Long-term reform and good governance

The Australian Institute of Company Directors’ Governance of the Nation: A Blueprint for Growth seeks to instigate long-term reform and good governance across the nation.

The Blueprint: At a glance

The Australian Institute of Company Directors (AICD) has released an important policy document, Governance of the Nation: A Blueprint for Growth , which sets an agenda for Australia and its political leaders based on well-established principles of good governance:

• A focus on the longer-term perspective, avoiding short-termism in decision-making.
• Creation of long-term value, for the nation and our community overall.
• Strategy and vision to benefit all stakeholders.

The AICD’s proposals aim to meet a timing and impact test, and if implemented over the next two years, should deliver a substantial productivity, growth or governance benefit for the nation.

Drawing on member insights gathered over successive years through the Director Sentiment Index , the AICD has set out a roadmap for sustainable growth with options for immediate, meaningful action by government under six key areas:

1. Governance of the nation.
2. Fiscal sustainability.
3. Innovation and entrepreneurialism.
4. Partnership with not-for-profits.
5. Human capital.
6. National infrastructure.

Reform Objective 1: Reforming NationalGovernance

The short-termism driving national policy debates is a significant issue for the nation. It impacts public confidence in the system of government and the quality of decision-making. Eighty-five per cent of the AICD’s members rated the quality of public policy debate as “poor” in the AICD’s April 2015 Director Sentiment Index survey.

No competent board – public, private or not-for-profit – would accept the standard of governance that applies to our system of national government. This is not a simple criticism of political parties or individuals, past or present. Rather, it reflects the need for structural changes to support better long-term decision-making at all levels of government.

The short, variable nature of federal parliament – our last 15 federal governments have served an average of just two and a half years – is a major challenge to effective policy implementation. The lack of a clear Council of Australian Governments (COAG) agenda with a forward-looking focus is another. While the AICD is pleased to see progress on senate electoral reform, further major changes are needed.

Recommendations

• Fixed, four-year terms for the federal government, introduced through a 2017 referendum.
• Reinvigorate COAG with a clear medium-term reform agenda, transparent, regular public reporting, and consideration of an independent chair and secretariat.
• Senate electoral reform as the first step in increasing public confidence in electoral systems.

Reform Objective 2: Fiscal Sustainability

While both major political parties promise a return to balanced budgets, these commitments have yet to translate into results. Without reform, the fiscal gap will continue to widen, worsening the structural deficit.

The nation’s fiscal sustainability is a vital medium-term priority. Two-thirds of the AICD’s members believe the government should aim for a return to surplus in a five- to 10-year period. Difficult decisions must be taken now if this target is to be met.

The nation’s fiscal sustainability is too complex a task to be defined as a binary choice between a “spending” or “revenue” problem. A range of strategies – most importantly, reforms to drive long-term productivity and economic growth – are critical to securing a sustainable economic base for the nation.

Recommendations

• Fiscal restraint and reform to reduce overall government spending to below GFC levels, as a percentage of GDP, by 2020.
• Tax reform to drive economic growth, with a lift in the GST rate, cuts in personal and company tax rates, reforms to superannuation and capital gains tax, and incentive payments to states and territories for state tax reform.

Focus on: Tax reform

The AICD has set three objectives for tax reform:

• Boosting national prosperity and growth.
• Improving fairness in the tax system overall.
• Lifting Australia’s competitiveness as a global economy.

The AICD has asked Deloitte Access Economics to consider the impact of changes to the tax mix against these three objectives, and is setting out a roadmap for reform (see table on page 20).

Taken as a package – and including action by state governments as well as the federal government – the AICD’s reform scenario would deliver a long-term “prosperity dividend” of almost $20 billion to the nation.

Reform Objective 3: Innovation And Entrepreneurialism

For Australia, dealing with stagnating productivity growth and an economy in transition from the latest resources boom, innovation-led growth is essential to our future prosperity.

The National Innovation and Science Agenda (NISA), launched by the Turnbull Government in December 2015, makes a strong start, but more targeted and long-term action is needed.

Directors understand the role that innovation plays in driving Australia’s growth. In the AICD’s November 2015 Director Sentiment Index survey, our members included a national innovation and industry strategy as a leading priority for the transitioning economy.

Recommendations

• Bipartisan national plan to take Australia from “lag” to “lead” on global innovation indicators.
• Fast-track national insolvency reforms and broader “safe harbours” to combat risk-aversion.
• Expand the national focus on talent and skills, with a focus on Science, Technology, Engineering and Mathematics (STEM), to support workforce skills.

