Calleja, Nicole --- "'To Delegate or Not to Delegate': Board Committees and Corporate Performance in Australia's Top 100 Companies" [1999] SydLawRw 1; (1999) 21(1) Sydney Law Review 5
[*] BA, LLB (Hons), University of Melbourne; Solicitor, Arthur Robinson & Hedderwicks, Melbourne. An earlier draft of this article was submitted as part of the coursework for a Master of Laws degree in the Faculty of Law at the University of Melbourne. I am grateful to Professor John Farrar for his helpful comments on earlier drafts of this article.
[1] Section 226A is a replaceable rule which is similar to the recently repealed Article 66(1) of Table A in Schedule 1 of the Corporations Law.
[2] Corporations Law 1991 (Cth) s226A
[3] Axworthy CS, ‘Corporate Directors – Who Needs Them?’ (1988) 51(3) Mod LR 273 at 273.
[4] Branson DM, Corporate Governance (1993) at 229.
[5] AWA Ltd v Daniels trading as Deloitte Haskins & Sells (1992) 7 ACSR 759 at 832.
[6] Branson, above n4 at 229–230.
[7] Francis I, Future Direction – The Power of the Competitive Board (1997) at 175.
[8] Korn/Ferry International, Boards of Directors in Australasia 1997 (1997) at 16.
[9] For a summary of these studies see Stapledon GP and Lawrence J, ‘Board Composition Structure and Independence in Australia’s Largest Listed Companies’ (1997) 21 MULR at 150.
[10] Refer to Table 2 on page 12.
[11] Australian Stock Exchange, Guidance Note – Disclosure of Corporate Governance Practices 1998. (Emphasis added).
[12] Ibid.
[13] Corporate Law Economic Reform Program, Directors’ Duties and Corporate Governance: Facilitating Innovation and Protecting Investors: Proposals for Reform, Paper No 3 (Canberra: AGPS, 1997) at 63. See also ASX, Good Response to ASX Corporate Governance Disclosure Rule, Media Release, (5 March 1997) at 1, where it was reported that in the 1996– 97 financial year, almost 96 per cent of the Top 150 ASX listed companies had an audit committee.
[14] Bosch H, The Director at Risk: Accountability in the Boardroom (1995) at 169.
[15] See Main A, ‘Tougher Bill is a Triumph’, The Australian Financial Review (Melbourne) (26 June 1998) at 22; Van Leeuwen H, ‘Corporate Crackdown: Executives Forced to Reveal their Salaries’ AFR (Melbourne) (26 June 1998) at 1 and 22; Maiden M, ‘Show and Tell Time for Top Pay Deals’ The Age (Melbourne) (26 June 1998) at B2; Hudson P, ‘Company Law Shake-up’ The Age (Melbourne) (26 June 1998) at B1; and Chenoweth N, ‘Show and Tell Executive Salaries Exposed’, AFR (Melbourne) (4–5 July 1998) at 1.
[16] Senator Ian Campbell, Corporations Law Amendments Unacceptable, No 6 (15 July 1998) at 1. However, it is unlikely that the PJCSS will report back before October due to a reorganisation of Senate sitting dates: Main A, ‘Battle for the Boardroom’ The Australian Financial Review (Sydney) 31 July 1998 at 33.
[17] Davis I, ‘Bid to Get the Law Back in Step with Business’ The Australian Financial Review (Melbourne) 15 July 1998 at 4; Henderson I, ‘Howard Backtracks on Corporate Law’ The Australian (Melbourne) 16 July 1998 at 21; Hudson P, and Shield H, ‘Rethink on Pay-packet Law’ The Age (Melbourne) 16 July 1998 at B1 and Main, above n16 at 33.
[18] Thomson MP K, Government Wrong on Disclosure of Directors’ Remuneration – Referral to Committee is a Waste of Taxpayers Funds, Media Release, (15 July 1998) at 1.
[19] Commonwealth of Australia, Senator Ian Campbell, Senate, Parliamentary Debates (Hansard), 25 June 1998 at 4064.
[20] Commonwealth of Australia, Senate, Parliamentary Debates (Hansard), 25 June 1998 at 4064 (Senator Margetts – Greens).
[21] See Barnard JW, ‘The Hampel Committee Report: A Transatlantic Critique’ (1998) 19(4) The Company Lawyer 110 at 111, which states that the motivation for US companies to improve their governance practices stems from fear and shame rather than any aspiration to simply try to do things better. It would seem that in Australia fear of embarrassment may play a similar role with respect to corporate governance practices.
