In his Final Report, Commissioner Hayne noted: 'Culture, governance and remuneration march together. Improvements in one area will reinforce improvements in others; inaction in one area will undermine progress in others.'18 The following organisations have published best practice principles:
- the Australian Council of Superannuation Investors (ACSI);19
- the Council;
- the Australian Institute of Company Directors (AICD);20 and
- the Investor Group on Climate Change.
Public companies are required to have a minimum of three directors (of which at least two ordinarily reside in Australia).21 In Australia, a board is structured as a single tier with one chair and executive and non-executive directors.
For listed entities, compliance with the CGPR constitutes a reporting requirement.22 The CGPR recommends, among other things, that listed companies establish and disclose board charters,23 diversity policies,24 performance evaluations (for the board, committees, directors and senior executives)25 and separate board committees.26 Gender diversity is also a key recommendation, with listed entities included in the S&P/ASX300 Index expressly required to have a target of no less than 30 per cent of directors of each gender holding board positions.27 ASX200 companies achieved this objective, in aggregate, in November 2019.28 Female representation on ASX200 boards has now increased to approximately 34 per cent and, as at November 2021, females comprised approximately 42 per cent of all new appointments to ASX200 boards for the calendar year. More broadly, ASX300 companies have now achieved, in aggregate, female board representation of approximately 33 per cent.
In response to the covid-19 pandemic, the AICD and the Governance Institute of Australia released a report on board practices observing the impact of virtual meetings on directors.29 The survey revealed that 41 per cent of respondents held more frequent board meetings, while 43 per cent disclosed that the security and stability of virtual platforms presented cybersecurity challenges for board governance.30 The key recommendations include, among others, implementing a virtual meeting protocol, proactive engagement with key stakeholders, preparing contingency plans and stress-testing to achieve critical organisational resilience.31ii Board and chair
The board must ensure that proper accountability systems and mechanisms are in place and that shareholders are kept informed in accordance with the entity's continuous disclosure obligations. The chair's role is to ensure that appropriate board structures and procedures are in place. The general view in Australia is that the roles of chief executive officer (CEO) and chair should remain separate.32
Listed company boards should comprise a majority of independent non-executive directors33 and must maintain oversight of the CEO and senior management.iii Delegation
Subject to the company's constitution, directors may delegate their powers and are responsible for a delegate's exercise of power unless he or she reasonably believes, in good faith and after proper inquiry, that the delegate would at all times comply with the director's duties and is reliable and competent in relation to the delegated power.34
In circumstances where a market announcement was 'a key statement in relation to a highly significant restructure' and where management has brought the matter to the board, none of the directors is entitled to 'abdicate responsibility by delegating his or her duty to a fellow director'.35 In this regard, non-executive directors also cannot avoid liability by pleading reliance on management or expert advisers.
There is a core, irreducible requirement for directors to take all reasonable steps to be in a position to guide and monitor the company.36
Board committees perform a critical role in determining matters where executive directors are faced with a conflict of interest37 and assist directors to obtain the information required to discharge their duties, including to challenge information or senior management, or both. As noted in the Final Report: 'The task of the board is overall superintendence of the company, not its day-to-day management.'38 It is a requirement for listed entities to have nomination,39 audit,40 risk41 and remuneration committees.42
During takeover transactions, committees should only comprise directors not associated with the counterparty to the takeover and the establishment of an independent takeover committee may be required.43iv Remuneration
It is expected that listed entities will remunerate fairly and responsibly.44 ACSI notes that non-executive directors should generally only be remunerated by way of reasonable fixed fees or shares, and there should not be any variable remuneration (which may include short-term (i.e., annual payment in cash or securities) and long-term (i.e., options or securities-based) incentives), which may be more appropriate for executive directors.45
For listed companies, remuneration reports are required to be adopted by shareholders at every annual general meeting (AGM).46 Voting on the resolutions to the report and the operation of the 'two strikes' rule is a mechanism for shareholders to hold the board accountable for excessive remuneration if at least 25 per cent of the votes cast by shareholders at the AGM are against remuneration reports in consecutive years.47 If this occurs, shareholders must then be asked to vote on a spill motion.48 Shareholders can also use this mechanism to express dissatisfaction with other governance and performance issues.v Directors
There are federal and state laws that impose liability on directors and senior managers for corporate breaches of laws other than the Corporations Act, including environmental, health and workplace safety laws and securities and competition laws. Directors must:
