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Governance foundations

Governance can be argued to have four key components:

  • Transparency: being clear and unambiguous about the organisation’s structure, operations and performance, both externally and internally, and maintaining a genuine dialogue with, and providing insight to, legitimate stakeholders and the market generally.
  • Accountability: ensuring that there is clarity of decision-making within the organisation, with processes in place to ensure that the right people have the right authority for the organisation to make effective and efficient decisions, with appropriate consequences for failures to follow those processes.
  • Stewardship: developing and maintaining an enterprise-wide recognition that the organisation is managed for the benefit of its shareholders/members, taking reasonable account of the interests of other legitimate stakeholders.
  • Integrity: developing and maintaining a culture committed to ethical behaviour and compliance with the law.

As embodied in Governance Institute’s definition, good governance encompasses not only the system by which organisations are controlled, but the mechanisms by which organisations and those who comprise them are held to account.

Governance, therefore, is vital to making the right decisions.

Faced with key decisions, all officers in an organisation must ask themselves this fundamental question:

What would ordinary, right-thinking members of the community — knowing all the relevant facts — believe to be an appropriate exercise of stewardship in such circumstances?

It is here that we see the vital link between governance and trust, given that decision-making within this context encourages the trust of all stakeholders.

In Australia, the principal reference and reliance for corporate governance rests in the provisions of the Corporations Act 2001 and the 4th edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations

While developed for listed companies, these principles and recommendations have become the model for other organisations, such as government agencies and not-for-profit organisations, when considering corporate governance frameworks.

The result is that arrangements for corporate governance in Australia reflect an amalgam of primary legislation, prescriptive rules, ‘if not, why not’ codes of sound practice, custom and market incentive.

Ensuring good governance depends as much on effective implementation as it does on organisational commitment.





Framework — understanding the boundaries

What is the enabling governance legislation for an organisation?

Do the powers derive from the Corporations Act 2001 (Commonwealth)? This is the enabling legislation for:

  • proprietary companies
  • public companies (both listed and unlisted)
  • companies limited by guarantee (many not-for-profit organisations are incorporated in this manner)
  • companies limited by shares.

Or do the powers derive from other legislation?

For example, for government agencies it could be State Government legislation or the Local Government Act, the Commonwealth Authorities and Companies Act 1997 or Public Governance, Performance and Accountability Act 2013.  A statutory authority is enabled under its own Act.

Not-for-profit (NFP) organisations are now subject to the Australian Charities and Not-for-profits Commission Act 2012  which provides the governance framework with which charities are required to operate.





Structure — unique to each organisation

All organisations need to understand and document:

  • the identities and roles of key stakeholders (eg board of directors, members, executive management) — the role of an organisation’s board of directors and the extent of its involvement in day-to-day management varies significantly, depending on the type of organisation and the size, nature and complexity of its business or activities
  • the powers vested in each stakeholder and the basis on which such powers rest (for example, do the powers arise from legislation, the constitution or other authorising documents?)
  • the reporting responsibilities of each stakeholder and the identity of the stakeholder to whom the reporting obligations are owed (for example, the CEO reports to the board, the board reports to members)
  • the extent of board, member and executive management’s decision-making powers respectively.

Key stakeholders’ powers

Under the Corporations Act, directors are appointed by members, but in a government agency they could be appointed by the shareholding Minister. The Corporations Act also provides for the appointment of the CEO, while in a government agency the shareholding Minister, or the Secretary-General of a department, could appoint the CEO.

Who do the directors report to?

Under the Corporations Act, the directors report to members, as well as the regulator — Australian and Securities Investments Commission (ASIC) — and, if a listed company, the Australian Securities Exchange (ASX); but in a government agency, the directors could report to the shareholding Minister, a department or Parliament, or indeed all three.

Who does the CEO report to?

Under the Corporations Act, the CEO reports to the board, but in a government agency the CEO could report directly to the shareholding Minister.

Other stakeholders

Organisations need to identify not only those key stakeholders with legal rights and responsibilities, but also other stakeholders with an interest in the affairs of the organisation. These include:

  • employees
  • customers/consumers
  • suppliers
  • creditors
  • the broader community in which the organisation operates
  • regulators
  • media.

It is typically, a matter for the board to consider the reasonable expectations of these stakeholders and assess what is appropriate in each organisation’s circumstances.

Documenting roles

It is essential to distinguish between authority, which can be delegated, and responsibility, which cannot. Directors, managers and employees are all accountable, but for different aspects of the operation and to a different extent in each case.

A board of directors is responsible for the governance of the organisation: they cannot abdicate that responsibility. There will usually be a clause in the company’s constitution that allow the directors broad ability to delegate their collective powers, but not their responsibility, to others.

The Corporations Act and a company’s constitution, give directors authority to make decisions on behalf of the owners (members or shareholders). That authority can be delegated, for example, to senior management and ought to be delegated systematically. The responsibility remains with the board and the directors are accountable for any failure of the system to operate.

Organisations need to develop policies and charters setting out the structure of authority and responsibility, and the roles attached to those responsibilities which include:

  • board (including chair, non-executive and executive directors)
  • CEO (and senior management)
  • company secretary
  • members (whose roles and rights are set out in the Corporations Act and the company’s constitution).

The matters reserved for the board of directors will vary greatly, depending on the size of the organisation and the composition of the board in respect of non-executive and executive directors.

Directors will decide on which matters they have direct control or oversight including: nomination and appointment of directors, board performance assessment and remuneration, the appointment, remuneration and assessment of the CEO and other senior executives, corporate governance matters including delegations of authority, shareholder meetings, relations and communications, company performance, annual reports and accounts, compliance and directors’ conflicts of interest and related party transactions.





Governance tools

Effective tools are essential for implementing and monitoring strategic direction, budgets, and governance and risk management frameworks.

Managing the board’s business, activities and relationships

Directors meet regularly to review the organisation’s progress during the year so that they are in a position to report to members/shareholders on an annual basis.

A meeting is the best forum by which a board’s collective skills and experience can be brought to bear on their responsibilities as a board of directors. A board (and, in particular, the chairman) can enhance its efficiency and effectiveness by managing its business, activities and relationships in the following key ways:

  • set meeting agendas, including order of business and agree expectations about boardroom behaviour (eg decision items first, followed by discussion items and information items). Governance Institute has a half-day training program Meetings, Minutes and Resolutions that examines the legal requirements and core functions of various types of meetings
  • format board papers — the benefits of standard formats
  • identify what the board is being asked to do/agree to
  • ensure the timeliness of the distribution of board papers
  • manage board meetings (and sub-committee meetings, as appropriate) to allow the board sufficient time to consider issues properly, while ensuring that the business of the organisation is not delayed
  • discuss and agree that board members are expected to have read board papers prior to the meeting; that for information papers, a board member will seek clarification prior to the meeting and that there is little discussion on such papers (unless there is a significant issue identified by members/shareholders)
  • ensure the recording of meetings (minutes) and the timeliness of the distribution of minutes after the meeting. Governance Institute has a half-day training program Meetings, Minutes and Resolutions that examines the issues associated with recording minutes.
  • agree on access to information outside of formal meetings
  • agree on the level of contact with staff other than the CEO
  • implement a library of board papers for directors.

A company secretary can assist the board with all of the issues identified above.