Australasian Corporate Governance Congress

Speech by Katie Lahey, CEO, Business Council of Australia

  • Much has been said, argued and debated in recent times about the health of corporate governance in Australia.
  • The fact we are here today highlights the profile the issue has taken on since the highly-publicised collapses of Enron, Worldcom and, on our own doorstep, HIH.
  • These events have undoubtedly impacted the global and Australian economy in terms of market confidence and trust.
  • And the business community is feeling the pressure.
  • In its annual global survey of CEOs released last month, Pricewaterhouse Coopers found more than half of CEOs thought public trust and confidence in business had been eroded in the wake of recent corporate scandals.
  • Fortune magazine recently published an article listing what it believed any selfrespecting CEO should pack for prison.
  • That the world’s most respected business magazine would think to publish such an article – albeit tongue in cheek – is a sure sign that the corporate sector is on the nose.
  • In this rather toxic environment, it’s hardly surprising that governments, shareholders and the public are demanding business undergo a major overhaul of its corporate governance practices.
  • We now have a raft of inquiries and reviews aimed at delivering new and better governance laws and codes.
  • At the same time, business is taking the initiative through more education and training on corporate governance and responsibility.
  • The Australian Institute of Company Directors reports that demand for its education courses and seminars has been running at unprecedented levels over the past 18 months or more.
  • In the last financial year alone, more 1,500 people undertook the Institute’s Company Director’s course – a 25 per cent increase on the previous year.
  • Like our friends at the Institute, the Business Council of Australia has participated in the overall debate and review process wholeheartedly.
  • As the peak group representing Australia’ s corporate sector, we are acutely aware of the need to ensure high levels of market confidence and accountability.
  • Our capital markets and therefore corporate sector will only function well and grow on the basis of informed decision making and investor trust and confidence in the integrity of the market and the companies that underpin it.
  • The BCA recognises that it must play a role in rebuilding that trust and confidence.
  • Let me summarise our role in the re-shaping of Australia’ s corporate governance landscape.
  • The BCA provided a comprehensive response to the Government’ s CLERP 9 discussion paper. In it, we made it clear that we support the vast majority of the Government’ s recommendations.
  • We strongly endorsed the Government’ s continued reliance on a principles based approach to strengthening corporate governance in Australia.
  • The BCA is also closely involved in the ASX Corporate Governance Council.
  • The Corporate Governance Council is working on developing best practice principles against which listed companies will need to report. We hope this will form a cornerstone of improved governance practices in Australia.
  • Importantly, the Federal Government has proposed that the Corporate Governance Council have an ongoing role in Australia’ s corporate governance framework. We strongly support this step, which recognises that best practice is, and must be evolutionary.
  • In short, we are committed to addressing the issues that threaten to undermine confidence in the integrity of Australia’ s corporate sector.
  • At the same time, it is worth emphasising the BCA’ s strong view that Australia is ahead of the corporate governance game compared to other jurisdictions.
  • To quote the Government, “Australia starts from a position of strength in terms of the robustness of our institutional frameworks (including a highly skilled accounting profession) and corporate governance practices.”
  • The Business Council strongly supports this position.
  • We have not had to address – unlike the United States – the fundamental issue of separating the roles of chairman and CEO.
  • The boards of Australia’ s large listed companies are already comprised of a majority of non-executive directors.
  • Both these key factors which have been part of Australia’ s governance culture for many years contribute to the independence of our corporate board structure and behaviour.
  • If I were to finish up at this point, I would hope that most of you would conclude Australia’ s corporate sector has acted quickly and responsibly to address any lasting negative perceptions over the state of Australian corporate behaviour.
  • But I want to throw the spotlight on some more fundamental issues related to corporate governance.
  • In what is shaping up as the most far-reaching change to Australia’ s corporate governance standards in decades, I believe there are issues that have largely been overlooked.
  • First among these is the clear recognition that good corporate governance cannot be regulated. Good governance is about company culture, ethics, and behavioural change.
  • You cannot regulate good behaviour – as much as we might like to think this is possible.
  • At the heart of good corporate governance are values and behaviours that we would view as both positive and desirable attributes on the part of business.
  • Good governance is about accountability, responsibility, transparency, respect – it is about ethical behaviour.
  • If I have a concern with the current debate, it is that the push to achieve a lasting good corporate governance regime has been subtly divorced from the issues of corporate culture and ethics, and from performance.
  • We have become focused on spelling out good processes and principles and have lost sight of the challenges of implementation and the challenges of driving cultural and
  • behavioural change throughout companies.
  • Initially, the debate about governance was all about ethics and corporate virtue, or lack thereof.
  • The transgressions of those individuals at the centre of those corporate collapses filled the news pages with stories and anecdotes of greed, avarice and corporate sloth.
  • It read very much like a 21st century version of the seven deadly sins.
  • However, as the emotion and anger that many in the community, and indeed business, felt over these events receded, the corporate governance debate has become more academic.
  • Now it is defined, or rather confined, to the need for tougher laws and a broader and deeper base of prescriptive rules to stamp out bad corporate behaviour.
