The Changing Roles and Responsibilities of Company Boards and Directors

Final Report released 27 September 2007. (Download Report. (2.6Mb PDF). For the Interim report, click here

Introduction

This report offers the highlights of a three year study into the changing roles and responsibilities of company boards and directors, a joint project funded by the Australian Research Council together with Dibbs Abbott Stillman Lawyers. The UTS Centre for Corporate Governance is the only multi-disciplinary Centre of its kind in Australia, drawing on the expertise of both the UTS Business and Law faculties spanning finance, economics, accounting, management and law. The Dibbs Abbott Stillman Group is a leading national association of local law firms with more than 500 legal and professional staff. They advise private enterprises, publicly listed companies and government authorities on all aspects of corporate governance, assisting them to achieve best practice, transparency and high standards of probity and integrity in their business operations.

The research project was designed to survey good corporate governance practice in Australia and compare this with international practice in the UK, USA and other countries. Over the last ten years there has been a world-wide drive to raise standards and practices of corporate governance led by international agencies including the OECD, IMF, World Bank, UN, and ADB, as the understanding was conveyed that high standards of corporate governance are essential for business accountability and performance, and for market integrity. With the publication of the revised Principles of Corporate Governance in 2004 the OECD developed the definition of corporate governance to include the relationships, context and benefits of good governance:

"Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth (OECD 2004:11)"

Accountability and Performance

A tension between accountability and performance has always existed in corporate governance, but in view of the current inclination to identify corporate governance as a break on entrepreneurship and performance, it is worthwhile emphasising that at the origins of the present reform movement with the Cadbury Report on The Financial Aspects of Corporate Governance (1992) the first words of the Report state the need to balance flexibility and accountability:

"The country's economy depends on the drive and efficiency of its companies. Thus, the effectiveness with which their boards discharge their responsibilities determines (the country's) competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. That is the essence of good corporate governance. (1992:11-1.1)"

The ASX Corporate Governance Council in the Principles (2003) set forward a definition which clearly captures the sense that corporate governance can facilitate and support entrepreneurship and innovation: "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 optimized. 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 (2003:3)". If corporate governance is to encourage entrepreneurship and innovation, there must be the possibility of innovating new modes of corporate governance, and there are problems involved in national and international policy-making appearing to advocate a one-size-fits-all prescription for corporate governance. Indeed the essential dynamism of corporate governance was fully recognised in the OECD Business Advisory Group’s report that informed the original OECD Principles:

"Entrepreneurs, investors and corporations need the flexibility to craft governance arrangements that are responsive to unique business contexts so that corporations can respond to incessant changes in technologies, competition, optimal firm organization and vertical networking patterns. A market for governance arrangements should be permitted so that these arrangements that can attract investors and other resource contributors - and support competitive corporations flourish. To obtain governance diversity, economic regulations, stock exchange rules and corporate law should support a range of ownership and governance forms. Over time, availability of 'off the shelf' solutions will offer benefits of market familiarity and learning, judicial enforceability and predictability (OECD 1998:34)".

There are many reasons why this dynamism has been forgotten, and corporate governance has become associated with compliance, but this does a disservice to both the concept and practice of governance. This compliance approach can critically undermine the effectiveness of governance, and potentially create a void of meaningless routine. It is clearly necessary to move beyond the compliance culture in corporate governance and discover what is working well in practice. Therefore, although this work does parallel the quantitative surveys carried out by the ASX Corporate Governance Council (which involved monitoring of company disclosures of corporate governance practices in annual reports), the focus of this project is very much on qualitative changes in thinking and behaviour rather than compliance. The aim of the research is to discover how corporate governance might add value to companies, both in terms of accountability and performance.

Project Outline

This research project examines the changing roles and responsibilities of company boards and directors, in the wake of CLERP 9, the ASX Corporate Governance Principles, and other recent best-practice guidelines in Australia. These guidelines themselves stemmed from widespread government, investor and public concerns regarding standards of accountability, disclosure and performance. Evidence from a survey conducted by Chartered Secretaries Australia in 2004 suggests a compliance mode continues to prevail in Australia. What this research seeks to explore is which aspects of corporate governance are working in practice.

There were three levels of analysis:

Changes in values and beliefs among company boards and directors regarding corporate governance
Changes in structures and procedures
Changes in practices and behaviour

This research assesses the experience of Australian corporations responding to the challenge of transforming their governance to meet changing expectations, with particular reference to the development of their boards' and directors' enhanced role and responsibilities. The specific aims of the research were:

To monitor and record the changes in board and director structures and practices made in response to the new corporate governance initiatives.
To offer a comparative analysis of the different company experiences of the effort to improve their corporate governance structures and processes.
To provide a survey of good practice in Australia, relating this to industry and firm characteristics.
To better understand the detail of corporate governance structures and behaviour in Australian companies.
To make comparisons with developments in international corporate governance standards and practices.
To contribute to the research and development of theory in corporate governance with reference to boards and directors roles and responsibilities, objectives, and measures of performance.

The research project design has benefited considerably from the assistance of a group of executives and professionals directly involved in corporate governance. The survey research was conducted over the period 2005-2007 and represents the most in-depth analysis of corporate governance practice yet completed in Australia. It involved interviews with corporate officers, such as company secretaries and directors of 67 companies, most of which were listed on the Australian Stock Exchange. Our sincere thanks goes to all of the project participants who kindly donated their time and assistance. These companies spanned a wide range of sizes, industries and geographical locations: from the ASX 100 to recently listed start-ups; from mining to medical technology; from Perth to Hobart. Each interviewee was asked a series of questions about how corporate governance was implemented within their company, a series of questions intended to explore their company's corporate governance practices. The focus was on changes in thinking and behaviour rather than on compliance. The questions were broadly developed from the ASX Principles of Good Corporate Governance and Best Practice Recommendations in consultation with focus workshops, and explored recent changes in corporate governance structures and processes as well as the changing behaviour and values of boards and directors. The ultimate objective of the research was to provide valuable insights into the response of Australian corporations to recent regulatory reform.

Final Report released 27 September 2007. (Download Report. (2.6Mb PDF))

If you are interested in participating in the project please contact either:
Professor Thomas Clarke, Director of the Centre (t.clarke@uts.edu.au)
or
Alice Bunker, Research Associate (alice.bunker@uts.edu.au).