[22] Grice B, ‘Institute Position on Audit Committees’ (1993) 64(11) Charter at 55. For example, the New York Stock Exchange requires that all domestic companies listing on the exchange establish and maintain an audit committee. This requirement has been in place since 1978: para 3.303.00 of the New York Stock Exchange Listed Company Manual.
[23] Committee on the Financial Aspects of Corporate Governance, Cadbury, Sir Adrian (Chairman), Report of the Committee on the Financial Aspects of Corporate Governance – The Code of Best Practice (Published by: Committee on the Financial Aspects of Corporate Governance) (hereinafter Cadbury Code) (1992) at 7.
[24] Listing Rule 12.43(j) of the Listing Rules of the London Stock Exchange.
[25] Keegan M & Degeorge F, ‘Audit Committees – A Study in European Corporate Governance’ (1998) 6(2) Corporate Governance at 117. The companies surveyed were based in Belgium, France, Germany, Italy, Spain, Sweden, Switzerland and the UK.
[26] The methodology outlined in this Section and in Section 5.3 is similar to that used in Farrer J & Ramsay IM, ‘Director Share Ownership and Corporate Performance’ (1998) 6 Corporate Governance: An International Review 233.
[27] Schroders Property Fund Annual Report 1997 at 56.
[28] Lynn B, ‘More Effective Audit Committees Can Improve Corporate Governance’ (1993) 9(4) Company Director at 44.
[29] Guthrie J & Turnbull S, ‘Audit Committees: Is There a Role for Corporate Senates and/or Stakeholders Councils?’ (1995) 3(2) Corporate Governance at 80–81.
[30] Australian Accounting Research Foundation, Institute of Internal Auditors – Australia and Australian Institute of Company Directors, Best Practice Guide (1997) at 8.
[31] This represents a significant increase. In 1982 a survey of the top 300 Australian companies found that 27 per cent had established audit committees. Another survey in 1993 found that 48 per cent of the 1200 publicly listed Australian companies in the survey had established an audit committee: Guthrie J, ‘Mandatory Audit Committees’ (1993) 64(11) Charter at 54–55.
[32] Above above n22 at 55.
[33] Guthrie & Turnbull, above n29 at 78 and Turnbull S, ‘Competitiveness and Corporate Governance’ (1994) 2(2) Corporate Governance at 84.
[34] Brown PM, ‘Responsibilities of the Remuneration Committee’ (1995) 3(2) Corporate Governance at 61. 42
[35] Houston W & Lewis N, The Independent Director (1992) at 12.
[36] Webb C, ‘Strictly Private’ The Age (Melbourne) 31 March 1998 at 4; Bartholomeusz S, ‘Measure of Value on the Board’ The Age (Melbourne) 13 December 1997 at 1; Rance C, ‘Top Executive Salaries Poorly Justified’ The Age (Melbourne) 10 May 1997 at 1; Reingold J, ‘Where Parting is Such a Sweet Deal’ Bus Week (31 March 1997) at 36–37; and Jeanes M, ‘Directors in for a Rough Ride From Shareholders’ AFR (Sydney) 24 January 1997. For a discussion of what constitutes reasonable remuneration see Defina A, Harris TC & Ramsay IM, ‘What is Reasonable Remuneration for Corporate Officers? An Imprical Investigation into the Relationship Between Pay and Performance in the Largest Australian Companies’ (1994) 12 Comp’s and Securities LJ at 341.
[37] Hill J, ‘Remuneration Disclosure in Australia’ Research Paper No.1/1996 for the Australian Investment Managers’ Association (February 1996) at 6.
[38] Id.
[39] Bacon J, Corporate Boards & Corporate Governance (1993) at 15.
[40] Id at 15.
[41] Bosch, above n14 at 172–73.
[42] Conyon MJ, ‘Corporate Governance Changes in UK Companies Between 1988 and 1993’ (1994) 2(2) Corporate Governance at 98.
[43] Bosch, above n14 at 173.
[44] Chester S and Rowley JWF, ‘Environment Committees and Corporate Governance’ (1992) 20(7) International Business Lawyer 342 at 342.
[45] See Lagan A, ‘Challenging the Bottom Line’ The Australian Financial Review (Melbourne) 27 July 1998 at 14, which describes Shell’s new corporate report entitled, ‘Profits and Principles: Does there have to be a choice?’.
[46] Australia and New Zealand Banking Group Limited is one example of a company that has established such a committee.
[47] It is interesting to note that it is not only the directors of a company that may be held liable for a contravention of some of the acts comprising the complicated legal regime that applies to companies. For example, under section 66B of the Environment Protection Act 1970, it is the directors, as well as any person ‘concerned in the management of the corporation’, that are liable for a contravention of provisions of the Act.