Reform Objective 4: Partnerships With Not-For-Profits

The not-for-profit (NFP) sector is large and diverse, and plays an important and expanding role in the social infrastructure of our nation. Together, NFPs employ over one million Australians and charities alone have a combined annual income in excess of $100 billion.

NFP organisations navigate a changing operating environment while managing the expectations of stakeholders from government, regulators and the community.

This is a demanding environment for NFP boards and makes NFP governance unduly challenging.

The AICD is calling for government reforms that will strengthen and improve the landscape for NFP organisations and support a high standard of governance, outcomes and efficiency.

Recommendations

• Increase funding certainty, with a best practice of five-year cycles and six-month notice periods.
• Greater regulatory certainty, with national harmonisation driven by COAG and the Australian Charities and Not-for-profits Commission (ACNC).
• Increase focus on governance in agreements.

Focus on: AICD and NFP sector

The majority of our members are involved in the governance of NFPs, making the sector’s regulatory and governance environment an important focus for the AICD.

Governance in the NFP sector continues to evolve and mature. Record numbers of NFP directors and executives are attending the AICD’s courses and events, demonstrating the sector’s commitment to governance practice. As the challenges the sector faces become more complex, capability in governance must continue to improve.

In the AICD’s 2015 NFP Governance and Performance Study directors from across the NFP sector called for a more collaborative and mature relationship with government. This is not a conversation about funding, but a desire to work in partnership.

Reform Objective 5: Human Capital

Directors understand that Australia’s true competitive advantage lies in its people. An engaged, skilled and flexible workforce is critical to sustainable economic growth.

Rapid changes impacting the workplace – such as technology-driven changes to the nature of work and evolving expectations about employment – are key strategic concerns for the boards of all Australian businesses, large and small.

The same strategic focus is needed by our governments if Australia is to make the most of our smart, ambitious people and embrace the opportunity for growth.

The AICD believes significant wins can be delivered from a focus on boosting workforce participation, and improving workplace flexibility, as national reform priorities.

Recommendations

• A national strategy to reduce the gender gap in workforce participation by 25 per cent by 2025.
• Simplification of national award system, improved governance for the Fair Work Commission, and reform of penalty rates (as recommended by the Productivity Commission).

Reform Objective 6: National Infrastructure

Effective and efficient infrastructure is essential to support our nation’s productivity and growth.

The AICD is encouraging strong COAG engagement with the findings and recommendations of Infrastructure Australia’s Infrastructure Plan and its focus on long-term national priorities. Greater coordination between governments is needed to deliver a pipeline of productive infrastructure that aligns with the nation’s longer-term capacity and growth needs.

However, Australia’s infrastructure needs cannot be funded by public investment alone. Well-regulated market-based solutions are needed to fund and deliver productive infrastructure.

Recommendations

• COAG commitment to a 15-year national infrastructure plan, drawing on the work of Infrastructure Australia.
• Nationally consistent benchmarks for project governance, reporting and cost/benefit analysis.
• Continued prioritisation of asset recycling to fund new infrastructure investment.

Focus on infrastructure

Directors have consistently ranked infrastructure as the most important long-term issue for government over the life of the AICD’s Director Sentiment Index . Ninety per cent of the AICD’s members consider the current level of national infrastructure investment to be too low.

As the Australian Infrastructure Audit (2015) highlights, without action on infrastructure, increasing congestion and bottlenecks will test Australia’s productivity and quality of life.

The Productivity Commission has noted that significant questions continue to be raised about the efficiency, governance and cost-benefit methodologies applying to infrastructure planning and investment.

FROM THE AICD

After 25 years of uninterrupted economic growth Australia has a strong foundation on which to build a prosperous future. But just as boards adjust and update their strategy as circumstances change, so too must our national policymakers.

It is time for essential debates on the decisions that will maintain our country on a path of continued growth and prosperity.

It is important for the AICD to engage on these national issues. The lack of progress on national reform is a concern for the AICD and our members.

Over the past five years the AICD’s bi-annual Director Sentiment Index survey has highlighted the issues that directors believe are priorities for government. Our 38,600 members govern organisations that reflect a broad section of the Australian community, from the not-for-profit sector to private business and listed companies.

Our Blueprint for Growth sets out solutions that will provide a foundation for better economic and social outcomes for all Australians, and it can be achieved – our recommendations will deliver real and lasting benefits, if implemented over the next two years.

We encourage government, opposition, minor parties and other stakeholders to consider our recommendations as part of an open discourse that sets aside unduly partisan positions in favour of balanced, long-term outcomes.

John Brodgen, MD & CEO
Elizabeth Proust AO, Chairman