4 areas of focus on our Forward Governance Agenda

From culture to accountability, the results from AICD's Forward Governance Agenda consultation show the main areas of focus for the director community moving forward.

The Forward Agenda consultation paper, launched in April 2019, draws on the governance findings of the financial services Royal Commission, along with other inquiries, and invited member views on areas where the AICD could change its focus, broaden debate or increase support for members.

Proposals were set out under four themes:

1. Standards & Professionalism, asking about the AICD Code of Conduct and proposals to strengthen Director Professional Development (DPD) obligations.
2. Duties & Stakeholders, seeking to lead the conversation on directors’ duties and to test application of the ‘best interests’ duty in practice.
3. Demonstrating Accountability, to help boards adapt to evolving community and stakeholder expectations, and guide good practice.
4. Governance of Culture & Remuneration, seeking to expand practical frameworks in AICD education and resources, and proposing a focus on governance of remuneration.

Importantly, the Forward Agenda does not represent the full range of AICD work — issues such as directors liability, innovation and strategy remain core AICD priorities.

A strong response from members

AICD CEO and managing director Angus Armour FAICD welcomed the strong member response. “We are delighted by the response of our members to the consultation and grateful to everyone who contributed to their views and guidance,” he said.

“When the AICD’s chair John Atkin FAICD and I launched the Forward Agenda at the Australian Governance Summit, I spoke about the importance of the AICD’s vision — strengthening society through world-class governance.

“As the peak body focused on building the capability of Australian directors, the AICD must lead the changes needed to lift the practice of governance and restore community trust.

“Along with the survey, John and I attended events around the country talking with members about challenges and opportunities in governance.

“We took some clear messages from these discussions. First, our members are committed to high standards in the practice of governance and expect the AICD to promote these standards itself and with members.

“There is also clear demand for the AICD to take a leadership role in governance debates, and to avoid being complacent or defensive in our approach.

“Over coming months, the AICD will be launching new initiatives under each of our Forward Agenda themes — from a full review of our Code of Conduct, to better cut-through on the role of the board, to more practical and targeted resources on culture.

“I look forward to continuing our dialogue with members as we implement this exciting program.”

Outlined below are some key insights, by theme, from those members who responded to the consultation, and the AICD’s next steps in response.

Standards & Professionalism

The AICD sought member views on two proposed actions under this theme: reviewing the AICD Member Code of Conduct, inviting views on where to focus; and strengthening the AICD’s Director Professional Development (DPD) obligations on members, by requiring members to spend some of their mandatory DPD units on priority topics.

Across all sectors, there was strong support (85 per cent) from members for a review of the Code of Conduct to consider clear standards of conduct and practice expected of directors — including a positive statement of fiduciary and legal duties and engagement with stakeholders.

A small majority (53 per cent) of members supported a complaints process for breaches of the code. Members set a higher bar for potential breaches, however, rejecting negative media coverage (only 12 per cent support), appearing before public inquiries (19 per cent) or being subject to investigation by regulators (36 per cent) as sufficient grounds.

Disqualification, serious criminal convictions, civil or criminal penalties for governance offences had wider support as possible code breaches.

Some members also sounded notes of caution about the AICD moving too far towards enforcement or compliance — important considerations for the code review.

On Director Professional Development (DPD), the AICD’s proposal to mandate a focus on specific topics as part of the DPD scheme was supported — with ethics and legal duties preferred subjects.

Only 25 per cent of respondents did not support mandating specific DPD topics (although this was higher for listed company directors, at 46 per cent). Overwhelmingly, members prefer a three-year cycle for any new DPD requirements. The AICD should also issue quality, accessible resources at no additional charge, if these reforms are introduced.

Duties & Stakeholders

Under this theme, the AICD committed to leading the conversation on directors’ duties, seeking to test the best interests duty in practice and promote informed debate. Members supported this focus and want the AICD to lead debate on duties; to be deepening the understanding of directors’ duties, with strong support for roundtables with stakeholders and directors, and commissioning papers and events with legal experts. There is very high member demand (91 per cent) for further AICD guidance on duties.

