Australian Corporate Governance: A Review and Analysis of Key Issues

Citation

Keeper, T. (2010), "Australian Corporate Governance: A Review and Analysis of Key Issues", Journal of Accounting & Organizational Change, Vol. 6 No. 2, pp. 284-288. https://doi.org/10.1108/18325911011048817

Corporate governance continues to be extensively debated in the popular and financial press. As the author, Jim Psaros (“Psaros”) acknowledges in the preface to the book, a great deal of this debate in Australia is at the anecdotal level, which does little to promote an in‐depth and objective analysis of the appropriateness of corporate governance practices. Accordingly, Psaros's stated objective for this book is to remove the debate in Australia from the realm of opinion and anecdote and to replace it with informed discussion, based not only on an understanding of the key issues, but also on the findings of germane empirical research. Psaros's incorporation of empirical evidence, both from his own research and other Australian and international research studies, to supplement his analysis of the essential themes of corporate governance, is what sets this book apart from other texts on this subject. Jim Psaros is an Associate Professor at the School of Business and Management, Faculty of Business and Law, University of Newcastle and has extensively researched and written on financial accounting and audit. His broad knowledge and experience in these areas is plainly manifest in the Chapters devoted to these topics. He is also part of research team that has compiled annually the Horwath Corporate Governance Report (“Horwath Report”) since 2002. Psaros comprehensively incorporates the findings of the 2005 Horwath Report that ranked Australia's top 250 companies on their corporate governance structure, in his analysis and conclusions in the book.

The book is primarily designed to be a student text and would be suitable for an undergraduate business student, although a prior understanding of fundamental accounting language and concepts would be useful, if not essential, in places. For example, the Chapter 3 outline of the CLERP 9 reforms in relation to audit and audit quality, presupposes that the reader has prior knowledge of the purpose and functions of both internal and external audits. While Chapter 8 on external audit does begin with a general discussion of auditing (or assurance services) and an explanation of why it is important to corporate governance, there is no link to this material in Chapter 3. The book is also stated to be of use to professionals who aspire to possess an understanding of the fundamental corporate governance issues that face Australian businesses.

It is well written, using every day language and care has clearly been taken to avoid jargon and overly specialist language. Chapter titles, paragraph headings and sub‐headings are highly visible and the use of colour to differentiate between headings promotes easy navigation within and between chapters; although, in places this is over done, as I found the white coloured font on pages with a gold background, which is used for the first page of each chapter, distracting and difficult to read. Instructors will find the text can be easily used for a corporate governance course. Each chapter starts with a list of the objectives for that chapter and concludes with discussion and review questions and a short list of bibliographic notes. The book is divided into 12 chapters with each chapter generally following a similar organisational template. Chapters normally begin with a discussion of why the specific topic covered in the chapter is relevant to corporate governance. This question initially is addressed by an outline of applicable theoretical explanations and/or regulatory responses, before moving to an overview of the findings of empirical research on the topic. There is often a focus on topical issues and usually includes references to the findings of the Horwath Report. The 2005 Horwath Report is reprinted as an Appendix to the book.

The initial chapters consider broad or generic issues that any text on corporate governance would likely include. The title of Chapter 1 is the “Practical and theoretical foundations of corporate governance”. It opens with an explanation of the problematic nature of corporate governance, illustrated by a selection of descriptions or definitions of “corporate governance” sourced from different theoretical and practical approaches to this term. An overview of agency theory and what Psaros identifies on page 14 as “other potentially valid theoretical corporate governance frameworks” concludes the chapter. Perhaps, the most revealing insight to the author's approach to corporate governance is the observation on page 20, that notwithstanding these alternative frameworks, “most Australian and internal corporate governance guidance and regulation have been directed implicitly at minimising agency conflict and thereby legitimising agency theory”. There is no analysis of the appropriateness of this approach in Australian corporate governance regulation, but this observation does allow Psaros to take a shareholder centred, agency theory approach to corporate governance throughout the book. This conclusion is based on the corporate governance codes that Psaros identifies as the most commonly applied or referred to in the Australian context. These codes are the Australian Stock Exchange's Principles and Recommendations of Corporate Governance (ASX CGC) and the OECD Principles of Corporate Governance.

Chapter 2 explores the hypothesis that corporate governance matters. Psaros confines his exploration of this proposition to two empirical questions; namely whether good corporate governance practices increases transparency and accountability and also whether it improves economic performance. These questions are addressed by providing a thorough literature review, which is preceded by a constructive reminder of the inherent limitations of empirical research that relies on potentially unreliable proxy or proxies for good corporate governance practices. The major regulatory influences on corporate governance in Australia are considered in Chapter 3. The author's comprehensive interpretation of the meaning of regulation allows the inclusion of a wide range of regulatory responses in this chapter. However, the main focus of the chapter is again the ASX CGC which is identified, together with the CLERP 9 reforms, as the main contributors towards Australian corporate governance policy and practice. The chapter's focus on regulatory influences on corporate governance practices in Australian companies justifies the selected subject matter. Although, as reforms at a national level to corporate governance practices generally are a result or reflection of international developments, a more global perspective would assist a reader to comprehend the genesis of Australian policies and practices.

Chapters 4‐7 cover a range of issues relating to directors, the board and board committees. Chapter 4 begins with the basic question: why do companies need to have a board of directors? Psaros answers this question from both a legal (the Corporations Act 2001 mandates that a company must have a director or directors) and business or value added viewpoints. This discussion is followed by an overview of broader corporate governance issues relating to the operation and composition of the board. The legal requirements of the Corporations Act are interlaced with the requirements of the ASX CGC, other regulatory provisions and empirical and normative research. The discussion of the role, definition and perceived benefits of independent directors provides a useful illustration of the pitfalls with any “one size fits all” solution.

