A Matter of Balance
Corporate Governance in Australia 2002 -2012
The last ten years have seen the continuing development of a hybrid system of corporate governance in Australia (Zadkovich 2007). The Corporations Act, 2001, the Australian Stock Exchange (ASX) and Australian Securities and Investment Commission (ASIC), have responsibility for regulating and monitoring (Grant 2005) corporate governance through a layered web of binding and non-binding codes and regulations with which companies must comply (Comino 2009). Yet the Global Financial Crisis raises the question of whether the current flexible system has merit, or whether a more ‘black-letter’, that is, prescriptive legislative approach, such as the current US system, should be adopted (Comino 2009; da Silva Rosa, Filippetto & Tarca 2008).
This paper explores whether good corporate governance can be achieved by a “combination of regulatory action, codes of best practice, […] and the implementation of company charters on ethics or governance” (Maltas 2005, p. 69). The paper begins by reviewing the corporate governance development, in the form of the ASX Principles of Corporate Governance [from here Principles] and the CLERP Act 2004, in Australia since 2002. The following section explores the usefulness of the voluntary guidelines, followed by a discussion of the case for regulation. A brief discussion of the dangers of a one-size-fits-all approach follows before coming to a conclusion.
Corporate Governance in Australia 2002-2012
Corporate governance in Australia, as elsewhere, is built on agency theory describing the nature of the relationship between managers and the owners of the firm, its shareholders, who delegate decision-making rights to managers (He & Ho 2011). It is the processes and procedures that are put in place to manage and control corporations (ASX Corporate Governance Council 2007; OECD 2004), and must take into account “the interest of internal stakeholders and other parties who can be affected by the conduct of the corporation” (du Plessis, McConvill & Bagaric 2005, p. 7). It is aimed at ensuring corporate socially responsible actions, whilst achieving an informed and efficient market, the profitability of the firm and the confidence of the investors (ASX Corporate Governance Council 2003; du Plessis, McConvill & Bagaric 2005). But in Australia this has always taken the place of very loose guidelines, ‘fuzzy’ laws and rules that “encourage companies and people to lift their gaze from regulatory minimums to the principles involved” (Bartholomeusz 2002, para. 9). These include the Corporations Act 2001, the ASX Principles and the CLERP Act 2004 (Grant 2005). This section briefly reviews the development of the latter in this time period.
Corporate governance in Australia was in play well before 2002 (Kiel & Nicholson 2003), though perhaps did not feature strongly in the public domain (ASX Corporate Governance Council 2007). However, the collapse of HIH, One-Tell and Harris Scarfe, and similar developments overseas (da Silva Rosa, Filippetto & Tarca 2008), brought the issues of corporate governance and the responsibilities of Boards into the public arena (Kiel & Nicholson 2003). In response, in 2002, the ASX announced the creation of the ASX Corporate Governance Council, which involved some 21 business groups (Robins 2006). The purpose of the Council was to ‘develop and deliver an industry-wide, supportable and supported framework for corporate governance which could provide a practical guide for listed companies, their investors, the wider market and the Australian community’ (ASX Corporate Governance Council 2003, foreword). The Principles, a voluntary code, was launched in March 2003. ASIC was given the task of administration and enforcement of the Corporations Act and the Principles, to deal with corporate misconduct and to apply civil and criminal penalties (Comino 2009).
The Principles were amended in 2007, when they were reduced from the original 10 to the current 8, with further amendments concerning Board diversity, communication with shareholders, and the role of the remuneration committee, published in 2010 (ASX Corporate Governance Council 2007). There are a number of other voluntary codes, standards and guidelines that support and provide further guidance to the Principles developed by organisations such as the Australian Institute of Company Directors, Standards Australia and the Institute of Internal Auditors (ASX Corporate Governance Council 2007).
The other significant development to influence corporate governance in Australia during this time was the Corporate Law Economic Reform Program (CLERP). CLERP began in 1997, in response to the Wallis Inquiry into the financial system. The reforms were aimed at “market freedom, investor protection and quality disclosure of relevant information to the market” (Grant 2005, p. 14). CLERP forms part of the Federal Governments ongoing business regulation reform commitment (CLERP in a Nutshell 2012) and were intended to be a continuous review of the corporations legislation in Australia (Jordan 2009). The reforms from CLERP 1-8 took effect before 2002 and many, such as the changes to director’s duties [CLERP3] and reforms to the financial services markets [CLERP6], were included in the Corporations Act 2001 and the Financial Services Reform Act 2001 (CLERP in a Nutshell 2012).