Members also want the AICD to focus on improving community and stakeholder understanding of the role of boards (61 per cent).

Asked about the best interests duty in practice, more members (49 per cent) report that they balance the interests of stakeholders and shareholders than those who consider stakeholder impacts as relevant to the interests of shareholders/members as a whole (32 per cent, although higher for listed company directors at 44 per cent). The latter is the more generally accepted understanding of the current legislative duty.

We asked members to tell us about the ways in which their boards draw on stakeholder input, with advice from management (75 per cent), Board engagement with consumers/clients (56 per cent) and with investors/members of the organisation (55 per cent) being the top mechanisms.

Members report relatively limited board engagement with employees/unions (44 per cent) or use of advisory committee structures (35 per cent), suggesting considerable scope for more work on stakeholder voices.

Demonstrating Accountability

We asked members about the ways in which their boards currently demonstrate accountability (see graph, above). Interestingly, external board reviews were reported by just 35 per cent of members. The results differed for listed directors, who were much more likely to nominate external reviews (50 per cent), proactive board renewal (53 per cent) and formal stakeholder engagement (44 per cent) than the broader membership.

Most members (57 per cent) support AICD guidance on “over-boarding” — although the results differ significantly by sector (only 35 per cent of listed directors in support).

A proposal to investigate annual director election models split the membership, with 37 per cent of respondents in favour and 35 per cent opposed. Listed directors were less likely to support this focus. In one of the more notable results, just 32 per cent of respondents believed that existing director accountability mechanisms are adequate. Here, listed company directors’ views differed from other members — 66 per cent considering accountability mechanisms adequate.

Culture & Remuneration

Culture is clearly a priority issue for directors — reported as a significant or ongoing focus for most of our survey respondents.

Members identified people metrics (75 per cent), risk (both financial and non-financial, 75 per cent), and performance management, learning and ongoing development (63 per cent) as the top three metrics for culture. Members are, however, broadly comfortable with their grasp of corporate culture — 61 per cent reported that culture was either “very well” or “well” understood by their boards.

There is strong member appetite for additional culture resources from the AICD, with members favouring a short-form guide, practical case studies and diagnostic tools.

Most members also supported the AICD providing guidance on the governance of remuneration (although listed directors were less supportive of this as a focus, at 54 per cent compared to 60 per cent overall).

Of note, just 33 per cent of respondents indicated that their boards link CEO variable pay to factors relevant to organisational culture — though that number increased significantly among listed members (56 per cent).

*While sectoral breakdown of member’s primary board role differed from question to question, based on completed surveys, it was approximately: 12 per cent listed, 38 per cent private/non-listed, 37 per cent NFP, eight per cent public sector, and four per cent overseas entities. This is broadly comparable to overall AICD membership, though with more NFP respondents and less private/non-listed company respondents than the member profile.

Next Steps

Drawing on the results of our consultation, the AICD is developing targeted initiatives under each of the four Forward Agenda themes. Over coming months, priorities include:

• Commencing a formal review of the Code of Conduct, including compliance approach.
• Updating DPD obligations to require a focus on priority areas, with supporting resources.
• Strengthening the AICD’s voice on duties with a refreshed outline of the best interests duty, and roundtables and research with stakeholder groups.
• Improving understanding of the role of boards with targeted media and stakeholder engagement.
• Greater prominence of stakeholder perspectives in AICD channels, including Company Director magazine.
• Investing in research on effective accountability measures and annual director elections
• Boosting the AICD’s resources on the governance of culture and remuneration.

As an initial step, the AICD recently issued a short-form member guide to the board’s oversight role on culture. It is intended as a practical guide for directors of any entity in governing the culture(s) within their organisations. (See more about the AICD Culture Tool here.)