August 28, 2018

Corporate Governance and Australia Board of Directors

Governance-Board-Australia

It’s been more than 26 years since Australia has seen an economic recession. Their corporate governance practices are at the forefront of Australia’s continued growth and strength. Achieving good corporate governance is a high priority for Australia board of directors. It empowers companies to maximize their potential, builds productive and profitable company culture, delivers long-term value to stakeholders and shareholders, and ultimately helps sustain the countries economic growth. Australia’s corporate governance framework includes a mix of what Herbert Smith Freehills refers to as “hard” and “soft” law. This includes the prescriptive elements of the Australian Securities and Investments Commission (ASIC) and the voluntary elements of the Australian Securities Exchange (ASX).

Regulatory Bodies and Corporate Governance

The Australian Securities and Investments Commission (ASIC) officially regulates Australia board of directors corporate governance. As an independent government entity, the role of the ASIC is to enforce and regulates all laws that protect consumers, investors, and creditors. The ASIC was created in 2001 through the Australian Securities and Investments Commission Act. The implementation of proper corporate governance is the basis for its framework.

The Australian Securities Exchange (ASX) is one of the top 10 exchange groups worldwide comparable to the New York Stock Exchange and the London Stock Exchange. The ASX is responsible for their own set of corporate governance guidelines. According to the ASX, these principles and recommendations guide “entities listed on the ASX to achieve good governance outcomes and meet the reasonable expectations of most investors in most situations.” However, these recommendations are just that- recommendations. “Different entities may legitimately adopt different governance practices, based on a range of factors, including their size, complexity, history and corporate culture.” continues the ASX. “For that reason, the Principles and Recommendations are not mandatory and do not seek to prescribe the corporate governance practices that a listed entity must adopt.”

The ASX’s 8 Principles and Regulations

Lay solid foundations for management and oversight
Structure the board to add value
Act ethically and responsibly
Safeguard integrity in corporate reporting
Make timely and balanced disclosure
Respect the rights of security holders
Recognize and manage risk
Remunerate fairly and responsibly

The ASX principles and recommendations take the “if not, why not” reporting approach for Australia board of directors. For example, if Australia board of directors find a principle inappropriate of their industry or company size, the board must explain and report why it has not adopted the recommendation. The ASX feels that requiring explanations ensures that the market receives an appropriate level of information about the company’s governance practices. “Within Australia, there is a prevailing view that ‘good’ systems of corporate governance can support and improve company performance,” says Herbert Smith Freehills. “This has influenced the extension of corporate governance beyond being simply a matter of legal compliance.” Australia board of directors has adopted these robust corporate governance laws and recommendations to provide better accountability to shareholders and transparency for stakeholders that improve investor confidence.

Australia Board of Directors Composition

Australia board of directors composition is primarily dictated by the industry and size of the company. However, the Australian Institute of Company Directors reports that under the Corporations Act of 2001 companies must have 1 director who ordinarily resides in Australia and a public company must have 3 directors of which 2 must ordinarily reside in Australia. There is no maximum number of directors. The ASX Corporate Governance Council also provides guidelines for the number of members on Australia board of directors, “The board should be of sufficient size so that requirements of the business can be met and changes to the composition of the board and its committees can be managed without undue disruption. However, it should not be so large as to be unwieldy.”

Australia board of directors also has an interesting stance on CEO and Chair of the Board duality. While most companies in the United States have a duel Chair/CEO, Australia board of directors best practices separate these respective roles. “Increasingly good governance practices prefer that chair also be independent even for family and proprietary corporations,” states the Australian Institute of Company Directors. The ASX also goes on to recommend that an independent director should be a non-executive director or a member of management. This independent director should be free of any business or other relationship that could interfere with objective judgment and guidance. The board chair should also be an independent director and the chair and CEO of the company should not be the same person.

Tackling Diversity on Australia Board of Directors

Australia boards of directors tend to be more homogenous with members with similar education, professional backgrounds, gender, age, and ethnicity. However, the ASX, in particular, are making strides to promote diversity on Australia boards of directors. “Australian authorities are formulating plans that would force public companies to reveal the proportion of women at various levels of their organizations, as well as steps they’re taking to increase female representation,” reports Bloomberg.

Board-Directors-Australia

ASX wants businesses to disclose their diversity policies, set representation targets for their boards, and have at least a 30% of each gender represented on boards. As of May 2018, Australia has almost reached its goal. “Among Australia’s 200 biggest public firms, women held 27 percent of board seats at the end of February, according to the Australian Institute of Company Directors’ gender diversity progress report,” Bloomberg continues. “74 companies meeting the 30 percent target.”

Setting the Tone for Sustainability Investing

In accordance with the UN’s Sustainable Development Goals, Australia boards of directors are also taking steps in sustainability investing. According to the Parliament of Australia sustainability reporting “involves companies and organisations demonstrating their corporate responsibility through measuring and publicly reporting on their economic, social and environmental performance and impacts.”

Sustainable investing is growing exponentially with the Australia board of directors at the forefront. Global growth in sustainable investments has jumped 24% since 2014. Australia has seen an impressive 250% growth. The Fifth State reports that Australian and New Zealand responsible investments reached $515.7 billion in 2016 making up 50% of all professionally managed assets. The Responsible Investment Association Australasia reports that responsible investments made up $622 billion in 2017. Australia’s ESG integration was the leading strategy.

Australia’s economic success is directly related to their corporate governance practices and Australia board of directors. Their efforts in diversity and sustainability investing are setting the tone for boards of directors around the world. More recently, Australia board of directors are taking on climate change. They’re now moving towards greater disclosure for boards as it relates to climate risk. These recent moves are indicative of the proactive approach Australia boards of directors use to guide their companies to success.

Tag(s): Governance