  • To my mind, the debate has placed too much emphasis on the conformance aspects of governance – that is, on the need to monitor performance rather than deliver it – both in regard to corporate governance and in regard to company performance.
  • We need to remind ourselves in these discussions that it is the latter – sustained company performance – that is what we are all trying to promote.
  • The respected Australian ethicist Simon Longstaff, Director of the St James Ethics Centre has remarked that corporations are really nothing more than an aggregate of individual values and actions.
  • In other words, the engine that drives every corporation is very much a human one.
  • As we all know, human behaviour is complex, ambiguous and often times defies rational thought – as the morality tales of Enron, Worldcom and HIH amply demonstrate.
  • So how is it that we believe that achieving good governance is solely about benchmarking corporate behaviour against rules and regulations?
  • Consider this - you are a director of a listed company.
  • You are presented with a plan that will deliver a return to shareholders of 20 per cent annum.
  • This at first blush, seems a godsend given the company has performed badly in recent times.
  • There are increasing calls from shareholders, analysts and the media for a board shake-up.
  • Reputations, including yours, are on the line if the company fails to lift its return-oninvestment performance in the short term.
  • The plan involves investing in a manufacturing plant which produces, as a byproduct, small amounts of a toxic material.
  • The material is believed to have a causal link to cancer although this information is not widely known, at least not in the community.
  • Your company’ s environmental experts inform the board a major study which will provide a definitive answer on this link will take at least a year to complete.
  • Yet without the plant, your chief financial officer solemnly tells directors that the only way to achieve break even in the current year is to cut the company’ s workforce by a third.
  • Should you, in the absence of definitive science that proves up or debunks this health risk, approve the proposal in the interests of maximising shareholder returns and protecting jobs?
  • Or do you shelve the plan and face the wrath of shareholders and the market by placing the community’ s interests above theirs’ ?
  • Both courses of action are right, within their own context.
  • Yet what are the signposts - or even the thought processes - that guide you to define and prioritise your responsibilities to shareholders, employees and the wider community?
  • I’m sure most of you here would weigh up the issues very carefully and come to a decision which reflects the weightiness and complexity of what is a hypothetical problem.
  • Yet I chose it because it underlines the sorts of dilemmas that exist at the corporate level - where competing interests between shareholders, employees and the community are the norm and often do not involve a simple choice between right and wrong.
  • Sometimes, it’ s a choice between right and right.
  • Sometimes the decision processes are sound and the decision is the right one at the time, but still the venture and even the company may fail.
  • That too is the nature of business.
  • Enterprise is about taking risks.
  • Most often risks taken against the backdrop of solid governance practices pay off, they provide significant returns to the company and its shareholders.
  • But sometimes risk taking fails even with best intentions.
  • This does not mean that corporate governance has failed. It is the nature of business and we must acknowledge that corporate collapses will always be a feature of our market system.
  • Yes people will lose money –but they have to expect to from time to time.
  • Equities are not a risk free asset – that is why the return from investing in shares is on average higher than government bonds and similar low risk investments.
  • Let me digress for a moment and touch on a very topical issue that highlights the complexity of governance issues – executive salaries.
  • Without wanting to reflect on individual packages, I think there are some interesting observations to make.
  • Revelation of Chris Cuffe’ s pay out quite simply has everyone in a lather. There have been loud and immediate calls for greater disclosure and for regulation of executive salaries.
  • Quite frankly, I can’ t say I am surprised.
  • But while there is instant appeal in these solutions, they do not come without problems.
  • And while it is easy to rail against particular cases – it is more than likely that the heat generated in the process will not contribute to sustainable solutions.
  • There is a danger in adopting simplistic solutions that do not reflect commercial realities.
  • There are some who argue that against the backdrop of a small pool of potential CEOs, the push towards greater disclosure of salaries has served to further inflate CEO salaries.
  • To my mind, if that is the case, we need to be thinking about what we can do to enlarge the pool of potential CEOs.
  • Equally, we need to be giving thought to what is driving companies to appoint external candidates over internal ones for the top job – for this too must be driving salaries higher.
  • What is happening in terms of succession planning within companies?
  • Is there a tendency for markets to reward external appointments?
  • Finally, the reality is that most large Australian businesses operate and compete in a global market. And the global pool of CEOs is small.
  • Australian companies must be able to compete for executive talent with salaries and packages that are competitive with global benchmarks. Quite simply, this problem is bigger than Australia.
  • That is not to say that nothing can be done. Far from it. I believe all of those involved need to be prepared to consider reasonable and responsible proposals.
  • But I think a long term solution is far more likely to be found in addressing the underlying causes of the ratcheting up of salaries, rather than in trying to treat the symptoms with some fairly blunt instruments.
  • Returning to my thoughts on the broader governance challenges, I strongly believe that we need to re-focus the debate on what I call a heads and hearts approach to corporate governance; on governance implementation and outcomes; and on the need to promote and support a viable and competitive corporate sector able to deliver shareholder value over the long run.
  • Such an approach recognises on the one hand, the need to re-define the parameters of what constitutes good corporate behaviour to address the immediate issue of restoring trust among investors.
