14 December 2018

The Global Corporate Governance Echo Chamber

This article is written by Matt Egerton-Warburton.

In our interconnected world, corporate governance concepts and ideas that grow, mature and reach acceptance in influential offshore jurisdictions rapidly reach our shores.

This is both a blessing and a curse. Australian boards, legislators and regulators have a broad template of choices and options of corporate standards they can adopt, but they face pressures to adopt the latest trends and fashions and justify why they have not imported corporate governance standards that are in use overseas.

While Australian boards, legislators and regulators need to be open and flexible to new ideas that improve corporate governance we need to look sceptically on the cacophony of trends and fads that distract and burden our already overburdened company directors.

Global shareholders and proxy advisors demand global standards

A large percentage of shareholders on Australian registers are the same shareholders that sit on most large global companies.

These shareholders include the big global index funds giants - Blackstone, Vanguard and State Street (who together hold 20% of the S&P 100 and a similar percentage of the ASX 200). The Big Three coordinate their voting behaviour through centralised corporate governance departments that push trends and concerns from New York to the corners of the globe. The big three are becoming increasingly activist and are exerting their influence to insist that large Australian companies (in which they are now substantial shareholders) meet global standards in corporate governance.

With global shareholders comes a global proxy adviser industry which applies talking points and trends in offshore jurisdictions to Australian boards. 

At the sharp end of this global shareholder trend are global shareholder activists who aggressively enter into the Australian market and use global corporate governance standards and trends as leverage in their campaigns to disrupt, and they would argue improve, Australian companies. 

As a result, trends and issues that arise in New York, London or Europe (such as cyber security, climate change and corporate culture) rapidly make their way on to AGM agendas in Australia.

Australian boards and directors are now under pressure to comply with international corporate governance trends. 

Australian Legislation in the echo chamber

Corporate legislators and regulators in Australia are increasingly looking overseas for legislative solutions to local governance issues. 

Over the last few years Australian state and federal governments have been introducing legislation that substantially increases the compliance burden on Australian companies.

Recent examples of new legislation that echoes and amplifies global trends in corporate governance legislation include:

  • Two strikes rule – Shareholder voting to approve remuneration was a global trend that began in the early 2000s.  Australia was an early adapter - in 2004 Australia passed legislation after the CLERP 9 reforms recommended an advisory shareholder vote on a remuneration report. The law in Australia was refined and amplified in 2011 when the two-strikes law was introduced after recommendations made in the Productivity Commission’s 2009 Report on Executive Remuneration.

  • Anti-slavery legislation – The first anti‑slavery legislation was passed in California in 2010.  The UK replicated, amended and looked to improve the California act with the Modern Slavery Act in 2015.  The NSW and the Federal Governments have recently implemented, modern slavery acts in Australia. 

  • Whistle-blower legislation – The writ of Qui Tam is an old common law writ allowing individuals to litigate on behalf of government (with the litigant receiving a percentage of the proceeds of funds raised). This right was recently repackaged by the IRS, the SEC and certain other US agencies. Certain US plaintiffs who provide tips that lead to successful enforcement actions can now receive awards of between 15% and 30% of the total recovery by the government agencies. In 2012, Bradley Birkenfeld received a $104 million bounty reward from the IRS for blowing the whistle on his employer, UBS. In 2017, there was an Australian Parliamentary recommendation that whistle-blowers be financially rewarded for speaking up about misconduct, fraud or corruption across both public and private sectors. Both Labor and the Greens are currently pushing for rewards to be included in legislation being considered by parliament.

  • Senior Management Regime and BEAR Regime –  As a response to the GFC the UK introduced the Senior Management Regime in 2016.  This regime was echoed and amplified in Australia with the introduction of the Banking Executive Accountability Regime (BEAR) in 2018.

  • Anti-Bribery Legislation – The US introduced the Foreign Corrupt Practices Act in 1977, barring US companies and individuals from bribing foreign government officials. The UK introduced mirror and amplified legislation in 2010 with the UK Bribery Act. Australia recently increased the scope of its laws, such that “facilitation payments” are no longer allowed and Australian companies abroad are prohibited from bribing foreign officials.

Conclusion

The cumulative effect of the proliferation of corporate governance obligations means that Australian boards are spending an enormous amount of time ensuring compliance with the myriad of laws and governance policies that apply to their companies.  As a result they have less energy to focus on their key task – setting strategic priorities while overseeing management’s implementation of corporate strategies. 

We argue that governments, regulators, shareholders and proxy advisors should only increase board compliance and governance burdens when absolutely necessary and when no other avenues are available. New standards and legislation should be thoroughly vetted and tested (including from a cost-benefit analysis) and introduced sparingly. We should also be looking at ways of decreasing the compliance burdens on our boards.

If we do not curb our instincts to constantly regulate and increase compliance burdens, we run the risk of stifling our companies and boards and minimising risk taking and entrepreneurship at exactly the time when we need flexible, agile boards that can react quickly and effectively to a rapidly changing global world.

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