Expectations Of ASX Corporate Governing Council For Majority Independent Directors

Background

Question:

What attempt can be made to examine the expectations of ASX Corporate Governing Council? Explain.

In this assignment an attempt has been made to examine the expectations of ASX Corporate Governing Council which requires that the majority of directors who have been appointed to the boards of listed companies should be independent (ASX Corporate Governance Council, 2014). The idea of having a majority of independent directors on the board of listed companies is a relatively new idea. While in the past, it was generally presumed that the board of directors had the responsibility to look after the management of the company and in this process, they were helped by the persons who had special contacts in the industry and those who had specific understanding regarding the industry. However, the widespread incidence of catastrophic corporate governance failures have resulted in the introduction of changes in the policy and regulations and these changes include the requirement that majority of directors on the boards of listed companies should be independent directors (Bezemer et al., 2007).

In this regard, the Corporate Governing Council guidelines have made certain recommendations. These recommendations include the recommendation which provides that majority of directors who have been appointed on the board of listed companies need to be independent directors. The Corporate Governing Council provides in this regard that if a particular corporation would not comply with the recommendations, this fact has to be disclosed by the company in its annual financial report. Therefore, the requirements that have been prescribed regarding the independence of the directors are based on the need for having fiduciaries that do not have any conflict of interests with the company (Bosch, 1991).

There are certain factors that are present in this regard and these factors have to be considered when the issue of the independence of directors is being considered. As a result, the interests, associations and the positions as a result of which, a doubt may arise regarding the independence of the directors includes the instances where a particular director was employed in an executive position by the company or its subsidiary during the last three years of the appointment of the director. In the same way, doubts may also arise if the director was a partner or acting as a senior employee. Similarly if the director was supplying material the company within the last three years, the doubts may arise regarding the independence of the director (Brooks, Oliver, and Veljanovski, 2009). Other such circumstances include the instances where the director was having business relations, for example a supplier or a customer or if the director is a major shareholder of the corporation. Other examples of such a situation are where the director is having a significant contract with the company or any of its subsidiaries or when the director is having family relations with the person who falls under the category is mentioned above (Coleman and Pinder, 2010). Another example of the situations where doubts may arise regarding the independence of the directors is the case where the person has been acting as the director of the company for such a long period that the independence of such person appears to be compromised.

Recommendations of the Corporate Governing Council

Under these circumstances, the materiality of interests, position or the association has to be evaluated for the purpose of deciding if these matters interfere or reasonably considered to be interfering with the ability of the director to deliver independent judgment while considering the matters that have been put before the board and also if such matters can have an impact on the capability of the directors to act in the best interests of the corporation as a whole (Erkins, Hung and Matos, 2009).

It has been mentioned by the Corporate Governing Council that independent directors need not be treated as the members of the management and in the same way, independent directors are also free from business or other reasons due to which, there can be any interference with the independence of the directors. It has been recommended that a director needs to be considered as independent director if such persons holds less than 5% stock. Another requirement related with the independence of the directors is that such a person should not have worked in an executive capacity in the company or any other company that is associated with it during the last three years (Heracleous, 2001).

It has been recommended by some experts that the definition of independent directors has been based on fair and reasonable reasons but at the same time, it has to be mentioned that the companies and their shareholders should adopt a pragmatic approach when the appropriateness of a person regarding the appointment as an director is being examined by them. Therefore, a person should not be rejected for being appointed as a director by the shareholders only on the ground that the person lacks independence. It is very important for the shareholders of the company that the constitution of board of directors as a whole, can help in providing good governance to the company (Hooghiemstra and van Manen, 2004). It can also be reasonably expected that the board will be able to further the interests of the shareholders of the corporation. It has also been suggested in this regard that along with the independence of the directors, there are certain other factors that can play a significant role in this context, like the diversity, skills and experience as well as the effectiveness and the independence of the board. It is also worth mentioning that generally is not an easy task to make this judgment, particularly from the outside (Kirkpatrick, 2009).

It will also not reasonably expect they will that any single definition related with the independence of directors can be applicable in all the cases. Therefore, the investors, investor relations experts and fund managers have different views regarding this issue. It is also reasonable to expect that the directors would also have divergent views regarding this matter. Similarly the investors will be impacted by their beliefs and time horizons when considering the independence of the directors (Long, Dulewicz and Gay, 2005).

