The AFR reports that AMP Chair David Murray has questioned both the role and the efficacy of the ASX Corporate Governance Principles and Recommendations
(Principles) and more particularly, proposed revisions to the Principles, in promoting strong governance standards on Australian boards. Mr Murray has also reportedly said that AMP 'will not be guided by the ASX corporate governance principles where they either weaken accountability or distract the company from less important issues'. Mr Murray's comments have sparked considerable debate over both the proposed revisions to the Principles and about possible methods of raising governance standards generally.
AMP Chair David Murray’s critique of the current approach
- Efficacy of the principles in raising governance standards is questionable: The AFR quotes Mr Murray as stating: 'I think APRA should reconsider whether they [ASX governance principles] have any value because the culture report on CBA demonstrated that those governance arrangements didn't operate to protect the company…If you look at the financial sector in Australia those principles haven't been of the slightest value at all.'
[Note: The 'culture report' referred to is the Final Report of the prudential Inquiry into the Commonwealth Bank of Australia released on 1 May. See: Governance News 04/05/2018.]
- Adherence to the Principles is no guarantee of strong internal controls: Mr Murray reportedly questioned whether adherence to the letter of the Principles is any guarantee of strong or effective internal controls: 'Am I okay because I tell the world I've got an audit committee and I follow the ASX corporate governance principals? Or am I okay because I've figured out the best possible set of procedures for the board to follow in signing off the accounts? They are two very different questions' he is quoted as stating. He went on to say 'There are certain things you can do to reduce risk. For example, the rest of the board, excluding the chairman and the CEO, might want to interrogate the CFO and the auditor without the chairman and the CEO present as part of a financial account sign-off process. That's a control system. People do this on your audit committee now. The question is how effectively it is done'.
- Excessive focus on non-core management issues: According to The AFR Mr Murray said that the Principles had led to directors being swamped by hundreds of pages of board papers and not having enough time to debate important strategic issues. Mr Murray also reportedly commented that adherence to the Principles was ineffective in preventing governance failures at AMP and other entities: 'The ASX corporate governance principles contributed to what happened to AMP and others in the financial sector. I'm not excusing anything and I'm not looking for a scapegoat at AMP. It has to fix itself. But these principles don't help at all' he is quoted as stating.
- Committee structure does not ensure stronger outcomes: Mr Murray also reportedly questioned the assumption that separating audit, risk, remuneration and nomination functions into committees with independent chairs necessarily leads to better governance outcomes. Mr Murray reportedly said that this enables Committee Chairs to develop special relationships with the CFO, CRO and head of HR and as such, potentially undermines the primacy of the CEO.
- The approach the regulators have taken is questionable: 'If it's clear that the governance arrangements in the financial system have been ineffective then have the regulators [the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC)] contributed to that by trying to reduce the separation of non-executive directors from the executive? That's the effect of the way they go about it. Once you do that the board gets bombarded with huge amounts of information without a good system of figuring out what is important and what matters and what doesn't matter. APRA holds the board directly accountable and the way they've picked up the corporate governance principles and made mandatory certain committees tends to join the executive in with the board in many ways' Mr Murray is quoted as stating.
AMP approach to addressing governance issues
Mr Murray has also reportedly said that AMP 'will not be guided by the ASX corporate governance principles where they either weaken accountability or distract the company to less important issues'. Instead, he said that he plans to implement the following.
- Restore the primacy of the chief executive: 'I think the board's got to conduct itself in a way that it looks to the CEO for everything'.
- Elevate the role of internal audit: 'I'm working through the AMP board issues now but what I can say is that the role of internal audit will be elevated substantially in the way the board does its work' Mr Murray reportedly said.
- Separation of the board and the executive: Reportedly, Mr Murray envisions a governance system at AMP similar to what was in place at the Commonwealth Bank of Australia when he was CEO between 1992 and 2005 which he said was successful because it remained separate from the executive (and therefore able to keep its strategic focus). 'A lot of the regulation and the principles don't allow that to happen anymore…When you're being dished up 1000 pages of stuff you're not separate from management' Mr Murray said.
Debate on the proposed revisions to the ASX Corporate Governance Principles and Recommendations.
Mr Murray's comments have sparked debate on both the proposed revisions to the ASX Corporate Governance Principles and Recommendations and more broadly on the best means of raising governance standards.
In relation to the proposed changes to the Governance Standards, debate has centred primarily around the following issues.
1. Level of 'prescription': Both the Australian Institute of Company Directors (AICD) and the Governance Institute of Australia (GIA) have separately raised concerns about the level of prescription in the proposed amendments to the principles.
- The AFR quotes AICD CEO Angus Armour as commenting: 'Our concern with this draft is it is moving away from the framing of the document as principles…It seems to be trying to address the issues which have emerged from the Hayne royal commission and APRA report on the CBA but it is not helpful because directors have clear obligations in legislation ... as directors contemplate the needs of their stakeholders they have to balance their sometimes conflicting needs... We think it is enough to ask companies to act in a legal and ethical manner'.