  • Yet it also challenges business to recognise and promote a deeper understanding and culture that commercial decisions invariably involve an ethical dimension.
  • The simple fact is we cannot be guaranteed long-term good corporate governance if the debate is defined purely in terms of lowest common denominator, thou-shalt-not rules.
  • Responsibility cannot be defined solely in terms of accountability.
  • Neither can compliance substitute a genuine commitment to corporate virtue.
  • We need to encourage within our corporate culture structures that reinforce and reward the positive aspects of human nature and behaviour.
  • In short, we need the capacity to think of corporate governance with our hearts – that is, recognising and acting on what we know to be instrinsically right - as well the baseline rules that simply tell us what is acceptable.
  • Again to paraphrase Simon Longstaff – it is difficult to see how companies can successfully manage the task of corporate governance without a significant focus on ethical thought and reasoning.
  • I concur – relying on a set of prescriptive rules borne out of and relevant to our own time, we will be condemned to repeating history.
  • The Quintexs and Tricontinentals in the 1980s, and the HIHs and others of recent times are variations on a common theme.
  • Rogue companies, directors and management will always find clever ways to disregard the spirit of the rules while claiming they are still conforming to the letter of the law.
  • A developed corporate conscious, on the other hand, is not as easy to ignore.
  • Enron, for example, was very good at reporting against every triple-bottom line type measure – and receiving government accolades in the process.
  • But in the end, it fell disastrously short of good governance in an ethical and operational sense.
  • Perhaps we have detached corporate ethics from the debate on corporate governance because ethical issues at the end of the day are about intangibles.
  • In a marketplace which increasingly defines company performance in terms of shortterm, quantitative outcomes, corporate ethics is seen at best as outside the mainstream, or at worst irrelevant.
  • After all, can the value of an ethical framework – which may take some considerable time to develop and mature - be captured in terms of asset growth, earnings per share or KPIs?
  • Yet, ironically, many companies are committed to delivering such a framework in another context, perhaps without knowing it as such.
  • Corporate stakeholder relations is now a fundamental part of many companies’ core functions.
  • What is stakeholder relations if not a deliberate task of promoting trust, understanding and loyalty between the company and groups and individuals outside it?
  • A study conducted by the Centre for Corporate Public Affairs in conjunction with the BCA in 2000 found that three-quarters of companies surveyed placed stakeholder engagement and community involvement at the heart of their business sustainability plan.
  • As the study noted, these relations are not aimed at achieving short-term commercial returns.
  • Rather, they are aligned with the companies’ intangible and long-term corporate goals and objectives.
  • If so much time and effort is allocated to creating and reinforcing a culture of ethical relations between a company and its external stakeholders, it is not such a leap to advocate that similar efforts can and should be made within.
  • Why not foster a culture in which employees are encouraged to speak out without fear of punishment if they believe management has acted improperly?
  • Why not develop of code of ethics that ranks alongside the company’ s code of conduct?
  • These suggestions may seem too fuzzy for some hard commercial heads to contemplate.
  • I won’ t go into studies that demonstrate companies with strong ethical cultures often do better than those focused entirely on the bottom line – suffice to say that intangibles can and do translate into superior commercial performance.
  • So let me propose a plan of action – a list of tangible ways to use our existing corporate structures to better promote ethics within companies.
  • First, I believe companies should develop a specific framework or code that set out appropriate standards of ethical behaviour by directors, management and employees.
  • This framework should define what the company believes constitutes both ethical and unethical behaviour, sets out proper processes to investigate reports of unethical behaviour, as well as determining sanctions for those found to have breached this framework.
  • Secondly, this policy or code should be disclosed in the company’ s annual report, along with a statement from directors as to whether they believe the company has complied with this policy.
  • Thirdly, companies should do more to encourage and support these structures byfacilitating the formal learning of ethical decision-making - not just in the board room, or at senior management levels, but throughout the company.
  • An issue that is definitely worth exploring further is whether business ethics should be considered a fundamental element of professional development.
  • Finally, companies should establish clear procedures that protect people who wish to highlight and correct wrongdoing inside the company.
  • Companies that put in place formal whistle-blowing procedures are effectively acknowledging the contribution and responsibility of every employee to uphold ethical standards.
  • Although I believe that efforts to cultivate a performance oriented, transparent and ethical culture throughout any company will diminish the need for whistleblowers.
  • To reiterate – governance cannot work if it relies simply on compliance.
  • Employees, management and board members must have the capacity, and be encouraged to form their own judgements about whether their colleagues or managers are acting in an ethical way.
  • I would like to conclude by stressing that my thoughts should not be taken as a criticism of the vast amount of effort contributed by many parties to making Australia a global leader in corporate governance standards.
  • These efforts which will undoubtedly go a long way to achieving this extremely important objective.
  • The purpose of my address has been to point out the potential difficulties and pitfalls if we focus exclusively on one side of the problem.
  • Focussing on issues of the head while forgetting that corporate governance is just as much about matters of the heart may not deliver the outcome that business needs and the market expects.