The latest consultation draft of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations has generated a great deal of debate. We’ve heard that the principles have been hijacked by special interests and that they don’t go far enough.
But in our view, we need to go back to first principles (pardon the pun) and remind ourselves what purpose these principles serve.
The ASX Corporate Governance Council was first convened in August 2002 in response to the Royal Commission into HIH Insurance and its demise, with principles following quickly in 2003.
In these, 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 were that many of these were novel, even for experienced directors leading some of Australia’s largest listed companies.
The context today is very different. Any guidance document competes for attention with diverse demands and published standards from regulators, stock exchanges, financial sector initiatives and institutional investors themselves.
New research from the Responsible Investment Association of Australasia revealed that $866 billion in assets under management for Australians were invested under a responsible investment approach.
This means that companies today field requests for information from a wide range of shareholders, each with differing interests, priorities and expectations.
This is where a strong set of corporate governance principles can help.
This helps companies prioritise against competing demands. Less helpful are crowdsourced laundry lists of features.
The consultation draft for the fourth edition of the Principles and Recommendations could be more precise and better targeted, which has probably contributed to the at-times heated debate; however, it is important that these flaws not be conflated with a lack of legitimacy for some of the ideas the publication seeks to express.
“Social licence to operate” is an unfortunate term for the entirely routine observation that organisations need to navigate the appropriate tension across many different interests – customers, lawmakers, employees, contractors and suppliers are among these.
For some of these stakeholders, some of the time, the relevant currency is trust, not cash (or other tangible assets). Referencing this concept within the principles acknowledges the challenges companies face in this balancing act.
It underscores to companies that shareholders recognise the value of their efforts to build, protect and grow this trust. Its inclusion among the principles is important to counter a common misapprehension that shareholder and stakeholder interests are necessarily at odds.
If the level of detail in the principles seems in parts to stray from the intended purpose, this can be resolved through clearer explanation, better-targeted expectations and judicious streamlining.
Clear distinctions between what is required of companies, what is recommended of them, and what is supporting material, for explanatory purposes, would greatly help.
The effectiveness of the principles relies on widespread acknowledgement of each recommendation’s rationale, not on reluctant compliance with things that seem like arbitrary rules.
As representatives on the ASX Corporate Governance Council, investors are poised to shape the final form of the fourth edition. They can support a document that presents a robust rationale for each recommendation it prioritises.
They can be selective in the disclosure called for, recognising that the scarce commodity for all of us in 2018 is not information but attention. They can emphasise that diverse corporate governance arrangements can deliver the transparency, integrity and accountability that they seek.
They can also acknowledge that the principles are only a means for streamlining the communication of their expectations to listed companies. Many carrots and sticks, levers and guy ropes lie elsewhere in the investor company interface.
Susheela Peres da Costa is the head of advisory at Regnan.