- Separately, GIA CEO Stephen Burrell has commented that 'the increased level of prescription in a number of areas within the draft Principles and Recommendations encourages a "tick the box" approach to disclosure. This could be counterproductive and would not lead to improved disclosures'. He went on to say that 'Our members are concerned about the marked increase in the level of prescription both in the text of some of the Recommendations and in many areas of the new Commentary' which he said is 'at odds with the intent of the Principles and Recommendations' and is also a contrast to the 'recently published 'shorted, sharper' UK Corporate Governance Code which was revised to reduce the level of complexity'.
- According to The AFR a number of organisations, and individuals have also raised concerns. These include: The Law Council of Australia, Chartered Accountants and Australian Financial Markets Association and Chair of Energy Australia, Graincorp, HSBC Bank Australia and Virgin Australia Graham Bradley.
- Business Council of Australia CEO Jennifer Westacott has also expressed agreement with Mr Murray's comments regarding the Principles and more particularly at the level of 'prescription' in the proposed changes. 'I think you've got to be very careful that if you've got a set of guidelines that start to add on to already existing legal obligations, or are very prescriptive about things that you and I could debate for hours the definition of, we've got to get corporate Australia back to focusing on its customers, its staff, its shareholders, the community' she said.
2. 'Social licence to operate': Both the AICD and the GIA have raised concerns about the introduction of this concept into the Principles.
- GIA CEO Stephen Burrell commented: 'We [The GIA] are concerned that the phrase "social licence to operate"…is now being used in a way that makes it open to a broad range of potentially extremely subjective interpretations. This term can mean very different things to different parties. The term has become loaded and is easily used to describe opposition or disagreement, rather than what we consider the Council intends, which is a concern going to the heart of how an entity is operating. We are concerned that the term is easily appropriated by interest groups that disagree with proposals to argue that their opposition indicates that a company has "lost" its social licence to operate, when the fact is that there is a particular group opposed to a course of action or proposal' he said.
- AICD CEO Angus Armour is quoted in The AFR as stating: 'We have significant concerns with the proposed revisions ... including the introduction of the fluid concepts of a 'social licence to operate' and acting in a 'socially responsible manner'. [These] concepts ... are subjective and will add unnecessary complexity and uncertainty…The concept of "social licence" is highly subjective and will be interpreted differently by different stakeholders ... these proposed changes have caused significant concern amongst the director community.'
- Former ASX Chair Maurice Newman has also reportedly expressed concern about the concept stating that 'companies should be focused on keeping your costs down and your customers happy'.
Broader debate on the best way to raise governance standards
- Do independent directors 'destroy shareholder value'? The AFR reports that University of New South Wales (UNSW) Professor of Finance Peter Swan has questioned the role and efficacy of the ASX Corporate Governance Principles and Recommendations (the Principles) generally and the role of independent directors in particular in raising governance standards, reportedly describing the Principles as 'made up rules' adopted without evidentiary basis. More particularly, The AFR reports that Mr Swan has questioned the assumption that independent directors necessarily add value, arguing that their lack of specific knowledge of the company is a disadvantage as is their lack of personal investment. The 'ASX rules are designed to promote professional directors who are completely ignorant of the companies of which they are directors' he said. For example, in Mr Swan's view it is because it is boards of industry super funds, largely free of independent directors, that have performed better than their for-profit counterparts. The AFR notes that both The Australian Council of Superannuation Investors and Australian Institute of Superannuation Trustees declined to comment on Mr Swan's views. The article goes on to quote the Association of Superannuation Funds of Australia CEO Martin Fahy as stating: 'The ASX corporate governance council has a consultation process under way and like any policy, it's important to get the balance right between transparency and onerous reporting, so that boards can best perform their strategic roles'.
- Time to rethink board structure? Mr Murray's comments have also sparked broader debate around the current approach to raising governance standards generally. Writing in The Conversation, RMIT academics Andrew Linden and Warren Staples have reiterated their own calls for consideration to be given to mandating a 'two tiered board structure for corporations and large companies'. 'Instead of looking to quick conventional fixes…such as re-emphasising directors’ duties and increasing diversity through soft targets, we argue that the unitary board structure itself is an underlying factor in systemic misconduct' they write.
[Note: Both writers have written previously that a rethink of the current board structure should be considered. The SMH has also suggested that a two tiered board structure should be considered 03/05/2018.]
Citing issues uncovered in the Financial Services Royal Commission, they argue that 'industry self-regulation has failed and corporate boards seem incapable of systemically improving corporate governance' and that failing to consider alternatives to the current system, will result in 'more of the same' issues recurring. They argue that separating the non-executive from executive directors, and creating clear, 'legally separate roles for both groups' would address confusion over roles/accountability. The supervisory board would comprise non-executive directors tasked with 'monitoring and control' eg approving strategy and appointing auditors. Separately, 'a lower' executive management board made up of executive directors would be responsible for implementing the approved strategy and day-to-day management. 'To be clear, relying on market-based responses, self-regulation and shareholder primacy will only result in more of the same they conclude.
[Sources: [registration required] The AFR 01/08/2018; 01/08/2018; 01/08/2018; 01/08/2018; 01/08/2018; 02/08/2018; 02/08/2018; 02/08/2018; 31/07/2018; 31/07/2018; 31/07/2018; 01/08/2018; Business Council of Australia Transcript Jennifer Westacott interview with Ticky Fullerton, Sky Business 02/08/2018; Governance Institute of Australia media release 02/08/2018;The Conversation 06/07/2018; 02/08/2018]