In June of 2004, the year that the NAB posted a loss of $360 million in foreign exchange losses, the result of fraudulent behaviour, the Commonwealth Law Economic Reform Act 2004 [CLERP9] was passed (Cordery 2007). CLERP9 was implemented as a direct result of the Ramsay Report and the Royal Commission recommendations from the HIH inquiry (Grant 2005). CLERP9 reforms were released to “bolster principles of corporate governance, improve the quality of financial reporting and improve audit quality” (Allan 2006, p. 145). Specifically, the reforms sought to improve the measures for auditor independence, but also ASIC’s abilities as the lead regulator (Dignam & Galanis 2004) to enforce continuous disclosures and its ability to prosecute those not complying (Grant 2005). CLERP9 together with the Corporations Act 2001 form the basis of Australia’s regulatory response to corporate governance.
The merit of voluntary guidelines
The ASX has throughout adopted the position of flexibility for corporate governance and maintaining the non-mandatory nature of the Principles (ASX Corporate Governance Council 2007). Neither these nor the Listing Rules are intended to prescribe how firms adopt corporate governance practices, but rather to underpin their operation (ASX Corporate Governance Council 2012). The intention in the voluntary framework is for firms to use them as a minimum benchmark (du Plessis, Hargovin & Bagaric 2011), develop their own appropriate corporate governance practices, and then be able to explain these and justify them to the shareholder and wider community, using the “if not, why not” approach (ASX Corporate Governance Council 2007, p. 2).
There is some question over the benefit of the adoption of the more formal corporate governance code inherent in the Principles approach by the ASX, with a number of market analysts “claiming it to be a ‘box-ticking’ exercise of dubious benefit” (da Silva Rosa, Filippetto & Tarca 2008, p. 68). Beyond this, there is the question whether a voluntary approach may in fact permit a considerable variation of actions and broad interpretations, which could be claimed to be consistent with the intent of code, but fail to give a consistent message to the market (Backer 2008). How firms explain the Principles may also vary, with what might constitute a satisfactory explanation in the annual reports not defined (Zadkovich 2007) or neglected all together (Dignam & Galanis 2004). In fact, there is some concern that a firm’s corporate governance may look good in their annual report but may have little impact on Board room procedures, with early research conducted in the 1990’s showing that company directors perceived governance as requiring no further work beyond ‘ticking the right boxes’ (Maltas 2005, p. 6). US research has questioned the economic value of compliance codes, their ability to prevent market failure, improve corporate performance, or demonstrate that they could prevent the agency problem (Thomsen 2006).
However, more recent Australian research by Henry (2008) found that there was a statistical and economic value in a firm’s adoption of the corporate governance structures as laid out by the ASX, even when using a ‘tick the boxes’ approach to the framework. And research by Hutchinson, Percy and Erkurtoglu (2008) into the application of the different Principles, showed that Board and Audit committee independence were positively associated with the quality of a firm’s financial reporting and reduced the incentives by the agent to act opportunistically. No voluntary system will ever be able to stop all corporate failure or malfeasance (Zadkovich 2007), however, these are significant finding, as more firms adopt the framework and comply with the reporting demands (ASX Corporate Governance Council 2007; Hutchinson, Percy & Erkurtoglu 2008) and vindicates in some way the ASX ongoing support for the more flexible voluntary system.
Overly prescriptive regimes – ‘black-letter’ laws
From the beginning not everyone has agreed with the ASX approach, the lack of research to support the development or implementation of the Principles has meant a great deal of scepticism by both academia (Thomsen 2006) and from within the United States, where there has been the adoption of a more stringent ‘black-letter’ approach (Robins 2006). There is some agreement in the literature that regulation limits uncertainty (Coulton & Taylor 2004) and more stringent controls would benefit the development of a more efficient market (Bloomfield et al. 2010).
Australia’s response to the corporate collapses at the turn of the century was comparatively weaker and slower when compared with the US, who were quick to introduce the Sarbanes-Oxley Act [SOX] (Robins 2006). SOX was passed in 2002, taking “the best practices of director independence and audit procedures and made them mandatory” (Cheffins 2009, p. 6). A study by Cohen, Krishnamoorthy and Wright (2010) of the outcomes of SOX demonstrated a significantly stronger corporate governance environment than existed previously (see also He & Ho 2011). These results would support the idea that a government would be justified in establishing ‘black-letter’ law to protect the interest of the broader stakeholders (Monks & Minow 2003). The big issue with SOX – and with other black-letter laws, however, is the compliance costs (Allan 2006; He & Ho 2011). The level of bureaucracy and compliance costs have risen steadily in the US as a result of SOX, triggering the decision by many smaller companies to either delist (Thomsen 2006), or to limit growth potential below the compliance market size threshold (He & Ho 2011).