It has been mentioned by Recommendation 2.4 that in case of listed entities, the majority of the board should be of independent directors. Due to the presence of this recommendation, can be expected by the investors and at the same time, the law requires that in case of listed entities, the board of directors should act in the best interests of the company and also keeping in mind the shareholders as a whole.

Factors Affecting Independence of Directors

On the other hand, when the majority of directors appointed to the board of the company will be independent directors, it will become very difficult for certain individuals or small groups to have a considerable impact on the decision-making process of the board. As a result, the chances will increase that the decisions of the board reflect the best interests of the company and its stockholders (Lorsch and MacIver, 1989). In such a case, it will also be possible that the decisions taken by the board will not be biased towards the management of the corporation or in favor of any other person or group. Another relevant recommendation in this regard is that in case of listed companies, the chair of the board should also be independent. In particular, this requirement provides that the person holding the chair of the board should not be the same person who is acting as the CEO. Therefore this recommendation is also related with the director’s independence in case of listed entities. In this regard, it is the responsibility of the chair to allow all the directors to effectively contribute and also to promote constructive and respectful relations among the directors and also between the board of the company and its management (Matolcsy, Stokes and Wright, 2004).

It is also the responsibility of the chair that agenda of the board meetings should be set up and in the same way, a responsibility has also been imposed on the chair to ensure that adequate time is available for discussing all the items present on the agenda, particularly the matters that are strategically significant. In view of these requirements, it can be said that an independent chair can also contribute in achieving a culture of openness and constructive challenge. In this context, it is required by good corporate governance that there should be appropriate division present between the persons having the responsibility of managing the listed entity and the persons who have been given the responsibility of looking after the managers. But in cases where the same person has assumed the role of the chair as well as the CEO of the company, it will not be very conducive for the board effectively performing its role which requires the board challenged the management and to hold them accountable. Therefore if the chair of the board is not an independent director, the law requires that it should be considered by the listed entity if an independent director can be appointed as the deputy chair (O’Higgins, 2002). The other option available to the entity is related with the appointment of a “senior independent director” who can play an effective role if there is any conflict with the chair. In such a case, even if any shares are owned by the independent director, the presence of a deputy chair or the presence of the senior independent director will allow the board to efficiently review the performance of the chair. Similarly, the situation will also provide a separate channel of communication that can be used by the shareholders and investors (Pye and Camm, 2003). The role that has to be played by the chair is very demanding and as a result, it requires significant time commitment. As a result, it is advisable that the other positions held by the chair should not be of the nature which can cause an obstruction in the effective performance of the responsibilities of the chair.

Definition and Requirements for Independent Directors

Another issue in case of the Independence of the directors is the tenure and the diversity of the board that needs to be considered at the time of the constitution of the board. For example, it has to be seen if the board is dominated by the directors who have held this position for such a long time and therefore, there is a risk that the directors may have become stale in their ideas. Another issue that needs consideration in this regard is to see if considerable directors with divergent backgrounds are present on the board and in the same way; it is also an important matter to see if appropriate gender diversity is present.

Another issue that needs to be mentioned at this point in context of the evaluation of the performance of an entity, regarding its corporate governance practices is that only the share price gains should not be the only relevant factor. The reason is that such situation will be too simplistic. It has also been strongly recommended by several experts that a corporation can achieve long-term sustainability and stability along with profitability if it adopts the good corporate governance practices (Young and Thyill, 2011).

In this context, it has been mentioned in the ASX listing rule 4.10.3 that there should be either a corporate governance statement that fulfills the requirements that have been provided by this rule or it should mention the URL of the page of its website. The company has mentioned its corporate governance statement which fulfills this requirement. This rule has been introduced with a view to make sure that the corporate governance statement of the company is capable of disclosing the extent to which a particular corporation has followed the ASX corporate governing Council recommendations.

