Boardrooms face major shake-up in 'significant shift' by AICD

Patrick Durkin
Mar 3, 2019
AFR
Directors are considering broader duties, annual elections and a cap on the number of board seats individuals can hold, in response to criticism of boards in the wake of the banking royal commission.
In a “significant shift”, the Australian Institute of Company Directors is working on a discussion paper designed to expand directors’ duties beyond shareholders to stakeholders such as customers.
“We’ve seen some very significant failures in the past few years and we are still going through commissions which could reveal even more, so this is not the time to stick our head in the sand, we need to push forward and lead a conversation,” AICD chief executive Angus Armour said, ahead of the group’s annual summit that starts on Monday.
AICD chief executive Angus Armour: “This is not the time to stick our head in the sand, we need to push forward and lead a conversation.” James Brickwood
“When the community look at business they feel we need to change the legal duty from acting in the best interests of the company to other stakeholders,” Mr Armour said.
Directors were heavily criticised for the alleged misconduct at AMP, NAB, IOOF and Commonwealth Bank, amid a public perception that boards are still “something to do on the way to golf”.
And the corporate regulator is understood to be working on at least one major case against former bank executives and directors that will shock the business community.
High-profile critics of boards include Swinburne University chancellor John Pollaers, who has warned that boards are “one part of our capital system not really working”. Veteran fund manager Peter Morgan has warned boards are “massively over-rated”.
Holding boards accounbtable
The proposal to expand directors’ duties was put forward by National Australia Bank chairman Ken Henry at his infamous appearance before the royal commission, which ultimately cost him his job.
But other directors including Westpac and Transurban chairman Lindsay Maxsted are deeply opposed to any legislative change, and the ASX Corporate Governance Council last week dumped a “social licence to operate” after a furore over political correctness.
Australian Institute of Company Directors roundtable. Standing, from left, Gene Tilbrook, Angus Armour, Dr Sally Pitkin and Glenn Barnes; front, Geoff Brunsdon, Christine Bartlett, Ken Dean, Kathleen Conlon. James Brickwood
Mr Armour said the AICD would review its code of conduct and strengthen professional development obligations in recognition that legal changes may be forced on directors if they did not restore their reputations.
It would also consult on the annual election of directors and over-boarding, which occurs when directors hold too many roles. If the peak body reaches a consensus on these issues it’s likely that top boards would move to adopt their recommended practices.
The dual-listed BHP and Rio Tinto have already moved to annual elections for directors, which is seen as giving investors more regular oversight of the board and takes the sting out of the two-strikes rule over pay.
“We need to convince the community that boards can be held accountable,” Mr Armour said. “One mechanism is a more frequent election process which allows investors to express their views.”
Many leading directors are opposed to the change including the chairman of GrainCorp, EnergyAustralia, HSBC Bank Australia and Virgin Australia, Graham Bradley, who said it would “enable activists to potentially destabilise the board at every AGM. Also, annual director elections would create extra cost, time and risks for boards.”
Overloaded directors are also being increasingly targeted by proxy firms and shareholder groups who have taken issue with directors who sit on more than five listed boards.
The AICD said it would also develop a plan to tackle the vexed issue of non-financial metrics for executive pay and practical frameworks to improve oversight of culture.
NAB, ANZ and Westpac all received strikes on pay last year with NAB receiving a record an 88 per cent protest vote and only CBA avoiding a strike after it withheld annual bonuses for executives after they received a strike in 2017.
One of the most contentious issues on pay has been the move to balanced scorecards and greater reliance on non-financial metrics, which have mostly been rejected by investors, despite Commissioner Kenneth Hayne emphasising the importance of non-financial metrics.