Should directors have professional qualifications to sit on a listed board?

The banking Royal Commission has revealed the need for greater accountability and prompted debate over whether professional director qualifications are a way forward.

Raising the bar

Does Australia’s director community need a professional qualification?

A spate of global corporate scandals and findings from inquiries such as the banking Royal Commission are fuelling a debate on what is required to lift professional standards in Australia’s boardrooms. Questions abound as to whether a new code of conduct, a professional designation for directors or even regulatory change might help.

Although not pushing professionalism, Treasury dived right into this subject in its submission to the Royal Commission last year. One way to raise the bar, it said, was to regulate corporate governance in a more direct manner — for example, by mandating measures to strengthen the competency, capacity and composition of boards.

It noted that this was already happening in other jurisdictions. The European Union has put limits on outside employment and on how many board seats directors in financial companies can have. And, the Reserve Bank of New Zealand is believed to be considering capping how many directorships can be held at one time.

Kerryn Newton FAICD, a non-executive director of Energy Queensland, says the Corporations Act 2001 (Cth) has requirements for directors, but these set the bar too low. “There isn’t a significant threshold that you have to meet — for example, you basically have to be a natural person, not convicted of a serious indictable offence and not bankrupt,” she says. “Just thinking about it, the process to be a Justice of the Peace is much more rigorous.”

Indeed, to become a JP in NSW you must be nominated by a member of the Legislative Assembly or the Legislative Council, must consent in writing to confidential inquiries being made as to your suitability and must complete a knowledge test, among other requirements.

Professional standards

Whether being a director should be recognised as a profession can be debated — while certain sectors have specific prerequisites, generally there are no hard and fast competency requirements. However, we can certainly learn from what other are professions are doing.

“If you go back in history, the professions were medicine, law and the church in which there was an implication of a higher duty to the public,” notes Steven Cole FAICD, managing director of Cole Corporate, and a chair or non-executive director of several boards who has also served on state and territory Professional Standards Councils.

“There was supposed to be self-regulation to some extent among these professions for that higher calling. It’s a statement of doing your job with integrity and to a very high standard.”

Professional standards schemes in Australia are governed by state- or territory-based laws. Professional associations with a professional standards scheme in place currently include Chartered Accountants Australia and New Zealand, CPA Australia, state-based bar and law societies, and the medical profession.

Cole explains that professions or groups applying for a scheme provide a certain level of service in exchange for limited liability.

“You’d require entry standards, strong risk management principles, strong ongoing development and training,” he says. “You’d have to have insurance up to a certain limit which would cover most major claims. And there must be a strong disciplinary and complaints procedure if there is misconduct.”

So, is there a place for professional standards for directors? Cole describes these as “a bit of a stick and carrot” concept. “It would be a five- to 10-year goal and you’d have to get the federal government to relinquish a certain element of control,” he says. There are a couple of inherent tensions here, too, because business is supposed to be entrepreneurial and that’s a bit counter to the professions, which have checks and balances. “There’s a role for a professional non-executive director, but probably only in the public company arena. You could have a narrowly defined class within that.”

Coding directorship

When it comes to codes of ethics and conduct, the Hippocratic Oath is one of the oldest and remains relevant today. Even so, the Medical Board of Australia (MBA), which regulates Australia’s medical practitioners, is working through the more than 800 submissions it received on its new draft code of conduct to improve the professionalism and conduct of doctors.

Those looking to practise medicine in Australia must be registered with the MBA. To do this, they need to meet a range of mandatory standards, such as participating regularly in continuing professional development (CPD) and disclosing their complete criminal history. They must also have recently practised in the field in which they intend to work and should have professional indemnity insurance.

Several other business sectors also are introducing new codes, some of them in response to the fallout from the likes of the Financial System Inquiry and the banking Royal Commission.

For example, a new Banking Code of Practice, aimed at better meeting changing community standards and expectations, will apply to all Australian Banking Association (ABA) members from July 2019. This is the first comprehensive broad-based industry code that the Australian Securities and Investments Commission (ASIC) has approved under its relevant powers and the ABA had to make significant changes to the code before ASIC would approve it.

At an institutional level, when it comes to encouraging higher standards of professionalism among financial advisers, the government established the Financial Adviser Standards and Ethics Authority (FASEA) in 2017. In addition to requiring advisers to complete an exam and certain hours of continuing professional development (CPD), FASEA is also finalising its own Code of Ethics.

Global trends

Looking abroad, the UK’s Financial Reporting Council’s revised Corporate Governance Code came into effect in January for companies with a premium listing on the London Stock Exchange. The code broadens the definition of governance and places a greater emphasis on a company’s purpose and culture. It also seeks to promote independence and constructive challenge in the boardroom, for example, by mandating that chairs should quit nine years after their first appointment to a board.

“Overboarding” is also tackled by the code. For example, the code states that before joining a board, new directors should disclose their major commitments and the time involved. In addition, directors should get prior approval from the board before taking on more outside board roles, and full-time executive directors should not take on more than one non-executive director role in a FTSE 100 company or other significant appointment.

Directors in the UK can also obtain a Chartered Director qualification from the Institute of Directors (IoD). This experience-based assessment requires directors to show how they work within the context of their boards, use their knowledge and skills and discharge their duties.

Elsewhere, Canada’s Institute of Corporate Directors (ICD) offers the ICD.D designation. To apply, directors need to be an ICD member of good standing, have completed the ICD-Rotman Directors Education Program, have signed the ICD’s Member Code of Conduct and have passed the ICD.D online examination. They also must pass an ICD.D oral peer examination and commit to a minimum of 14 hours ongoing governance education annually.

The Institute of Directors in Southern Africa (IoDSA) now confers the Chartered Director (SA) professional designation. To receive the CD(SA) an applicant must comply with the entrance requirements, have been a practising director (or held equivalent office of an organisation of substance) for at least three years during the five years prior to application, and be sponsored by two individuals, preferably IoDSA members. Chartered directors must maintain their professional development through the IoDSA Continuing Professional Development (CPD) scheme.

Finding an Australian solution

Marina Go FAICD, chair of Ovarian Cancer Australia and a non-executive director on boards such as EnergyAustralia and 7-Eleven, believes as a minimum, all directors should know their fiduciary duties. “Perhaps some kind of test should be passed before a person joins their first board,” she says.

“There’s already a process in place for screening prospective Australian Securities Exchange (ASX) directors. A national police check is conducted for clearance. As part of this process, perhaps ASIC could conduct a director suitability test on knowledge of the responsibilities they are about to accept.”

Go says introducing a director designation in Australia could encourage continued learning and upskilling for many.

“You’d expect that as a result there would be more highly professional directors around board tables because companies would be able to select directors with greater confidence,” she says. “The downside could be diversity. If boards were to prefer candidates who already had the professional director designation, then the first group to achieve it would be on the short list for everything. It would be likely that large companies would be early adopters in choosing to introduce the professional designation process, therefore potentially making it more difficult for directors of smaller boards to make the leap to larger boards in a time frame that is necessary for board renewal and diversity of thought.”

Newton also believes some kind of designation could be viable approach.

“First you’d have to look at different types of companies,” she says. “For example, a small proprietary company would not require the same type of directors as an ASX-listed company. We need to be careful not to use a sledgehammer approach. But if we’re talking about boards where there is significant community and public interest in their performance, we need to have a better debate about what the requirements should be.”