[48] Charkham JP, Keeping Good Company: A Study of Corporate Governance in Five Countries (1995) at 191.
[49] For example, CSL Limited states on page 27 of its Annual Report: ‘The Company abides by the Code of Conduct of the Australian Pharmaceutical Manufacturers Association, the Code of Good Manufacturing Practice, the Code of Good Laboratory Practice and similar standards suitable to the pharmaceutical and veterinary industries.’
[50] Bosch, above n14 at 168.
[51] Ibid.
[52] Westpac Banking Corporation has a political donations committee and the Australian and New Zealand Banking Group Limited has a donations committee. WMC Limited has both a community and a political donations committee.
[53] In 1996, 64 of the Standard & Poor 500 companies reported having a committee dealing with corporate governance issues. See Tobey S, ‘Board Study Points to Increased Independence’ (1996) 13(3) IRCC Corporate Governance Bulletin at 11.
[54] Fridman S, ‘The News Corporation Super Shares Proposal: Crime of the Century or Tempest in a Teapot’ (1994) 4 Australian Journal of Corporate Law at 184.
[55] Clutterbuck D and Waine P, The Independent Board Director (1994) at 3; and Australian Investment Managers’ Association, Corporate Governance: A Guide for Investment Managers and Corporations (2nd ed, 1997) at 20–21.
[56] Committee on the Financial Aspects of Corporate Governance, Cadbury, sir Adrian (Chairman) The Financial Aspects of Corporate Governance (Published by: Committee on the Financial Aspects of Corporate Governance) (the Cadbury Report) (1992) at 21 and 38.
[57] Ibid.
[58] Id at 27.
[59] Dignam Dr A, ‘A Principled Approach to Self-regulation? The Report of the Hampel Committee on Corporate Governance’ (1998) 19(5) The Company Lawyer 140 at 140.
[60] Study Group on Director’s Remuneration, Greenbury, Sir Richard (Chairman) (the Greenbury Committee), Directors’ Remuneration: Report of a Study Group by Sir Richard Greenbury (Gee Publishing) (hereinafter the Greenbury Report) (1995) at 22.
[61] Id at 21–22.
[62] Id at 23.
[63] Committee on Corporate Governance, Hampel, Ronald (Chairman) Report of the Committee on Corporate Governance – Final Report (Gee Publishing) (hereinafter the Hampel Report) (January 1998) at 5.
[64] Note 59 at 140.
[65] Id at 152.
[66] Hampel Report, above n63 at 29, 36 and 49.
[67] Id at 36.
[68] The Working Group on Corporate Practices and Conduct, Corporate Practices and Conduct (3rd ed, 1996) at 17-18.
[69] Bosch AO H, ‘Corporate Practices and Conduct: Setting Standards for Corporate Governance in Australia’ (1993) 1(4) Corporate Governance at 198.
[70] Bosch AO H, Bosch on Business: Essential Readings for Directors, Executives and Investors (1992) at 173.
[71] Note 68 at 18.
[72] Bird H, ‘The Rise and Fall of the Independent Director’ (1995) 5(2) Australian Journal of Corporate Law 235 at 246.
[73] Hilmer FG (ed), Strictly Boardroom: Improving Corporate Governance to Enhance Corporate Performance (1993) at 61.
[74] AIMA, ‘Corporate Governance: a Guide for Investment Managers and Corporations’ (2nd ed, 1997). Although AIMA has recently been renamed the Investment and Financial Services Association (IFSA), it shall be referred to as AIMA since the discussion will focus on what are referred to as the AIMA Guidelines which were published in July 1997.
[75] Australian Investment Managers’ Association, above n53 at 21.
[76] Ibid.
[77] Ibid.
[78] Ibid.
[79] Linaker P, ‘The Institutional Investor – Investment from M & G’s Viewpoint’ in Prentice DD & Holland PJR (eds) Contemporary Issues in Corporate Governance (1993) at 110. See also Griffin P, ‘Institutional Investors in Australia: A Shareholders’ Perspective’ (Speech presented at Corporate Governance & Australian Competitiveness: The Role of the Institutional Investors Conference, organised by the Australian Investment Managers’ Group and the Business Council of Australia, 11 November 1993 at 12.
[80] Refer to Table 6 in Section 5.G.
[81] Kohler A, ‘Back to the Boardroom’ The Australian Financial Review, 9 December 1997 at 19.
