A cry for help from the boardroom

28 April 2011

With boards under growing pressure from shareholders and the courts, alumni Kevin McCann (BA 1961, LLB 1964) and Bob Austin (BA 1966, LLB 1969, LLM 1974) discuss the way ahead in a special article published in The Weekend Australian Financial Review.

The following is an excerpt of that article and the topics addressed.

The chairman

Bob Austin: "The flow of accurate, material and digestible information into the boardroom is absolutely essential for sound corporate governance. But too often the process becomes a content between the board and management

"The law provides a framework of rights and duties but, if the law is appealed to, the system has already broken down. Practical strategies and good personal relationships are the foundation for efficient governance."

Kevin McCann: "I agree. for the chairman in particular, a key task is to implement effective connections between directors and the executive team, through board workshops, site visits and other meetings with operational management."

How much information is enough?

Bob Austin: "Of course, every director of the company has an interest in, and a responsibility to ensure, that information flow from management to the board is adequate and reliable. In terms of legal liability, the risk of making decisions without having all of the material information is obvious. If directors are concerned that something material is missing, they must insist on receiving it. They need to approach their task with an inquiring mind, as was said many years ago in the Tricontinental Royal Commission."

Kevin McCann: This is a perennial problem. Fortunately in my experience, the quality of board papers in major listed public companies is quite high. Management provides focused material analysing the proposal placed before the directors for decision. But over the years I have seen or heard about some board papers of disappointing quality. Occasionally managements feels compelled to put everything in the board pack and the outcome is a truckload of papers for a board meeting. I have heard of board packs exceeding 500 pages.

The board and board committees

Kevin McCann: "I have a real concern about the way board committee reports are handled by some listed company boards. You sometimes encounter a belief that the delegation of the function to a committee is complete, so that only a perfunctory report from the chair of the committee is needed, or even that the minutes of the committee will be sufficient. I understand that sometimes there is little reporting from the chair of the committee to the board on the important issues the committee has considered."

Bob Austin: "There is a legal distinction between decisions by a board committee exercising delegated authority and recommendations by the committee to the full board. Mostly board committees make recommendations rathern than decisions, but occasionally they have some limited authority to make decisions. Legally, there is a big difference. Where the committee makes a delegated decision, the key issue for the board is whether the committee was reliable and competent. Where the committee merely makes a recommendation, and the board makes the decision, the non-committee directors have a 'reliance defence', but to invote the defence they need to make an 'independent assessment' of the recommendation having regard to their knowledge of the corporation, its structure and operations."

Kevin McCann is a lawyer turned company director who recently became chairman of Macquarie Group.

Bob Austin is a former Dean of Sydney Law School and judge of the Supreme Court of New South Wales who now heads the corporate HQ advisory team at Minter Ellison.

Contact: Greg Sherington

Phone: +61 2 9351 0202

Email: 140500575e115f0e453c1f36150a060d20102645121b4230053e4f3303