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    The banking Royal Commission has prompted increased scrutiny of Australian board governance models. AICD explores global jurisdictions and where we can take inspiration.


    In recent months, there has been a lot of discussion about how Australian boards work and whether we should be looking overseas for inspiration. Everything from two-tier board structures to compulsory employee representatives to mandated renewal requirements have been floated in public debate.

    The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has helped prompt much of this introspection, although we must be mindful — as Justice Neville Owen who oversaw the Royal Commission into HIH Insurance commented in the July edition of Company Director — that the right response to every corporate crisis isn’t just more regulation.

    ”We shouldn’t be afraid of standing up and saying that Australia’s system stands up well to scrutiny. The reality is that Australia’s corporate governance model is robust and well respected globally.”

    Christian Gergis GAICD Photo
    Christian Gergis GAICD
    Head of Policy, AICD

    While direct comparisons can be difficult — each jurisdiction is a result of its own unique history, law and society — we shouldn’t be afraid to look at how overseas models work. Equally, we shouldn’t be afraid of standing up and saying Australia’s system stands up well to scrutiny.

    The reality is that Australia’s corporate governance model is robust and well respected globally. The World Economic Forum 2017–18 Global Competitiveness report ranks Australia eighth out of 137 nations for “efficacy of corporate boards”, while we come in at 11th place for the “ethical behaviour of firms”.

    The Asian Corporate Governance Association has also ranked Australia first in corporate governance practices compared to 11 other jurisdictions in Asia, including Singapore, Hong Kong, Japan and South Korea, in a 2017 study.

    enron ceo

    Enron CEO Jeffrey Skilling (centre) was convicted of fraud in 2006.

    voltswagon

    Volkswagen admitted cheating US emissions standards in 2015.

    siemens

    In 2008 Siemens paid US$1.6b to settle bribery inquiries in the US and Germany.

    None of this is to say that we shouldn’t be looking at other models and seeing whether there are things we can learn. Governance developments are increasingly happening on a global scale and there is always value in seeing what might be coming over the horizon. The reality is that no country has a monopoly on corporate scandal, nor can any particular governance model guarantee good outcomes, all of the time. The cases of HIH Insurance, Enron, Wells Fargo, Siemens and Volkswagen over recent decades show that. 

    So how are things done overseas?

    Board structures

    Broadly speaking, major Western economies are dominated by two main board models: the unitary model, and the two-tier (or “dualistic”) structure. In the Anglo-American tradition, followed in countries such as the UK, US, Canada and Australia, boards are responsible for supervising the affairs of the corporation, but generally delegate day-to-day management to an executive, which is led by the CEO. Under such models, the board’s role is primarily one of oversight, with directors required to hold management to account and continually test their trust in the executive team.

    This approach contrasts with many European countries, where authority is diffused between a management board and a separate supervisory board. In Germany, the supervisory board is banned from being involved in the day-to-day affairs of the company, but has the power to appoint and remove the directors of the management board. The management board can ignore the supervisory board’s opinion, but must explain why.

    Greater flexibility can be seen in other major European economies, such as France and Italy, where companies have the choice whether to adopt a unitary or dualistic model.

    Board composition

    A close look at comparative corporate governance models globally reveals one area with a high degree of uniformity: around independent directors. Varying independence requirements can be found in legislation or corporate governance codes in the UK, France, Italy, South Africa, Canada and, of course, Australia. Germany is an outlier, without such a rule. Interestingly, South Africa requires at least two executive directors.

    In contrast, there is a clear point of divergence on employee representation. In France, larger companies (with more than 1000 employees) must include at least one director representing employees. The worker voice on the board is even stronger in Germany, where for companies with at least 500 (but fewer than 2000) employees, the employees elect one-third of the members of the supervisory board. That representation jumps to half of the supervisory board when employee numbers reach 2000.

    Conversely, neither the UK, Canada, South Africa, Italy nor Australia reserve board seats for worker representatives.

    There is a similar point of difference on board diversity, where there is a split between countries such as Germany, Italy and France — which have 30 per cent, 33 per cent and 40 per cent gender requirements, respectively (the latter two enforced via legislation) — and both Canada and the UK where, although there are diversity initiatives, no such targets exist. In Australia, the latest draft of the ASX Corporate Governance Principles & Recommendations looks to hard-code for the first time a 30 per cent gender target for ASX 300 boards.

    Corporate governance codes

    A review of international corporate governance codes demonstrates that the “if not, why not” approach taken by the ASX Principles is common practice globally. In the UK, Canada, Germany, France, South Africa and Italy, implementation of the relevant code is required on a “comply or explain basis”. South Africa is a market with one of the most stringent regimes, with the latest King IV code moving from an “apply or explain” approach to an “apply and explain” model. The Toronto Stock Exchange also mandates compliance with its own specific governance requirements.

    So what does all of this tell us?

    Although there are some common threads, there is no universally accepted, best practice, corporate governance model. Ultimately, regulatory frameworks emerge out of the milieu of each individual country, and no law, however well enforced, can stop every failure. That would be too simple and fail to recognise the complexity of business and the human strengths and frailties upon which all structures rely.

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