Chapter 5 focuses on the provisions of the Corporations Act 2001 with regard to the definition of directors and their powers and duties. Psaros's background in accounting may explain the difficulties with his interpretation of the definition of director in Section 9 of the Corporations Act 2001 and its application to de facto and shadow directors. The remainder of Chapter 5 consists of a general summary of the common law and statutory duties of directors, including duties in respect of the preparation of financial reports and in relation to continuous disclosure. In a legal sense, the essential question with regard to directors' duties is to whom are their duties owed? As Psaros explains in Chapter 12 with regard to corporate social responsibility (CSR) considerations, such duties from a legal perspective continue to be owed to the company. Accordingly, the statement on page 97 that in reality directors have a responsibility to all legitimate stakeholders (which he states must include all shareholders, but may include employees, clients and environment groups) is misleading, at least from a legal viewpoint.

Chapter 6 focuses on the important relationship between the audit committee and effective corporate governance in a corporate organisation. The book again balances discussion of the regulatory and normative requirements that relate to audit committees against practical aspects. Psaros asserts that if a company has an independent audit committee, it is more likely to engage in quality financial reporting. The chapter continues that if the audit committee is financially literate, the members would be less likely to encounter fraud. These assertions are supported by reference to the findings of international, mainly American, research studies that found a properly skilled and functioning audit committee added value to a company. Chapter 7 is set out in a similar fashion. The first part considers the corporate governance advantages of a board setting up other (than audit) subcommittees and then reviews specific aspects of remuneration and nomination committees including their respective purposes, uses and composition. The analysis concludes with a discussion of empirical studies into the existence and impact of such subcommittees, substantially relying on the Horwath Report findings.

The external audit function and its relevance to good corporate governance practice are discussed in the next Chapter (8) and the author's in‐depth knowledge in this area is evident. In common with other chapters, its reviews the statutory and professional obligations of an auditor, before providing a detailed and thorough assessment of the role that auditing can play in corporate governance. At both a practical and theoretical level, the need for auditor independence is examined. Psaros argues coherently and persuasively that if an auditor lacks independence, either in appearance or reality, then the credibility of the audit performed is compromised. It follows that the provisions of non‐audit services to client companies may impact on the independence, perceived or actual, of the audit firm.

The corporate code of conduct, risk management requirements and practices, and share trade polices are discussed in Chapter 9. There is no explanation as to why these issues have been discussed in the same chapter, which may reflect that the motivating factor was convenience rather than the existence of a unifying link. The material covered in each topic follows the book's organisational template. In terms of the code of conduct, the discussion focuses on the reasons why organisations need to document, and therefore disclose their ethical behaviour through establishing codes of conduct or codes of ethics. While this represents the requirements of the ASX CGC (and its underlying agency theory framework), the importance of ethical business behaviour and the normative theoretical drivers for such behaviour deserved more than the cursory overview provided in this chapter. In terms of the second topic, the chapter's coverage of risk management policies, as they relate to corporate governance practices, is both timely and important. The OECD recently reported that one of underlying causes of the global financial crisis is the failure of organisations to have systemic organisational risk management policies. The rationale for the inclusion of the third element of the chapter, namely the discussion of share trade policies, as a separate sub‐topic is not apparent. While the extent of, and policies surrounding, share trading of directors are important to the corporate governance culture within a company, as such trading arises due to the directors' position as insiders of a company, arguably this discussion more clearly relates to the chapters on the role and duties of directors earlier in the book.

Chapter 10 considers models of corporate governance at a more theoretical level and, therefore, it is suggested fits more comfortable with the material in the introductory chapters. Although, one advantage of its positioning as one of the concluding chapter, is that Psaros is able to refer to material introduced in earlier chapters and draw out threads or common elements. It is useful for students to examine alternative models as a lens to reflect on best practice within a country and unpacking alternative models enables students to become aware of the underlying constructs on which corporate governance practices are built. Constructs that need to be understood and acknowledged when reform measures are considered in the future. As Psaros states, the outsider and insider formulation of corporate governance are two ends of a continuum, with most counties falling somewhere in the spectrum.

The penultimate chapter expressed purpose is to provide evidence on the corporate governance practices in Australia's largest companies, which to an extent is the overriding objective of the entire book. What in fact this chapter does provide is an overview, and to an extent justification, of the methodology used by the compilers of the Horwath Report. This justification involves a summary of the main regulatory requirements and key findings of the previous chapters to support the selection of the factors used in the compilation of the Horwath Report rating system. It also sets out which companies are Australia's top ranked and low ranked companies in terms of corporate governance structures according to the Horwath Report. The chapter adds little new material to the book in terms of the policies and practices of corporate governance and the discussion in respect of the rankings of individual companies is material that a reader could access directly from the Horwath Report.

While it would be easy to criticise the apparent marginalisation of CSR by the fact that it is discussed in the last chapter of the book, this placement is consistent with the underlying shareholder centred, agency theory approach adopted consistently throughout the book. This initial observation aside, the chapter contains a valuable summary of the standard motivations for implementing CSR initiatives and an up to date analysis of the CSR developments including the 2006 CAMAC Report. The chapter concludes with an overview of the growth of socially desirable investment funds and the research to date on the performance of such funds.

Overall, the Australian focus of the book, together with the mix of theory, regulatory requirements and empirical findings makes this text unique. Books on corporate governance tend to either be either theoretically driven or use case studies to develop the analysis and therefore the book is a welcome addition to the literature in this area. Unfortunately, while this is the book's greatest strength, it is probably its greatest weakness too. For in places, it appears to be simply a vehicle to promote the findings of the Horwath Report. This criticism aside, the book provides a thorough introduction to Australia's current policies and practices of corporate governance.