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The Australasian governance challenge - our old Hilux vs their new Volvo

01 July 2014

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This article first appeared in the June/July issue of Boardroom magazine.

Australia is making a serious investment in lifting the quality of its governance culture and will enjoy a competitive advantage against New Zealand unless we smarten up our act – and soon.

The turning point came with the formation of the ASX Corporate Governance Council in August 2002, comprising all of the relevant industry and sector organisations.  The Council put out its first Corporate Governance Principles and Recommendations booklet in 2003, updated it in 2007 and has just released its latest update after an extensive public consultation that began in August last year and attracted 69 submissions. 

The new guidance, consisting of eight principles with 29 supporting recommendations, will take effect for listed companies next month, with application in their first full financial year after 1 July 2014. 

It is not prescriptive but any failure to follow a recommendation must be identified and explained on an “if not, why not” basis. Our nearest equivalent to the ASX publication is the handbook put out by the (now defunct) Securities Commission in 2004 with its nine principles and 48 guidelines. 

Despite the ten year age difference between the two publications, there is a very large measure of agreement in the advice they offer.  That is to be expected given that the basic constituents of good governance are essentially timeless and also given the strong cultural resonances between Australia and New Zealand.  But, where there are differences, the more contemporary Australian product is superior - more forward-looking, more reflective of the lessons of the Global Financial Crisis, more relevant.

To use a motor analogy, they’re driving a fuel-economic new model Volvo XC90 with all the latest gadgetry – Blind Spot Information and Intelligent Driver Information systems, crumple zones at front and rear, a safety cage etc.  And we’re in a 2004 Toyota Hilux – solid and reliable but a bit tatty and with a few kilometres on the clock.  They’ve got GPS.  We’ve got a map in the glove box.

Some comparisons

The regular updating provides a natural opportunity to refresh the ASX Listing Rules.  So, for example, the Council was able to assume “supporting changes” to the Listing Rules in recommending that listed issuers make their governance disclosure on their website rather than in their annual reports (as a means of streamlining the annual report).

Equally, the Council has strengthened its gender diversity guidance by stating that, where organisations choose to report progress in terms of the respective proportions of men and women on the board and in senior executive positions, they should disclose how they have defined “senior executive” for this purpose. 

The Securities Commission handbook is silent on the issue of diversity and the NZX diversity rule, which was introduced on July 2012, has not been changed since and is weaker than the Australian version. 

The Australians are also beginning to contemplate a wider approach to diversity encompassing matters of age, disability, ethnicity, marital or family status, religious or cultural background, sexual orientation and gender identity - although the Council is at this stage presenting these as “suggestions” rather than “recommendations”.

Another major point of difference is that the Australian advice is much more preoccupied with the need proactively to manage risk.  Boards are urged to establish a dedicated risk committee, charged with developing a comprehensive risk management strategy which is to be reviewed at least annually.

This framework should identify any material exposure to economic, environmental and social sustainability risks and how these will be managed.

The other innovations in the 2014 document reflect the “great comfort” that security holders derive from the appellation “independent director” and the importance that this not be “applied lightly”.

Length of service has been added to the factors for determining independence and it is recommended that boards regularly assess whether a director who has served for more than 10 years may have become too close to management to be still considered independent.

Both the ASX and the NZ Listing Rules, and both the Securities Commission and the Council’s governance guidelines, state that the roles of chairperson and chief executive should not be held simultaneously by the same person in a listed company. 

The Securities Commission, however, is much more nuanced over whether the CEO should go on to chair the board, saying that - with New Zealand’s relatively small pool of qualified and experienced directors - there is a risk that seeking independence at the cost of all else will lead to missed opportunities to appoint the best talent. 

But surely the relevant measure is not size but proportionality and one wonders if the mood among shareholders is still so tolerant after the finance company collapses and the excesses of the GFC.

Obviously, given the large measure of commonality between the two jurisdictions, we can borrow from the Australians when the Financial Markets Authority updates the Securities Commission publication.  But the better solution, surely, is to replicate the Australian model.

We need to set up a New Zealand version of the ASX Corporate Governance Council – a broad-based organisation capable of providing a comprehensive guide to boards which captures best international practice adapted to the New Zealand context.

Member organisations of the Council are: Actuaries Institute, Association of Superannuation Funds of Australia, ASX, Australian Investor Relations Association, Australian Council of Superannuation Investors, Australian Institute of Company Directors, Australian Institute of Superannuation Trustees, Australian Shareholders Association, Business Council of Australia, CPA Australia, Financial Services Council, Financial Services Institute of Australasia, Governance Institute of Australia, Group of 100, Institute of Chartered Accountants Australia, Institute of Internal Auditors Australia, Institute of Public Accountants, Law Council of Australia, Property Council of Australia and the Stockbrokers Association of Australia.  

This article was written by Roger Wallis, who specialises in corporate and securities law.

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