First Principles

SUSHEELA PERES DA COSTA, HEAD OF ADVISORY

8 August 2018

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The latest draft of the ASX Corporate Governance Principles and Recommendations have generated a great deal of debate. This piece aims to find a way back to first principles (pun intended) in recalling what corporate governance principles should be about.

The ASX Corporate Governance Council was first convened in August 2002 as a “central reference point for companies to understand shareholder expectations, in order to promote and restore investor confidence” as part of a range of responses to a different Royal Commission into the demise of HIH. Coincidentally, the formation of Regnan – then known as BT Governance Advisory Service –was another of these responses.

Its Principles were first published in 2003. “Best practice recommendations” were included to guide companies to produce an “efficiency, quality or integrity outcome” by exemplifying ways to address the ten underlying Principles that the Council believed underlay good corporate governance.

Corporate governance itself was clearly defined as the system by which companies are directed and managed, and through which accountability to owners is achieved.

Our observations from engagement records at that time were that many of these precepts were new information for many corporate directors, novel even for many experienced directors leading some of Australia’s largest listed companies, given the absence of other feedback on these matters from their owners.

Accountability, integrity and transparency

Rather than offering wayfinders in an information vacuum, any guidance today competes for attention and legitimacy with diverse demands and standards across a huge range of ESG initiatives that have arisen in the intervening fifteen+ years at the interface between companies and their owners.

Supporting “efficiency, quality and integrity” outcomes in this crowded context means helping companies to plot a principled pathway through this noise-filled marketplace of ideas. Achieving cut-through requires precision in the expectations being communicated, and robust rationales for the priority they are accorded.

Investors have a role here too. We can be clear about what structural tensions we want addressed, while re-emphasising that diverse governance arrangements can deliver the transparency, integrity and accountability results. We can acknowledge trade-offs inherent in commercial contexts, and ensure our demands do not result in superficial outcomes being prioritised. And we can be selective in the disclosure we call for and the initiatives we back, recognising that the scarce commodity for all of us in 2018 is not information, but attention.

We believe that Principles better tailored to this context would be valuable in 2018. Accordingly, we have called for (among other things):

  • Clearer distinction between requirements (which are intended to support market efficiency), recommendations (which should be presented as exemplification), and supporting materials (which should be tightly targeted to providing a robust rationale for focus).
  • Clearer recognition of the distinct shareholder interests/concerns that Principle 3 and Principle 7 (specifically, 7.4) need to address; being externalities versus risk to the business, respectively.
  • More direct attention to cognitive diversity in board appointments.

 

Regnan's submission is available here →