- exercise their powers and discharge their duties with a reasonable degree of care and diligence;49
- act in good faith in the best interests of the company or for a proper purpose;50
- not misuse their position or improperly use information obtained from their position as director to obtain an advantage for themselves or a third party or to cause detriment to the company;51 and
- prevent the company from trading while insolvent.52
Companies often create a conflicts of interest policy as a best-practice defence.53 Directors' duties must be observed carefully, as the consequences of breaching duties can be severe. There are legal protections available to directors in certain circumstances, including:
- the business judgement rule: when directors are making a business judgement and in doing so:
- are acting in good faith and for a proper purpose;
- do not have a material personal interest subject matter of the judgement;
- inform themselves about the subject matter of the judgement to the extent they reasonably believe to be appropriate; and
- rationally believe that the judgement is in the best interests of the company;
- meeting the requirement of exercising due care and diligence both under the Corporations Act and the common law; and
- reliance on information and advice: directors are entitled to rely on information or professional or expert advice from a competent employee, professional adviser or expert, another director or officer, or a board committee, provided the reliance was made in good faith, and after the director has made an independent assessment of the information or advice.
The purpose of the business judgement rule is to recognise that directors are expected to take advantage of business opportunities and engage in responsible risk taking. In practice, the rule has fallen short of this goal as it has not alleviated directors' concerns about liability. The ability to rely on information and advice has been diluted by courts postulating 'core irreducible duties' in certain areas. The Centro case54 requires directors to personally be financially literate and to understand the AASB accounting standards.
Other protections, such as constitutional indemnities and insurances, including directors and officers liability insurance, are also commonly relied on. Additional duties may arise for directors of responsible entities, directors of life companies,55 superannuation trustees and authorised deposit-taking institutions (ADIs). In addition to these duties, the Listing Rules impose continuous disclosure obligations on listed entities. A company's obligation to continuously disclose market sensitive information is considered by the ASX to be critical to the market staying informed. Accordingly, directors should give due consideration to the company's communications strategy and market announcements or otherwise risk personal liability. This is reflected by the breach of directors' duties found by the High Court of Australia in the case of James Hardie Industries Limited.56
The role of an audit committee is to assist the board to discharge its duties in respect of the entity's financial performance, reporting and management.57 The Centro case raised the bar; directors must apply their own minds to, and review carefully, the financial statements and directors' report.58 Directors must ensure that the CEO and chief financial officer provide a declaration stating that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements give a true and fair view and of the entity's financial performance comply with accounting standards.59
New legislation recently introduced in Australia requires that all persons who are appointed as directors and alternate directors of certain Australian entities must apply for a Director Identification Number within prescribed time frames. A Director Identification Number is a unique 15-digit number that will be assigned to each eligible director (upon a one-off application by the director) as proof of his or her identity. Directors will keep the same Director Identification Number regardless of whether they change companies or their name, cease to be a director, or move interstate or overseas. This regime, introduced as part of the Australian government's Modernising Business Registers Program, is aimed at preventing fraudulent or other unlawful activity in a corporate context.60vi Appointment, nomination, term of office and succession
The CGPR stipulate a detailed process for the nomination and election of directors to the board of a listed entity. Candidates must have the requisite skills, capacity and experience to ensure that their duties can be discharged and that they can provide effective leadership to act in the best interests of the company. Nomination committees should be formed to provide recommendations to the board based on objective criteria, such as the CGPR.61
Generally, a company's constitution outlines the appointment process for directors. However, Listing Rule 14.4 provides that a director of a listed company must not hold the position of director without re-election past the longer term of the third AGM following appointment or three years appointment.62 Although some bodies call for annual re-election of directors,63 staggered board re-election is commonly adopted in Australia. If a director serves for 10 years or more, the director's independence may need to be considered.64
Board succession processes ensure that board composition reflects an appropriate balance of skill, experience and subject matter expertise. This is often overseen by the nomination committee.65