29 January 2008
Key Points:
An Australian survey has found that good corporate governance practices can deliver real benefits to a business at a reasonable cost.
The Changing Roles and Responsibilities of Company Boards and Directors is a report produced by the Centre for Corporate Governance of the University of Technology, Sydney. The report is the result of a three-year study into the changing roles and responsibilities of company boards and directors in the wake of the implementation of CLERP 9 and the Australian Securities Exchange Corporate Governance Principles.
This article summarises some of the main points made in the report.
Study aims and methodology
The aims of the research included:
The study was carried out between 2005 and 2007, and involved interviews with company secretaries and directors of 67 companies. The majority of the companies was listed on the Australian Securities Exchange and 24 of the companies were in the ASX 100. Eleven of the companies surveyed were not listed on the ASX, or foreign-owned. The interviewees were asked questions about how their company implemented corporate governance and about their companies' corporate governance practices.
The companies surveyed had responded positively to a request for an interview, and the Report suggests that:
"... companies responding positively to a request for interviews were likely to be more interested in corporate governance, and confident of their competence in this, and in the standard of corporate governance they had achieved."
Main findings
Some of the main findings of the study were that:
A majority of companies have formal risk management systems
The majority of companies had set up the committees suggested by the ASX Principles. At least 50 percent of the listed companies in the study had a committee to deal with risk management, though most had a combined audit and risk management committee, rather than a separate risk management committee.
For many companies, the introduction of a formal risk management system was triggered primarily by Principle 7 of the ASX Principles. (Principle 7 states that companies should establish a sound system of risk oversight and management and internal control.) Other companies responded to Principle 7 by refining and formalising existing systems.
Formalisation of corporate governance procedures
CLERP 9 and the ASX Principles have not greatly changed the way companies are governed. The majority of companies believed that they already had good corporate governance practices prior to the introduction of these regulatory initiatives. What the initiatives have done is to cause companies to document and report on their corporate governance procedures. The comments of a number of interviewees suggested that this process of formalisation leads to some enhancing and strengthening of governance.
A cultural change by boards
Many study participants noted there was now an increased awareness by boards of governance and its importance. A small number of participants commented that this change in attitude by the board was starting to filter down through the organisation.
Risk aversion and personal liability
Survey participants also mentioned some negative changes. The main concerns were that:
In turn, the "governance as a legal defence" approach was seen as possibly leading to the creation of a system relying on "ticking the boxes" rather than genuine compliance.
Cost and burden of corporate governance
As the Report notes, one of the most surprising aspects of the research was the lack of complaint about costs. The report suggests that a possible reason for this is that the self-selecting nature of the survey means the survey sample is skewed towards companies that view corporate governance favourably. The most common cost mentioned by survey participants was loss of time - the use of time on corporate governance that could otherwise have been used for other activities.
In addition, few interviewees expressed negative views about the Australian corporate governance regime, particularly when compared with the United States Sarbanes Oxley Act 2002. The report concludes that "The fact that there was little compliant about the ASX Principles suggests that they have, for the most part, succeeded in finding the right cost-benefit ratio."
Comment
Despite the self-selecting nature of the survey, the results demonstrate that good corporate governance practices can deliver real benefits to a business at a reasonable cost. They also seem to endorse the flexibility inherent in the ASX Principles as being preferable to the blackletter law approach of the Sarbanes Oxley Act.
On a more negative note, it seems the benefits of good corporate governance practices are yet to be recognised by some mid-sized companies listed on the ASX. A survey of 150 "mid-caps" (companies ranked 251-400 based on market capitalisation as at 31 December 2006) found that the corporate governance standards of more than 40 percent of them were inadequate. The BDO Kendalls Mid-Cap Corporate Governance Report 2007 is based on the annual report disclosures of these companies and was prepared by the University of Newcastle. Other features of the report included findings that 14.7 percent of the companies surveyed did not have a code of conduct and 14 percent did not have a risk management policy.
Five companies that participated in the UTS study were also surveyed by the University of Newcastle. Perhaps not surprisingly, four of these five achieved a rating of "good" (3.5 or more out of five) or better.
For further information, please contact Randal Dennings.
