too much governance

  • Date:01 Nov 2005
  • Type:CompanyDirectorMagazine

Too much governance?

Chris Pearce, the Parliamentary Secretary to the Treasurer, is surely right when he says it is time for Australia to take a pause in the introduction of new and intrusive regulation in corporate governance. The Prime Minister and the Business Council are on to something as well with their campaign to cut needless red tape in this field and others.
   I recently attended the annual International Conference on Corporate Governance and Board Leadership in the UK and came away with several main conclusions.
   One is that the tsunami of governance regulation that has swept the world since 2002 has largely passed. American firms, and foreign firms registered with the SEC, are busy getting used to the burdens of the Sarbanes Oxley Act, while the US courts are meting out heavy sentences to those who plundered public companies like Enron and Worldcom. British businesses are digesting their Combined Code. But there is not a great deal that is new.
   Would that were true in Australia. We continue to have new rules proposed or brought forth by the regulators, state governments or the courts.
A top candidate for roll-back would be the proposals of the Australian Prudential Regulatory Authority to regulate the boards of the banks, insurers and funds managers it supervises on behalf of depositors and policyholders. These are fundamentally ill-conceived and should not be implemented as planned from next January.
   The states and territories should take off the pressure they are putting on the Commonwealth to introduce  stakeholder or community responsibility into the duties of directors. This is an odd and illogical response to their justifiable anger at the conduct of James Hardie. Before plunging all Australian companies into these murky waters, they should at least send someone to Europe to look at how it works there.
   At the conference I sat through several presentations on governance by Swiss, Dutch and German experts. My conclusion is there is no simple way to serve multiple objectives.  Decision-making is messy and full of compromises. Consultants find rich ground to ply their trade. Accountability is obscured.
One delegate suggested that the balancing of multiple objectives lies behind low average financial returns by German businesses, which may well be true and would be a worthy topic for a PhD.
   Our state politicians might reflect on the fact that their constituents will depend for their retirement incomes on the returns earned from investments in business. Besides, it is entirely legally possible and normal conduct today for  businesses to take account of relevant interests of the society in which they operate as they formulate their plans and make their decisions. 
  On the other hand, the authorities might do well to keep an eye on the risks inherent in various forms of private equity, trusts and unlisted vehicles that are springing up worldwide to escape the rigours of corporate governance rules now imposed on listed companies. Canada has put a freeze on the formation of “income trusts”, a device peculiar to their market, that have suddenly mushroomed to $C160 billion. A knighted British commentator said he expected to see such entities grow larger collectively than UK listed companies within five years.
There are plenty of reputable people active in this environment (I chair the boards of two unlisted venture funds myself), but people with less scruples will see the opportunities. Big scandals haven’t happened in this field yet, but they may, and they could lose a lot of money for investors and set off another tsunami of laws and regulations.