Corporate governance myths exposed – Part 1
It’s time to unravel some common corporate governance myths.
In the first of a two-part series, I examine two classic myths:
- that corporate governance is complex
- that only big companies need corporate governance.
Let’s debunk myth #1.
Corporate governance does not have to be complex. Governance has been around since the 14th century and it can be simplified. The broad point is that governance covers all sectors of organisations from government to business to charities (not for profit sector). All sectors apply levels of governance and sub-sets get created, such as church governance or university governance.
Distinguish governance from corporate governance
Corporate governance is one of the biggest categories of governance, as it is applied to every business organisation in the world at some level. This could range from a sole trader at the corner store, to the accounting firm partnership in the city, to a large billion-dollar company listed on the Australian Securities Exchange (ASX). All these business entities will require some level of corporate governance, but the level of simplicity and/or complexity may depend upon the size of the organisation.
Also, once a company is listed on an exchange like the ASX, there are additional rules or laws or regulations that must be complied with by the jurisdiction. In the ASX they are known as the ASX Corporate Governance Principles and Recommendations (4th edition, 2019). Additionally, most companies are governed by the Corporations Act 2001 (Cth) and other businesses by the Australian Competition and Consumer Act 2010 (Cth).
So, the basic principles of corporate governance (and in fact all governance) are:
- Do the right thing
- To do things right.
Guiding lights to simplified corporate governance
Although there are rules and regulations to be followed and complied with, the basic principles never change. These laws are actually contained in the court case law (known as common law and equity), as well as in legislation, such as the Corporations Act. But the myth that corporate governance is complex is untrue – the simple reality is if you follow the principles below you are unlikely to break the law.
Before summarising the basic principles applied to all governance situations and in particular corporate governance, it is worth noting that corporate governance often gets confused with due diligence and compliance. Additionally, for listed companies, the concepts of corporate social responsibility (CSR) and environmental, social governance (ESG) play a role. These will be subjected to other myths being explained in a later article.
The basic principles of corporate governance to be followed are:
Tip #1: Act honestly. There is an expectation that all owners and leaders (whether management, executives or directors of a board) will act with honesty – not be dishonest in their dealings.
Tip #2: Act with reasonable care and skill. Leaders will be professional and take care to not act negligently – they do not have to be perfect, but have the necessary skills to do their job, role or function, at the appropriate level for that size of organisation. You don’t have to be perfect – mistakes happen!
Tip #3: Do not make a secret profit or take confidential information. There is an old saying “sunlight is the best disinfectant” meaning if you disclose to a supervisor or the board of a company, it is unlikely that you are making an unauthorised transaction or taking advantage of secret information.
If you apply these three basic governance principles, you will be in a great position to be a leader – as an executive in management, or as a director or trustee of an organisation.
Myth #2 is that only large organisations are required to have corporate governance. Although large organisations, such as companies listed on the ASX must have corporate governance policies, all organisations should have a governance policy. The size of the organisation and the structure may impact on the complexity of the governance policy, but every organisation should have one.
In Australia, there are many types of organisation for both profit (often companies or partnerships) and the not-for-profit (charity) sector. Companies are divided into public (approximately 20,000) and private (known as Pty Ltd and over three million are registered).
Some organisations are one person organisations (sole traders) and other are state/ territory charities, such as Incorporated Associations. If a charity grows across state borders then they usually become companies limited by guarantee.
Why corporate governance is important for all organisations
Every organisation with a board of directors or leadership group will want to have a clear understanding of the organisation’s strategy. It will also want a constitution (internal rule book) and guidance on issues such as conflict of interest or how to deal with internal disputes.
If an organisation is small, with a simple vision and one main activity, then it is logical that a one-page statement can deal with most issues. By contrast a company listed on the ASX will have a document on their website, as well as lodged with the ASX each year disclosing how they handle the eight principles of the ASX Corporate Governance Code(2019, 4th edition).
Tip #1: Small organisation. Aim for a simple statement of principle – what is the organisation trying to achieve (vision statement or mission) and identifying who is responsible for what.
Tip #2: Medium organisations. Size matters in the context of corporate governance – as you grow and have more staff or offices or assets, over a wider geographic area, there is more need for clear rules and principles to be applied. Have a longer document and clear systems for reporting for units or divisions (subsidiaries) of a company to head-office.
Tip #3: Large organisations. Companies (and charities) that operate in multiple states/ territories will need to have a dedicated corporate governance statement and polices. This will guide the management team, led by the CEO and the board to know their roles and principles.
Stay tuned as I unpick more governance myths next month.
About the author:
Professor Michael Adams FGIA(Life) FCG is an internationally recognised specialist in corporate law, governance, securities markets regulation, and legal education (especially e-learning). Michael has been writing, teaching and regularly presenting on all these topics for over 20 years. He is a Fellow of the Australian College of Educators (FACE), as well as the Australian Academy of Law (FAAL), and is also a Fellow of the Governance Institute of Australia. Professor Adams is also a brand ambassador for Governance Institute.