Ten Tips for Directors for 2004

Elizabeth Johnstone LLB, MA (Hons), BA (Hons), ACIIC

Processes are no substitute for integrity

The establishment of committees, procedures and other structures within a company is not, of itself, a sufficient means of achieving a good system of corporate governance. In addition to these procedural mechanisms, it is necessary for directors to demonstrate integrity and loyalty and to exercise sound judgment, due care and good faith in the execution of their duties – stop and ask "Is this right?". Independence, of itself, will not be sufficient to ensure the maintenance of good corporate governance within a company. In reality, an independent director will not always be aware of all of the intricacies of the company's business operations and may be more likely to be tempted to rely more heavily on the advice and decisions of other directors and management. It is necessary for a board not only to be capable of independent judgment and review, but for all directors to act with integrity and responsibility. Independence of mind is what matters most – not just ticking the boxes.

Demonstrate stewardship

A director's role in a company is one of leadership and guidance. To fulfil this role, a director must be fully aware of, and understand, the strategy and risks of the company. If a director does not fully appreciate these crucial aspects of the company, the director must be active in asking the right questions to obtain a thorough understanding of such matters.

The role and position of the director has changed

Recently, directors have increasingly come under public limelight and criticism in relation to their roles within companies. Due to recent high profile corporate collapses and director cases, regulatory bodies, the media and the public are scrutinising directors' decisions and actions to an unprecedented extent. In this new environment, directors are advised to contemplate every action, or inaction, carefully and to always turn their minds to any potential public consequences.

Compliance with Legislative requirements is not enough

It is no longer satisfactory for directors to merely adhere to the letter of the law. The recent publication by the Australian Stock Exchange of "Principles of Good Corporate Governance and Best Practice Recommendations" imposes requirements which far exceed the existing legislative framework. In addition to complying with the extensive range of director's duties outlined in the Corporations Act 2001 (Cth) and in case law, directors must strive to act in accordance with the spirit of the corporate governance regulations, rather than merely with the black letter legal provisions.

Be Proactive and Ask Thoughtful Questions

A director should be in a position of knowledge and understanding in relation to the key aspects of the company. These key aspects include the operations of the company, long and short term strategies of the company, the risks inherent to the company and the financial situation of the company. If a director lacks knowledge or understanding in any of these or other important aspects of the company, it is the director's responsibility to be proactive and ask questions to ascertain such necessary understanding.

Disclose all information which may be relevant

It is vital that all material matters concerning the company should be disclosed in a timely manner. Considered and sound decisions can not be made by the directors of a company if certain relevant information is not made available. Directors should strive to disclose all matters within their knowledge which concern the company in a complete, accurate and timely fashion. Matters which a director should disclose include material personal interests, conflicts of interests, information relevant to any of the company's operations, information concerning the financial and commercial status of the company and information relevant to any issue being decided by the company, to the extent that such matters are not generally known among the other directors.

Maintain Transparent Practices and Procedures

Accountability and transparency are cornerstones of a good corporate governance system. It is important that directors establish procedures through which the decisions, structures and procedures of the company can be reviewed and tested.

Corporate governance is not one size fits all

As directors, it is necessary to establish a structure within the company which promotes and achieves good corporate governance practices. Such a structure may comprise various committees, processes and policies. It is important to tailor the corporate governance structure to suit the company, as different companies will have different needs and capacities depending on their size, field of operation and risk profile. A director should not simply apply a generic model of corporate governance to a company as the company will possibly not be able to comply, on an ongoing basis, with the model. In such a circumstance, good corporate governance practices can rarely be achieved.

Remember the difference between independence and independence of judgement

In the HIH Royal Commission Report, Mr Justice Owen commented on the misguided emphasis on "directors being independent". Rather, His Honour emphasised that what is crucial is that directors exercise independence of judgment. A director should bring to all decisions an unprejudiced, autonomous and informed mind. This does not preclude a director from seeking professional advice from others, however the law requires that the director does not rely blindly on such advice.

Stay up to Date – The External Environment and Your Obligations

In the current environment, legal and regulatory issues are developing at an unprecedented rate. It is important for directors to keep abreast of developments and issues which are in the public eye. In this respect, directors should strive to learn as much information as possible from professionals within the company, external professional reports, the media and key industry players. Issues which may be important in 2004 include executive remuneration, salary disclosure, increased shareholder participation in the company through annual general meetings and the increasing number and extent of duties directors are being required, by the public and by the Courts, to satisfy.

About Elizabeth Johnstone

Elizabeth Johnstone is a Partner with Blake Dawson Waldron and the National Segment Leader: Corporate Law and Governance. She joined BDW in 1992 after 14 years as a senior executive and consultant specialising in corporate advisory, restructuring and legal compliance work. In 1985 Elizabeth was selected as the BPW Business Woman of the Year. She is an Associate of the University of Sydney's Centre for Innovation and International Competitiveness (ACIIC). Elizabeth served as an appointed Public Member of the Australian Press Council for ten years, and has served as a director for a number of organisations. She has been appointed to the American Bar Association's Corporate Governance Committee and the Australian Stock Exchange's Corporate Governance Council – Integrity of Reporting and Board Composition and Independence Working Parties. Elizabeth practises in the Corporate Advisory group - advising on corporate law and governance, restructuring, privatisation, strategic issues in mergers and acquisitions, and competitive tendering and contracting including probity issues. Elizabeth's previous legal practice experience has included corporate and commercial, employment and industrial, and trade practices law.