Effective corporate governance (CG) can be critical in enabling boards and management to navigate their way through uncertainty in the international business arena. It should guide how a company sets the right strategy and manages risks.
Yet, a joint study Balancing Rules and Flexibility by ACCA Singapore and KPMG reveals a wide divergence in CG requirements across 25 markets, including; Australia, Singapore, Thailand, China and Brazil. This does not help promote cross-border trade, so the report calls on governments to work towards meeting global CG standards, which are based on the Organisation for Economic Co-operation and Development (OECD) principles. The good news for Australia is that the survey rates us as a world leader in corporate governance – but there are still some challenges ahead that mean Australian boards need to recalibrate their approaches in some areas.
It's not surprising that achieving good corporate governance is high on the agenda for Australian board members. It empowers individuals to perform to their highest potential; it builds productive and profitable cultures that deliver long-term value to stakeholders and shareholders; but it also has surprisingly significant effect at a macroeconomic level.
When implemented well, corporate governance builds confidence in capital markets. This is especially important in the context of high anticipated growth rates in many emerging economies such as those in the ASEAN region.
Given the disparity in corporate governance requirements across the markets we have studied, there is still a long journey ahead of us. We hope this study can contribute to raising the standard of corporate governance requirements globally.
Understanding the relativities between countries when it comes to robust CG frameworks helps businesses and their boards understand how and where to trade effectively and profitably in an interconnected world. This outcome is good for shareholders, businesses and the communities they serve.
Effective corporate governance and organisational integrity is now a key reputation issue, particularly for large multi-national companies. It is essential to understand how businesses are operating across borders and how corporate governance might be used as a competitive asset. But there is also a regulatory dimension.
Just as boards set the 'tone at the top' for the companies they govern, market regulators and policy makers do the same with the corporate governance instruments and requirements they set.
It's clear that Australian businesses are getting the message about the power of good corporate governance. Out of the 25 countries surveyed, Australia ranked equal fourth for its corporate governance regime, only outranked by the UK, the US and Singapore. This is particularly interesting given Australia does not have the regulatory overlay present in the UK or US market. There is a significant commitment in Australia to reducing red tape around corporate governance and utilising a strong principles-based approach, which appears to be working well.
For the purposes of the survey Australia's CG was defined as consisting of three core elements – Corporations Act 2001, ASX Listing Rules and ASX Corporate Governance Principles (2014); encouragingly, Australia has reviewed its CG principles three times since its introduction. We are strongly aligned with Organisation for Economic Co-operation and Development (OECD) principles – ranking fourth on this measure having adopted 63 percent of OECD related principles and 56 percent of better practice principles.
Against this backdrop, there are some key areas of strength that boards need to build on and some key opportunities for improvement. While Australia scored well in terms of board diversity, there is still a way to go on this front. According to the Australian Institute of Company Directors (AICD), the latest percentage of women on ASX 200 boards is 20.4 percent (30 April 2015), so we’re still a long way from the AICD's 30 percent target.
Diversity goes beyond the inclusion of more women, however. Securing the right blend in terms of age, ethnicity, experience and skill-sets are also important factors, in a global and digital world where customer bases can be more diverse and transient. Boards and executive teams entirely composed of individuals from similar backgrounds may not be ideally suited to understanding this evolving landscape, and can also succumb more easily to 'groupthink'.
Australia was also a high scorer in terms of remuneration committee activity and clarity around the role of the board. However, risk governance is a key area requiring improvement. Our companies need to demonstrate far more explicit disclosure of strategy, risks and going concern linkages; more detailed analysis of risk appetite considerations is required and businesses should consider governance reporting from a group perspective and disclosing material risks in joint ventures and associates.
Another key area that Australian business needs to strengthen relates to Directors' time and resources. Australia did not score particularly well on this measure. Some key things for boards to think about include: considering requirements to limit the number of concurrent directorships and strengthening disclosure around other commitments; being more explicit around the frequency of board meetings and the types of information required, including around board protocols and better training.
Finally, assurance levels can be enhanced in Australian companies. While external audit is mandatory, internal audit is not. Requiring an internal auditor to independently report to the audit committee would be a good step for Australian businesses. I believe an internal audit function that delves into core processes and has the required independence is a sign of real strength.
Introducing CEO/CFO assurance on risk management and internal controls system should also be on the agenda, along with being more transparent about evaluating and dealing with internal controls systems weaknesses. I would also like to see a more explicit approach to whistleblowing policies and systems.
It is pleasing to see Australia in a leading position when it comes to corporate governance. But we can't rest on our laurels. Regulators and policy makers must continue to review corporate governance requirements to help ensure they remain relevant, adequate and effective. As the business environment changes around us, we need to continually improve our own controls to maintain an efficient competitive edge.
ACCA Singapore and KPMG in Singapore jointly conducted a study comparing corporate governance requirements across 25 markets globally.