Compliance costs come in the form of legal fees (Jordan 2009), increased use of Director’s time (da Silva Rosa, Filippetto & Tarca 2008), and financial cost to the firm and to the State (Zadkovich 2007). As a result of SOX, companies are expected to spend more than a third of their time and financial resources on internal audits and on information systems for SOX compliance (He & Ho 2011). Average annual compliance costs in 2004 were estimated between $US3 and $8 million dollars (Ibid, p. 625). In Australia the 2006 estimated combined cost for compliance with the current voluntary standards was $375 million for the top 50 listed companies (Allan 2006, p. 16), leading in some instance to what has been termed ‘governance fatigue’ (de Kluyver 2009, p. 77).
The burden of compliance costs was one of the reason given by the ASX for not introducing more onerous mandatory regulations, not wanting to increase them more then existed already and opting to give particularly smaller companies the option to develop their own within the limits of the Principles (ASX Corporate Governance Council 2007; Robins 2006). The reality is of course that not all agree that ‘black-letter’ laws make that much difference (Robins 2006). Whilst regulations may set a minimum standard for firms to follow (de Kluyver 2009), they can often become “only a roadmap for the unscrupulous” (Leung & Cooper 2003, p. 512). Many people have benefited from the growth in the market economy, both in wealth creation and social innovation, but as we have seen in recent years the market needs some regulation in order to cease its destructive path (Bloomfield et al. 2010; Leung & Cooper 2003).
A One-Size-Fits-All approach
There is some argument that the quasi-soft law approach (Allan 2006) adopted by the ASX fosters a one-size-fits-all mentality to corporate governance as companies seek to comply with the code (Coulton & Taylor 2004). This is an inherent danger of either a voluntary or regulatory system of corporate governance that has been recognised in the literature (Davies & Schlitzer 2008). It is also one of the reasons why an international approach to corporate governance may not work – as it has the potential to ignore the variations that exist across national borders (Monks & Minow 2003). But, there is a strong push by institutional investors to have similar corporate governance criteria across jurisdictions, to help standardise the delivery of their product (Thomsen 2006).
Conclusion – a matter of balance
The growth in corporate governance systems over the last 10 years was the result of significant corporate collapses. But corporate failures are seldom the result of a “single ‘big bad’ decisions, but from unbroken chains of bad decisions” (Mellahi, Frynas & Finlay 2005). The question remains what is the best balance for good corporate governance between the regulatory environment and the voluntary codes to prevent or limit the damage from future events (Robins 2006). The ASX approach allows for a flexible implementation that responds best to companies’ needs, a balance between a voluntary code and recommendations, contained in the Principles, and mandatory reporting as a result of the Listing Rules and the Corporations Act 2001 (ASX Corporate Governance Council 2012). ASIC’s earlier ‘hand’s off’ approach to compliance (Dignam & Galanis 2004) was intended to encourage companies to enter into the spirit of the law (Bartholomeusz 2002). In making “technical compliance with the law less of an issue than compliance with its spirit, the Australian system has offered scope for good governance and practice to evolve and respond to the corporate environment and community expectations” (Bartholomeusz 2002, para 11).
The GFC renewed calls for more effective and stringent regulation of corporate governance (Bloomfield 2010, Comino 2009). The growing uncertainty caused by court actions over the interpretations of the Corporations Act in the early years of this century (Coulton & Taylor 2004), the failure of ASIC to maintain compliance through civil penalties (Comino 2009), has also led to calls to revisit the regulatory environment (Henry 2008). But research in the US has demonstrated that the GFC was not necessarily the result of bad corporate governance practices (Cheffins 2009). The ASX responded by changing some of the recommendations embedded in the Principles, particularly around Board diversity, communication with shareholders, and the role of the remuneration committee (ASX Corporate Governance Council 2007). But they have not gone for an increase in the level of regulation. The answer to the question of good corporate governance for companies lies not in increased regulation, but in an individually developed combination of “regulatory action, codes of best practice, research and the implementation of company charters on ethics or governance” (Maltas 2005, p. 69) as companies balance the need of the market, their shareholders and the wider community of stakeholders.
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 CLERP – Corporate Law Economic Reform Programme
 These are not the only two developments to directly or indirectly affect corporate governance in Australia; others include the Corporations Act 2001, the Financial Services Reform Act 2001, the ASX listing rules, and a number of Industry and Accounting Standards documents. Besides these the common law also plays a large role in defining CG in Australia (Zadkovich 2007).
 The Corporations Act 2001, having been passed the previous year. Further changes to the Act have been made since it was passed, some of which have been part of the CLERP reforms (Jordan 2009).
 The USA had just passed the Sarbanes-Oxley (SOX) Act, 2002, whilst the UK had launched its Combined Code in 1998 by the Hampel Committee on Corporate Governance
 CLERP8 (cross border insolvency) was released on October 2002.
 The Annexure C of the Guidance Note 9 is literally a box ticking document (ASX Corporate Governance Council 2012)
©Karin Oerlemans June 2012