On the other hand, if has not followed a recommendation, it should be mentioned in the corporate governance statement of the corporation and the period during which the recommendation was not followed by the corporation also needs to be mentioned along with the grounds due to which the corporation could not follow the recommendation as well as the fact if the corporation has adopted any alternative corporate governance practice. This matter needs to be decided by the board related with the appropriate corporate governance practice that should be adopted by the corporation. The reason is that the leader responsibility of managing the business has been provided to the board and this responsibility has to be discharged by the board with due care and diligence. It is also the responsibility of the board to make sure that suitable corporate governance arrangements have been put in place. In this regard, the principles and recommendations that have been provided by the corporate governance Council required that the boards of listed entities should consider if any particular recommendation of the Council is not suitable for the company in view of the circumstances and therefore the board can decide that such a recommendation will not be adopted by the company (Young and Thyill, 2011).

Importance of Good Governance and Independence of Board

But if it has been decided by the court that a particular recommendation should not be adopted by it as it is not suitable for the company, it is the responsibility of the board to explain why the particular recommendation was not adopted by it. This approach is known as “if not why not” approach. The purpose behind the introduction of the requirement of making an explanation for not adopting a particular recommendation, is to make sure that appropriate information is being provided to the market in case of the corporate governance arrangements that have been put in place by a company. Such information will help the shareholders of the company as well as the members of the investment community to have a meaningful dialogue with the management and the board of the company. At the same time, such information can be immensely helpful for the stockholders of the company, particularly when they have to make a decision regarding the issue of voting on a particular resolution. This information is also useful for the investors when they are making decisions related with the investment in the securities of the particular company.

It can be said in the end that at present the focus of corporate governance is on the role played by independent directors in the board of listed entities. However, the Independence of the directors is not the only factor that is relevant in this regard and as a result, certain other factors like the skills and experience of the directors also needs to be considered.

References

ASX Corporate Governance Council (ASX), 2014, Corporate Governance Principles and Recommendations, 3^rd Edition, Canberra, Australian Stock Exchange,

Bezemer, P., Maassen, G., Van den Bosch, F. and Volbera, H., 2007, “Investigating the development of internal and external service tasks of non-executive directors: the case of the Netherlands (1997 – 2005)”, Corporate Governance: an International Review, 15(6): 1119 – 1129

Bosch, H. (1991), Corporate Practices and Conduct, Melbourne.

Brooks, A., Oliver, J. and Veljanovski, A., 2009, “The Role of the Independent Director: Evidence from a Survey of Independent Directors in Australia”, Australian Accounting Review, 19(3): 161 – 177

Erkins, D., Hung, M. and Matos P., 2009, “Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide”, University of Southern California working paper.

Gee Coleman, L. and Pinder, S., 2010, “What were they thinking? Reports from interviews with senior finance executives in the lead up to the GFC”, Applied Financial Economics, 20(1-2): 7-14.

Heracleous, L., 2001, “What is the impact of corporate governance on organisational performance?”, Corporate Governance: An International Review, 9(3): 165-173.

Hooghiemstra, R. and van Manen, J., 2004, “The independence paradox: (im)possibilities facing non-executive directors in the Netherlands”, Corporate Governance: an International Review, 12(3): 1119 – 1129.

Kirkpatrick, G., 2009, “The Corporate Governance Lessons from the Financial Crisis”, Financial Market Trends, OECD Journal, 1: 61-87.

Long, T., Dulewicz, V. and Gay, K, 2005, “The role of non-executive director: findings of an empirical investigation into the differences between listed and unlisted UK boards”, Corporate Governance: an International Review, 13(5): 667 –679.

Lorsch, J. W. and MacIver, E., 1989, Pawns and potentates: The reality of America’s corporate boards. Boston: Harvard University Press.

Matolcsy, Z., Stokes, D. and Wright A., 2004, “Do Independent Directors Add Value?”, Australian Accounting Review, 14(1): 33-40.

O’Higgins, E., 2002, “Non-executive directors on boards in Ireland: co-option, characteristics and contributions”, Corporate Governance: an International Review, 10(1): 19 – 28.

Pye, A. and Camm, G., 2003, “Non-executive directors: moving beyond the ‘one-size-fits-all’ view”, Journal of General Management, 28(3): 52-70.

Young, S. and Thyill, V. 2011, “A Holistic Approach to Corporate Governance: Lessons from the financial crisis and the way forward”, in Sun, W., Stewart, J. and Pollard, D. (Eds), Corporate Governance and the Global Financial Crisis –International Perspectives, pp. 365-388, Cambridge University Press.