[82] AWA Ltd v Daniels t/a Deloitte Haskins & Sells and Others (1992) 7 ACSR 759 at 867.
[83] Pease G & McMillan K, The Independent Non-Executive Director (1993) at 45.
[84] Tricker RI, Corporate Governance: Practices, Procedures and Powers in British Companies and their Boards of Directors (1984) at 189.
[85] Pease & McMillan, above n83 at 153. See also Veasey N, ‘The Defining Tension in Corporate Governance in America’ (1997) 7(2) Australian Journal of Corporate Law at 143.
[86] Tricker, above n84 at 188.
[87] Pease & McMillan, above n83 at 55.
[88] Note 81.
[89] Ibid. Note, in particular, Kohler’s discussion of Coles Myer.
[90] Ibid.
[91] Pease & McMillan, above n83 at 154.
[92] Carver J, Boards That Make a Difference: A New Design for Leadership in Non-profit and Public Organizations (2nd ed, 1997) at 149.
[93] Paris Colloquium on Corporate Governance, ‘Session Three: Board Committees’ (1984) 6 Journal of Comparative Business and Capital Market Law 231 at 231.
[94] Bosch, above n14 at 157.
[95] Francis, above n7 at 175.
[96] Pease & McMillan, above n83 at 155.
[97] Ibid.
[98] Bosch, above n14 at 157.
[99] Pease & McMillan, above n83 at 155.
[100] Carver, above n92 at 146.
[101] Pease & McMillan, above n83 at 156.
[102] Carver, above n88 at 154.
[103] Pease & McMillan, above n83 at 156.
[104] Carver, above n92 at 147.
[105] Francis, above n7 at 171.
[106] Bosch, above n14 at 158.
[107] Section 226D(1) Corporations Law.
[108] Section 226D(2) Corporations Law.
[109] Pease & McMillan, above n83 at 156.
[110] Australian Institute of Company Directors and Australian Investment Managers’ Association, Employee Share Scheme Guidelines and Executive Share Option Scheme Guidelines (1994) at 1.
[111] For an outline of the regression techniques used see Hamburg M, Statistical Analysis for Decision Making (5th ed, 1991) at 453–484.
[112] The t-statistic for this regression analysis was 0.560. As OLS involves linear regression, it is not surprising that this relationship was not statistically significant because it does not appear to be a linear relationship, that is, Table 4 suggests that shareholder returns rise and then fall as the number of board committees increase.
[113] Klein A, ‘Firm Performance and Board Committee Structure’ (1998) 41 J of Law and Economics 1 at 275–303.
[114] Id at 293. This is in contrast to the findings of this study, since it can be said that generally companies with an average of three board committees perform the best. Also, companies in the sample with audit, remuneration, compliance, environment and occupational health and safety committees generally performed better than companies without these types of committees. See Tables 3 and 4.
[115] Id at 277. This appears to be supported by the findings of this study. See Table 5.
[116] Sheikh Dr S & Rees Professor W, ‘Corporate Governance and Corporate Control – Self- Regulation or Statutory Codification’ in Sheikh Dr S & Rees, Professor W (eds), Corporate Governance and Corporate Control (1995) 361 at 389. See also Kohler, above n81.
[117] This finding is supported by a recent study by Wright D, ‘Evidence on the Relation Between Corporate Governance Characteristics and the Quality of Financial Reporting’ (Working Paper, School of Business Administration, University of Michigan, 1996) which found negative correlations between the presence of executive and non-independent non-executive directors on the audit committee and the quality of financial statement information.
[118] Klein, above n113 at 3.
[119] See generally, Stapledon & Lawrence, above n9 at 150; Hilmer, above n73 at 93; Klein, above n113; and Donaldson L & Davis JH, ‘Boards and Company Performance – Research Challenges the Conventional Wisdom’ (1994) 2(3) Corporate Governance at 151.
[120] Hilmer, above n73 at 93.
[121] Stapledon Dr G & Lawrence J, ‘Board Composition and Structure in the Top 100’ (1996) 12(9) Company Director 8 at 9.
[122] The t-statistic for this regression analysis was 0.369. Again, this may have been due to the non-linear relationship between the percentage of non-executive directors on the board and adjusted shareholder returns, that is, shareholder returns seem to fall and then rise as the percentage of non-executives on the board increases.
[123] Stapledon & Lawrence, above n9 at 161.
[124] Crown Limited, Crown Limited Annual Report (1997) at 62.
[125] Hilmer, above n73 at 54.
[126] The t-statistic for this regression analysis was 0.212.
[127] Bosch, above n14 at 175.
[128] Carver, above n92 at 147.