PLATYPUS SYMPOSIUM CORPORATE GOVERNANCE IN AUSTRALIA: WHERE ARE WE AND DOES IT MATTER? Professor Jim Psaros The University of Newcastle
Corporate Governance in Australia: Where are we, and Does it Matter? Professor Jim Psaros Newcastle Business School The University of Newcastle
Some historic context “There is a wide gap between the maximum possible and the minimum excusable, and the whole spectrum is observable in Australian corporate governance … the best of our boards are performing well, but there is a long tail of boards in which little thought is given to governance, and in which more attention is given to personal gain than fiduciary duty.” Henry Bosch, former Chairman of the National Companies and Securities Commission (2001)
Some historic context (continued) “If you think I should piss off and get someone who knows nothing about my business [to chair the board], well I don’t think my shareholders will be very impressed.” Chair & CEO of Harvey Norman – Gerry Harvey “… if [shareholders] aren’t happy, sell your shares, go and buy government bonds and sleep happily ever after.” Chair of QBE Insurance – John Cloney
Some historic context (continued) “Improving corporate governance in Australia is truly a happy hunting ground for consultants … the received wisdom about how to improve governance does little for business performance, and possibly hinders it. Shareholders beware.” AFR Editorial 12 November 2004
Does Good Governance Matter? Increased Transparency & Accountability 1. Quality of Financial Reporting • More timely and informative disclosures Beekes & Brown (2006) • Earnings management is reduced Davidson (2005), Koh, Laplante & Tong (2007), Peasnell, Pope & Young (2005) • Reduced Risk of Financial Statement Fraud Beasley (1996), Farber (2005), Seamer (2007)
Does Good Governance Matter? (continued) Increased Transparency & Accountability (continued) 2. Executive Management Over-Consumption • Curtailing management excesses Core, Holthausen and Larker (1999), Sridharan (1996), Brickley and Christopher (1987) 3. Management Monitoring • Closer monitoring of management Weisbach (1988), Borokhovich, Parrino & Trapani (1996), Byrd & Hickman (1992), Cotter, Shivdasani & Zenner (1997)
Does Good Governance Matter? (continued) Economic Performance?? • Negative relationship between corporate governance and economic performance Klein (1998), and Kiel and Nicholson (2003) • No relationship between corporate governance and economic performance Core, Guay and Rusticus (2006) and Linden and Matolcsy (2004)
Does Good Governance Matter? (continued) Economic Performance?? (continued) • Positive relationship between corporate governance and economic performance • Above normal stock returns Gompers, Ishii Metrick (2003) • Long term abnormal returns Cremers and Nair (2005) • More profitable, higher return on assets Brown and Caylor (2006a, 2006b) • Enhanced future operating performance Larcker et al (2007)
Does Good Governance Matter? (continued) Is perception as important as reality? “Value is the eye of the beholder … and the appearance of governance may be preferable to the real thing.” - Monks (2002) McKinsey study (2001) quantifying the premium that investors would pay for good governance.
Does Good Governance Matter? (continued) Is perception as important as reality? (continued) Melbourne Institute of Applied Economic and Social Research (Feb 2014) survey of 1,000 Australian Retail Investors . 1. Do you think a company’s corporate governance affects its performance? 1. Yes 71.6 % 2. No 10.8 % 3. Don’t know / Uncertain 17.6 %
Does Good Governance Matter? (continued) Is perception as important as reality? (continued) 2. If a company’s corporate governance is rated poorly, would you buy its shares? 1. Yes 5.0% 2. No 83.7% 3. Don’t know / Uncertain 11.3% 3. Should a corporate governance rating system be introduced to identify companies that are not meeting “best practice”? 1. Yes 70.3% 2. No 12.0% 3. Don’t know / Uncertain 17.7%
Our Corporate Governance Model • Composition and operations of Board of Directors • Composition and operations of Audit Committee • Composition and operations of Remuneration Committee • Composition and operations of Nomination Committee • Independence of the external auditor • Code of conduct • Risk Management Structures and Policies • Share Trade Policies • Length of director tenure • Female Board members • Quality of Disclosures
2002 Horwath Corporate Governance Report 250 Companies • 9 were outstanding (3.6%). • 108 were generally good or better (43.2%). • 73 had deficient corporate governance (29.2%). 2002 Case Study • “(Company name) … corporate governance practices have been designed to accord with good corporate governance principles …” • Board comprised of 3 exec directors • The company had no remuneration committee • During the year ended 30 June 2002, each of the 3 directors were paid $1.7 million in salary and other benefits • Private companies associated with the three directors engaged in transactions with (the company) worth over $5 million • Family interests associated with two of the directors entered into contracts to purchase property from (the company) totalling $834,000 • Timbercorp was ranked very poor for corporate governance
Forge Corporation – case study • Forge - Engineering, Procurement & Construction service provider. Listed June 2007 • Experienced substantial and dramatic growth 29 August 2013 2013 Annual Report Chair reports “Forge has had an exceptional year … and has delivered a record financial performance”. 4 November 2013 Forge requests a trading halt. 28 November 2013 CEO “Despite these disappointing results [$127 mill profit write-down], we remain confident in our future prospects”. 11 February 2014 Forge is suspended from trading list. 12 February 2014 1,300 employees are stood down and administrators are appointed.
Forge Corporation Forge Group 700 600 500 Market Capitalisation 400 FGE 300 200 100 0 2008 2009 2010 2011 2012 2013 2014
Forge Group corporate governance (2011) • Board Chair CEO held by the same person • No Female Directors on the board • Disclosed Trading policy on website: “ The Board has adopted a policy and procedure on dealing in the Company’s securities by directors, officers and employees which prohibits dealing in the Company’s securities when those persons possess inside information. ” • No separate Audit, Remuneration and Nomination committees. All functions are carried out by the board • 6 board members and 2 are declared independent. However, one of the independent directors is associated with a legal firm that provided services totalling $80,753 (2010: $318,039)
Forge Group corporate governance (2012) • Board Chair CEO held by the same person • No Females Directors on the board • Disclosed Trading policy on website: “ The Board has adopted a policy and procedure on dealing in the Company’s securities by directors, officers and employees which prohibits dealing in the Company’s securities when those persons possess inside information. ” • No separate Nomination Committee • 7 board members and 2 are declared independent. However one of the independent directors is associated with a legal firm that provided services totalling $288,895
Ansell – corporate governance (2012) • 8 members, 7 independent with one non - (CEO) • Separate Board Chair and CEO • 2 directors are female • Majority of directors have tenure of less than 10 years • Audit Committee 5 members, all independent • Chairman is fellow of CPA and Fellow of CA • 4 meetings in the year • Have joint Remuneration and Nomination Committee, 3 members, all independent • 7 meetings in the year
Ansell – corporate governance (continued) • Risk management committee, 4 members, all independent • Code of conduct • Trading policy: trading windows around price sensitive information, blackouts prior to the release of half and full-year reports • No non-executive retirement benefits • No options granted to non-executives. Non-executive directors are required to spend 10% of their director’s fee to the on-market purchase of Ansell shares • Audit fees $2.7 mill. Non-Audit Fees = $193K
10 Year Global Observations Independence • Dubious classifications Industry effect • Banking, insurance and transport industries were generally good • Metals and mining, real estate, retailing, and media were often poor Size effect • Large companies generally had better corporate governance than smaller companies Quality of disclosures • Questionable on occasions and template driven
22 Questions Professor Jim Psaros Newcastle Business School The University of Newcastle
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