. Compliance with the Principles might be seen as a necessary condition for a company to be of investment grade, but not a sufficient condition for it to be a top financial performer.
It is important that governance principles really are principles. There is little point in a welter of detailed and prescriptive rules if the real aim is to help investors judge whether to trust the governance structure of a company. Detail may even be counterproductive if it leads to mindless box-ticking, where a company is evaluated simply by its conformance with a long list of specific requirements. Like HIH, a company could get the ticks in the boxes but still be a disaster waiting to happen.
Companies are extraordinarily diverse in their size, their nature and what they do. The system of governance principles has to be universal and able to cope with this diversity. It should therefore be based on broad principles and should have a mechanism for accommodating exceptions. The ‘comply or explain’ or ‘if not, why not’ rule in the first edition of the ASX Principles (which is well established in many countries overseas) is such a mechanism. AICD is very much in favour of it. As we have said before, we think the system adopted by the financial regulator APRA of accommodating variations through confidential deals is an extraordinarily bad alternative.
We urge our members to look very carefully at the new draft Principles from the ASX CGC. It should be the main framework to guide the governance of companies in Australia for years to come – for unlisted companies and non-profit bodies as well as the listed companies that are its prime target. The CGC is providing an opportunity for comment. AICD would be interested in any improvements our members feel are needed and would like to publish their comments in this journal.
Regulation of corporate governance under the benign, flexible and pragmatic system of the ASX CGC works well. It does not constrain boards from adopting the practices they think are appropriate for their companies and allows them to let the market be the judge of whether they are right. We urge companies to view the new Principles positively and to be rigorous in their ‘if not, why not’ disclosures.
If corporate Australia does not make this system work, the most likely alternative is regulation by ASIC. Because of what ASIC is, this would inevitably be less flexible and based more on black-letter rules. APRA has shown us what this could be like, and it is a very unattractive alternative to the ASX CGC and Principles.
Ralph Evans FAICD
CEO, Australian Institute of Company Directors
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