The Australian Council of Superannuation Investors (ACSI) has released a policy paper outlining two proposals to ensure company boards are focused on culture and diversity both of which are identified as drivers of long-term shareholder value.  

Context for the proposals

• Culture can 'drive or discourage misconduct': ACSI argues that as was identified by the recently completed Financial Services Royal Commission, and as is recognised more generally, poor culture is a key contributor to major behavioural and governance failings, which harm consumers, investors and markets
• Investors view poor culture as a material risk to the value of their investments: 'Poor corporate culture can have a profound impact on a company's reputation, social licence to operate and value. Loss of social licence to operate puts companies at risk of reputation damage, intervention by regulators, and loss of customer and community support. Accordingly, investors recognise that poor corporate culture is a material risk to the value of their investment'.
• Long term sustainable investment is 'underpinned' by strong culture and diversity: 'Our members consider that long-term, sustainable investment is underpinned by sound management of environmental, social and governance (ESG) risks and opportunities. They recognise that good culture is not supplementary to effective management, but integral to it. They understand the link between corporate culture and organisational diversity.  In particular, gender diversity can assist in developing corporate culture, with diverse directors more likely to identify a broader set of risks and opportunities, and a diverse board demonstrating the company's commitment to diversity and inclusion more broadly'.

Policy Proposals

Proposal 1: Regular cultural reviews

All listed entities should be required to undertake regular cultural reviews and disclose the action taken

ACSI argues that despite 'the observations and focus on corporate culture, the pace of improvement in Australia has been slow' and that improvement is needed across the market. ACSI considers that 'the observations on culture from around the world, the CBA report and the Royal Commission' should apply to all listed entities and that all listed entities should be required to undertake regular culture reviews. 

[Note: The CBA report referred to is the Australian Prudential Regulation Authority's (APRA's) prudential inquiry report into the CBA which was released last year (see: Governance News 04/05/2018).  Among other things, the Financial Services Royal Commission's Final Report included a recommendation (recommendation 5.6) that every financial services entity should 'as often as reasonably possible' take steps to assess the culture and governance practices within their organisation, identify and address any issues identified and then evaluate the changes made.  See: Governance News 11/02/2019]

Proposal 2: Gender balance on boards (of listed companies)

All listed entities should be required to set a time frame within which they will achieve board gender balance (40:40:20).   If companies are unwilling to set a reasonable time frame or those targets do not improve diversity by 2025, regulatory intervention should occur. 

ACSI explains that gender balance in this context means 40% men, 40% women and 20% 'unallocated' to allow flexibility.  Commenting on this measure ACSI CEO Louise Davidson said that it is the next 'logical step' in supporting improved board diversity.  ACSI considers that diverse boards 'make for better governed companies and maintain more effective oversight' of environmental, social and governance (ESG) risks and opportunities which ACSI considers to be 'intrinsically linked to the creation of long-term shareholder value'.  

Broader context: ACSI's policy response to the Financial Services Royal Commission

The proposals form part of ACSI's broader policy response to the Financial Services Royal Commission. which includes, in addition to the reforms outlined in this post, measures to strengthen corporate accountability and also measures to strengthen investment stewardship and integrate ESG considerations into institutional investment decision making.  A summary of ACSI's overall policy response is covered in a separate post in this issue of Governance News: 08/05/2019.]

[Sources: ACSI media release 06/05/2019; Towards Improved Corporate Culture and Diversity 06/05/2019]

Response to the proposed 40:40:20 gender target?

The AFR quotes Westpac and Transurban Chair Lindsay Maxsted as saying that though supportive of the 30% female board representation target,  the push for new gender targets is 'premature'.  Mr Maxsted reportedly said, 'The reason that I consider any further push to be premature is that, in general, the pool from which we should be recruiting is the senior executive, including CEO roles, and that is where most attention should be focused'.  

Noting that gender representation on ASX 200 boards has stalled, Australian Institute of Company Directors (AICD) CEO Angus Armour, reportedly agreed that achieving the 30% gender target should remain the focus.  'Our initial target of 30 per cent remains in place…The ASX100 met this target last year but once you move into the 100-200 it falls dramatically away. We think the 30% target should be the baseline and that remains the priority' he said.

Graeme Samuel reportedly said that diversity of skills, thought, knowledge and experience rather than gender per se, is desirable.  'The targets are interesting but they are not the be-all and end-all for improving the quality of directors…We have to look at the talent pool available, which is much wider…It is not to diminish the importance of gender diversity but there is also diversity of culture and skills' he is quoted as stating.

[Source: [registration required] The AFR 07/05/2019]

Related posts?

For an overview of ACSI's proposed reforms to strengthen corporate accountability see: Governance News 01/05/2019.  For an overview of ACSI's proposed stewardship reforms and an overview of ACSI's overall policy response to the Financial Services Royal Commission see: Governance News 08/05/2019.