Event: Interview with Ticky Fullerton, Sky Business
Speaker: Jennifer Westacott
Date: 6 August 2018
Topics: ASX Corporate Governance Principles and Recommendations, National Energy Guarantee
Ticky Fullerton, host: Jennifer Westacott well this is literally hot off the press today. The BCA submission into the ASX's corporate governance principles and recommendations. You've got some pretty strong views on this.
Jennifer Westacott, chief executive Business Council of Australia: Yeah absolutely. Look we think, you know, these guidelines have served corporate Australia pretty well to date. They've been principally about matters of disclosure but we think this draft has a number of really serious issues. First of all, it tries to do things like describe culture. Secondly, it's very prescriptive on a whole lot of issues...
Ticky: It seems to be going further.
Jennifer: Exactly right and then it, kind of, broadens out some scope and starts to talk about concepts like social licence to operate which are great terms but, you know, they mean different things to different people and they will be different for different companies.
Ticky: Let's break it down for the moment.
Ticky: Let's go to the social licence to operate. This has come out of, no doubt, all the missteps that have been in say financial services, the royal commission. Why is putting in something like the social licence to operate as opposed to social responsibility, why is that a concern?
Jennifer: Because it means different things and the problem with these guidelines, it’s the starting point is an 'if not, why not' principle. So, the more prescriptive you are, the more you duplicate what's in legal responsibility, the more you talk about gender targets, the more you talk about the composition of committees, if you're starting principle is 'if not, why not' then you start setting different standards which potentially are at odds with existing legal provisions and so if you're on a board, well what are you really going to be held accountable for? So, to your point about social licence, I mean, if I'm a mining company, I have a different set of issues to take account of in my social licence to operate in respect of the environment. If I'm a financial services company, different. So, these terms just become very different to very different people.
Ticky: Could they be hijacked by some corporations?
Jennifer: I think they can be hijacked and I think you've got to go back to the, kind of, companies doubling down on their legal responsibilities, sure on their social and ethical responsibilities. And I think by-and-large companies in Australia do a pretty good job on that but once you start diluting, you add more and more in, my risk, my issues, the more you ask boards to do the less time they've got to do on the absolute core things that they're accountable for. The more you dilute, the more you duplicate, the less accountability rather than more accountability and I think what we want to see is greater accountability on boards, on CEOs for the management of conduct, relationships with shareholders and customers.
Ticky: But you're saying that the problem with being more prescriptive is that it blurs that.
Ticky: So, it's very much the David Murray argument that it blurs the line between boards and management and you can't, as a board, keep management accountable.
Jennifer: Correct. And also, you can't take account that different companies have different purposes, they have different obligations in respect to those purposes. They have different make up of customers, of shareholders. So, you know, my social licence to operate interpretation might be different to yours. In which case, as you say, it's an opportunity for, I think, a lot of mischief in the corporate world.
Ticky: So, the 'if not, why not' rule that's been running boards should basically stick to a set of principles. They can go off and do other things if they can justify…
Ticky: So, you're arguing are you that if you're more prescriptive in the guidelines, it gives less opportunity for boards to go 'if not, why not'?
Jennifer: Yeah exactly. And it's got to be 'horses for courses' because say, you know, committee structures for example which is something David Murray has raised. You know companies will…
Ticky: These are the sub committees.
Jennifer: Correct. Companies will have different ways that they break down issues but fundamentally, and this is his point and I agree with it, the fundamental relationship is a board and the chief executive and look, you know, audit committees have generally served companies pretty well. But what you don't want is a dilution of accountabilities. And the problem with more and more and more obligations on directors, you do kind of question, does that mean less and less and less time on the really crucial things that matter. Their fiduciary responsibilities. Their responsibilities to their customers. Their responsibilities to their shareholders. So, if you've got a charter...
Ticky: A setting of culture.
Jennifer: And setting of culture. And so, you can't prescribe culture. This is something I'm very concerned about in the national debate at the moment that somehow you can say 'here's the 10, kind of, principles for good culture'. Culture is a creature of leadership, of values, of systems, of processes, of skills and attributes. Cultures get created organically, to use that jargon, you can't just put up a sign one day and say 'here's our new culture everyone, get with it'. It's all about, you know, all of those things internally that really matter.
Ticky: So, going back to the accountability issue of boards, specifically. I'm just wondering, was there a beginning of the slippery slope? Say, post James Hardy. Where the roles and responsibilities, the duty of care of a director actually changed - it extended. So, you didn't just, you couldn't reasonably rely on experts anymore, you had to go and find out yourself as a director, which presumably is why a lot of these subcommittees started.
