Corporate Australia has seen the collapse of substantial organisations across all sectors (HIH, Dick Smith, One. Tel, Qintex, Babcock & Brown). Whilst the Sarbanes-Oxley Act (2002) saw the introduction of corporate governance principles relating to financial reporting, the recent Hayne Royal Commission has re-ignited the focus on governance practices and conflicts of interest and expanded these to consider:
organisational structure and how it relates to governance and independence;
remuneration targets and how these impact on culture and in turn, the service provided to customers; and
the re-allocation of accountability onto boards and re-defining their role in driving organisational strategy, risk management and decision making.
This has created a significant amount of concern at board level as the delineation between board and senior management responsibilities continues to blur and create tension. But this concern has not been limited to the big end of town. Smaller organisations and start ups are drowning in compliance and board reporting, spending a disproportionate amount of valuable time and resources to meet compliance obligations.
The million dollar question is therefore - What level of governance is appropriate for the organisations size, value, industry and maturity?
What is corporate governance?
Corporate governance is the framework that defines the relationship between shareholders, management, the board of directors, and other stakeholders, to help influence how a company operates.
Frameworks need to incorporate
rules (Corporations Act, ASX Corporate Governance Principles and Guidelines etc);
processes and systems (e.g Strategy including Vision and Mission statements, Risk Appetite, Management Plans etc.); and
the behavioral expectations for how relationships are managed (e.g: Code of Conduct, Public Relations, Role of the Board etc).
Big end of town
For large corporates, the Hayne commission has thrust the issue of improper remunerations targets and poor culture into the public spotlight. It has exposed how organisations have been structured in a way that fundamentally create conflicts of interest. Boards have needed to be reminded of their fiduciary duties and it is comforting to see high profile leaders in the community begin to respond accordingly.
Boards are no doubt reviewing the measures by which culture is reported and tracked as well as their management plans and internal structures to ensure they meet the expectations of their stakeholders and the community.
Boards should also be looking inward and conducting evaluations to ensure board members have the appropriate technical skills together with the understanding that the boards role is to challenge what is presented to them.
As noted in the Higgs Report. "The effective non-executive director questions intelligently,debates constructively, challenges rigorously and decides dispassionately".
Medium sized organisations and start ups
The lack of economies of scale are an inherent disadvantage for smaller organisations already overloaded with compliance obligations. A recent discussion with a start up in home loans indicated that "...Almost a week per month is spent developing board papers. This is time we simply don't have and its affecting out ability to go to market."
Smaller organisations also often lack the internal skills required to develop briefing papers or provide sound analysis on the reporting of financials.
Smaller organisations will need to get external support in the form of outsourced secretariat and governance support in order to focus on implementing their strategy preferring to ensure their staff are focused on "performing" and other more skilled externals are focused on "compliance". They will need to ensure that a pragmatic approach is taken to ensure their governance frameworks are at the appropriate level of maturity for their organisation and industry.
Regardless of where organisations may sit, the only guaranteed outcome is that corporate governance, whilst sometimes considered to offer minimal value adding is here to stay and organisations are well advised to invest in ensuring that governance frameworks are in place and are actively being communicated and implemented.
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