What is corporate governance?
Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised.
Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved.
Fundamental to any corporate governance structure is establishing the roles of management and the board, with a balance of skills, experience and independence on the board appropriate to the nature and extent of company operations. There is a basic need for integrity among those who can influence a company's strategy and financial performance, together with responsible and ethical decision-making.
Meeting the information needs of a modern investment community is also paramount in terms of accountability and attracting capital. Presenting a company's financial and non-financial position requires processes that safeguard, both internally and externally, the integrity of company reporting, and provide a timely and balanced picture of all material matters. The rights of company owners, that is shareholders, needs to be clearly recognised and upheld.
Every business decision has an element of uncertainty and carries a risk that can be managed through effective oversight and internal control. Keeping pace with the modern risks of business and other aspects of governance requires formal mechanisms that encourage enhanced board and management effectiveness.
Rewards are also needed to attract the skills required to achieve the performance expected by shareholders. The impact of company actions and decisions is increasingly diverse and good governance recognises the legitimate interests of all stakeholders.
Underlying values of corporate governance
The following ethical principles underlie corporate governance:
The essence of good governance is accountability.
All information should be open to interested parties.
The exceptions to this principle are when such information is:
- private intellectual property which might be exploited to the detriment of the legal owners;
- is of a personal nature and not of organizational relevance; or
- disclosure is not in the national interest
Fairness and balance
All transactions should be made in such a way as to minimize inequalities of power.
All statements and actions should be made honestly and accurately, so that they maybe relied upon.
This principle also notes that selective presentation of information, or the suppression of relevant information, is an act of dishonesty.
Dignity
All dealings with others should be characterized by dignity of treatment. While people may be used for various permitted purposes, such as employment, where there is a conflict of purpose the action that fosters human dignity should prevail.
Legal
Shareholders, customers, employees and other shareholders expect corporate bodies to:
- have respect for the law, and an intent to abide by the law and its intent (whether it be criminal law, corporate law, environmental law, OHS law, consumer law etc.); and
- deal honestly with all stakeholders to whom they have a duty of care under the law or accepted conventional of behaviour
All organizational dealings should be done in a spirit of goodwill. Goodwill is recognized as an essential component of ensuring that the good intention of ethical behaviour is not subverted.
Not all cases involving ethical dilemmas will necessarily invoke all of the above principles. Where the solution of an ethical dilemma involves the application one ethical principle then the resolving decision must still be consistent with the other principles.
An ethical organization should be benchmarked by the presence, at least, of:
- a formalized Code of Conduct;
- a committee that oversees the Code in that it hears and attempts to resolve real cases, and also monitors and suggests amendments to the Code;
- a training scheme for the fostering of ethical conduct; and
- regular reporting to the responsible board of the organization
Characteristics of effective corporate governance
Decisions must be open and transparent, easy to follow, include reasons, and be communicated appropriately.
Good policy and accountability systems will allow councillors to be confident that the needs of constituents are being met, and negate the need to bring day-to-day issues to council. For example, if there is an effective system for replacing a stolen wheelie bin, councillors can be more comfortable focusing on the overall waste management strategy.
The community, council and management must be able to measure and report council's performance against its stated objectives and budget.
Misconduct and corruption will be minimised through identification of risks and appropriate controls.
Effective corporate governance will enable council to meet the highest standards of public accountability and achieve better outcomes for the community.
How is good corporate governance achieved?
What constitutes good corporate governance will evolve with the changing circumstances of a company and must be tailored to meet those circumstances. Best practice must also evolve with developments both in Australia and overseas. There is no single model of good corporate governance. Each principle of good corporate governance will be explained in detail, with implementation guidance in the form of best practice recommendations.
Why is it important to Australia?
Demonstrably good corporate governance practices are increasingly important in determining the cost of capital in a global capital market. Australian companies must be equipped to compete globally and to maintain and promote investor confidence both in Australia and overseas. In an examination of our corporate governance practices, Australia starts from a position of strength. However, it is important that we continue to review those practices to ensure they continue to reflect local and international developments and position Australia at the forefront of best practice.
The lack of fair and transparent corporate governance processes often leads to abuse and dilution of shareholder rights as well as preferential treatment of domestic stakeholders. Weak corporate governance practices also inhibit growth of foreign and domestic investment.
The Recommendations are prefaced by an important qualification which we believe should remain a paramount consideration:
- The best practice recommendations are not prescriptions. They are guidelines, designed to produce an efficiency, quality or integrity outcome. This document does not require a 'one size fits all' approach to corporate governance. Instead, it states aspirations of best practice for optimising corporate performance and accountability in the interest of shareholders and the broader economy.
The challenge will be the extent to which a company's tailored (non-conforming) corporate governance practices can be communicated effectively to external stakeholders and the managed funds industry in its Annual Report as part of the 'comply or explain' regime that will apply under the ASX Listing Rules.
The risk is that superficial analysis by the increasing number of external corporate governance commentators and ratings organisations will not give sufficient recognition to a company's own informed assessment of its circumstances.
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