It has been an extraordinary year for governance in Australia. The ongoing fall-out from a government investigation into the financial services sector and a damning regulator’s report into the capacity for proper oversight of the board of the country’s biggest company, have forced change at the highest levels of public entities.
As Prime Minister Shinzo Abe leads reforms to Japan’s corporate governance practices in order to increase transparency and attract greater foreign investment, Japanese listed companies can learn much from how Australia, regarded internationally for the high standard of its governance, is responding to these scandals.
The focus on corporate governance reform in Australia this year began with the report into an inquiry by the Australian Prudential Regulation Authority (APRA), into the behavior of the Board of the Commonwealth Bank of Australia, (CBA) the country’s largest listed company. The report found failings into CBA’s governance, culture and accountability frameworks: “CBA’s continued financial success dulled the senses of the institution particularly in relation to the management of non-financial risks,” it concluded.
Around the same time, the Federal Government’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry began public hearings with a wide-reaching remit that uncovered a range of inappropriate, and possibly even illegal, behavior.
The Royal Commission hearings – which are ongoing - created a media storm. Among those companies impacted was one of Australia’s largest financial services companies, AMP. The Chairman and the CEO resigned in the wake of evidence given to the Royal Commission.
Shareholder class actions have begun, with AMP simultaneously defending multiple cases concerning its financial advice business where it is alleged to have charged fees for no service. The class actions have been brought by customers who suffered losses and shareholders who were impacted when the AMP share price fell as a result of the fall-out from the evidence given at the Royal Commission.
Shareholder activism is increasing in Australia, with shareholder groups, proxy advisors and superannuation (pension) funds exercising influence during the current AGM season and voting against some companies’ remuneration reports. This is contrary behavior to what happens in Japan, where close ties exist between companies and investors in the form of cross-shareholdings - a tradition that Prime Minister Abe is keen to dismantle.
What do these events mean for governance in Australia? The CBA Report and the ongoing evidence being provided to the Royal Commission has been the subject of numerous private Boardroom discussions and director briefings hosted by professional services firms.
As a consultant to ASX100 Boards, I am receiving mandates to include in my analysis issues raised by the CBA Report and from the Royal Commission when I conduct external annual board performance reviews (annual board appraisals are a requirement of the ASX listing rules). These issues include the board’s role in overseeing and setting corporate culture, the board’s monitoring of financial and non-financial risk, and the how the Board can properly hold management to account.
The commissioner, Kenneth Hayne AC QC, is due to deliver his final report into the Royal Commission’s findings on Feb 1, 2019, and his recommendations are expected to force more changes to how public companies and superannuation funds are governed.
Anticipation also surrounds the publication of the fourth edition of the ASX’s "Corporate Governance Principles and Recommendations." The "Principles" were introduced in 2003 and although they are voluntary, they are also covered by the ASX listing rules.
The original spirit of the "Principles" was to apply an “if not, why not” approach to best practice governance. This allows more flexibility for listed companies of varying size and market capitalization to report against the guidelines.
But the proposed fourth edition, which expands the number of recommendations from 29 to 38, has been criticized as being overly prescriptive. The concern is that this draft will drive Boards into “tick-the-box” compliance and promote risk-adverse decision-making.
Japan has its own set of voluntary principles – the Tokyo Stock Exchange’s Corporate Governance Code - which was introduced in 2015. The Code was recently revised to focus more on unwinding cross shareholdings, enhancing the performance of board committees, increasing the number of independent (outside) directors on Japanese corporate boards and ensuring a more balanced membership of male and female directors. The new version of the Code came into effect on June 1.
Australia is highly-regarded internationally for the standard of its governance. The World Economic Forum’s 2017-2018 Global Competitiveness Report ranked Australia as eighth out of 137 nations for the “efficacy of corporate boards”. The Asian Corporate Governance Association ranked Australia first in corporate governance practices compared to the 11 other Asian nations surveyed, including Japan.
Australian listed boards are composed by-and-large of professional, experienced, independent, non-executive directors who operate in boardroom environments which promote “robust discussion”, even dissent, in order to consider all perspectives and opinions. This approach relies on the chairman’s leadership to bring the discussion to an outcome, and to maintain the collegiality of the board.
This culture of being able to debate without fear or favor is healthy, and ensures that directors – with management – make decisions after thorough analysis and in the best interests of shareholders.
Yet the events of 2018 could jeopardize some of the best of Australian boards, forcing Directors into seeking costly second opinions on decisions for fear of a shareholder backlash, or burdening Boards with compliance obligations and “black letter law”.
In times of corporate crises, the pendulum often swings to hard compliance. In the early 2000s, when Enron, World Com and Tyco collapsed, and similar examples of poor governance were occurring in Australia, public sentiment swung too.
It will be interesting to see whether anger over some companies falling below community expectations and standards will result in all directors being overly-burdened by red tape, or whether there will be an opportunity to build on Australia’s reputation for good governance and learn from the mistakes of the few.
Meanwhile, Japan might continue to improve its corporate governance practices by examining its own corporate scandals, with companies such as Toshiba Corp and Mitsubishi Motor Corp making headlines for poor corporate and board practices.
Japan might also look at ways to more closely resemble corporate governance oversight in Australia, and adapt and adopt Australian practices that go even further than the current TSE Corporate Governance Code.
Discerning ways to enhance board structures, board processes, boardroom dynamics and board composition – including diversifying membership beyond gender - may be the next step to opening Japanese boardrooms to being more independent.
Dr Ann-Maree Moodie is the Managing Director of Governance Australia & Asia, a Sydney-based governance advisory firm. Dr Moodie has 20 years’ experience advising boards of listed companies, superannuation funds and not-for-profit organizations. In addition to her PhD, Dr Moodie holds a Bachelor of Arts in Journalism and Japanese.© Japan Today