Jennifer: Maybe. You know, I haven't, sort of, traced it back. But maybe you're right about that. I think, clearly, boards have got an oversight responsibility. They've got to satisfy themselves that the information they are receiving is bona fide, it's accurate. But, you know, they can't duplicate the role of management. You can't do that.
Ticky: There's a specific thing on diversity here that really there should be at least 30 per cent of women on boards. What do you think of that?
Jennifer: Look again, we've challenged that. Not because we shouldn't have more women on boards. Of course, we should aim to have a better gender mix and this has been an issue for a long time. But, you know, my concern about this is that, first of all, what you want is boards that are diverse more generally. Diverse of ideas, diverse of backgrounds, people who are going to, you know, bring some particular expertise. The concern I've got with the 30 per cent gender target is that it becomes sort of like a minimum standard. Okay well we've got 30 per cent so we don't need to worry anymore versus the quality of the directors. So, it becomes another tick box thing. And you miss the possibility of really getting a diverse board which is about diversity of ideas. My other concern, and there will be different views to mine on this, is you end up with the same women on lots of boards.
Ticky: Which has been happening.
Jennifer: Yeah. So how much of that is really about diverse cultures and cultures where you're bringing in different expertise? I think we need to go back to the principles of diversity.
Ticky: Does this all affect continuous disclosure obligations as well?
Jennifer: It does. It does and I think the, you know, kind of classic 'if not, why not' was principally around matters of disclosure but once it starts to, kind of, get into 'if not, why not' 30 per cent, 'if not, why not' on some of these very detailed provisions then you start to [cross talk]
Ticky: [cross talk] social licence to operate.
Jennifer: Yeah then, you know, boards have really got then a very confused landscape of accountabilities where, you know, we've got to actually go back to. We've got a piece of legislation, we've got other legislation, we've got a very clear standard of corporate governance. People have to obviously adhere to that.
Ticky: Does this open it up to, I mean I was speaking to Brett Himbury from IFM investors the other day and he reckons this whole 'horses for courses' argument actually is great because it positions the industry funds to argue that in their particular case, having union representation on these boards as oppose to independent directors given their returns are superior to retail funds, this is an opportunity for them to make their point.
Jennifer: Well, yeah, I think there's a bit of a long bow there. I think there's a very serious case about the independence of directors on the industry super funds and I think the government's right to kind of call that out.
Ticky: So, your accountability goes to more than just returns?
Jennifer: I think it has for every company. I mean there is an accountability that is to your stakeholders, to your customers, your shareholders particularly and I've been saying for a long time companies have to have a broader purpose than just a return on equity or just some financials but there's, kind of, a right of balance isn't there? You know, the more you give boards to do, the more a board sits down and they've got stacks and stacks of compliance some of that is absolutely core and some of it's not. You know, you end up either having week long board meetings or you end up, I think, diluting accountability because you've got confusion.
Ticky: Alright a lot to chew on for the Council I would imagine. Now, I spoke to you last week about the National Energy Guarantee, the NEG. What's your biggest fear about this week?
Jennifer: My biggest fear is that the states seek to delay it. That we bring in, you know we now have another contest about the target, that we bring in a whole lot of, you know, reasons for delaying that I think are just not justified and then we kick the can down the road for however. And I think business is crying out for certainty. Today all of the business organisations have signed a statement saying please get this done, we need the certainty.
Ticky: And is the setting of a higher target, is that justifiable at this stage?
Jennifer: Well, no because we've got a target. A target that's quite ambitious. A target that we think is realistic. It's been through a process. It's been through the Paris Agreement. The NEG allows us to bring together reliability, the emissions reduction target, it does, kind of, address a lot of the affordability issues. My concern, Ticky, is that if we delay this or we say we are not doing that, we don't go back to the next iteration of something. We've seen in the last decade of dysfunction in this debate. We don't go making incremental improvements. We go back to ground zero all the time. We start again. Now for investors, for companies wanting to extend the life of those coal fire power stations for people wanting to bring on our gas resources, for people wanting to invest in new technologies, that…
Ticky: Including green energy.
Jennifer: Including green energy, that inability to set a clear signal on how emissions will be treated is absolutely investment stifling and we don't ever seem to make incremental progress - we go back to ground one.
Ticky: Jennifer Westacott thank you so much.
Jennifer: Thank you