What does Good Governance look like ?.

I get asked this question occasionally, most often in the context of “why didn’t XXX want to invest in us”.  The sad truth is that nearly 50% of all Australian businesses are not “investable” for various reasons … but one of the key reasons is a lack of Governance/Controls that makes potential investors nervous about the company.

Feel free to contact me if you want further information, or are looking for assistance in improving your business Governance.

I’m providing the following high level guidelines for businesses that meet the following criteria:

  • Revenues of over $20M;
  • EBIT of over $5M; or
  • Seeking to raise over $2M in capital for acquisitions, expansion or other growth.

All Australian private companies looking to raise capital, or looking to sell, should review and where possible comply with the ASX Corporate Governance Council’s “Principles of Good Corporate Governance and Best Practice Recommendations” refer to http://www.asx.com.au/ListingRules/guidance/gn09a_corporate_governance_principles.pdf for details.

Your Board of Directors

Ideally your Board should consist of up to 3 Executive Directors (including the CEO and/or Managing Director) and an equal number of Non-Executive Directors, including the Chairman (who has the casting vote).

The role of this Board in relation to nomination and membership is to:

  • review the size and composition of the Board;
  • review the range of skills available and determine the appropriate balance of skills required for future board membership; and
  • review and consider the succession planning of the Managing Director, the Chief Financial Officer, the Company Secretary and succession of Directors generally.

All Directors, with the exception of the Managing Director should be subject to re-election by rotation periodically.

Director Independence

Good governance dictates that the majority of the Board of Directors, including the Chairman must be independent of management and free of any business or other relationship that could “materially interfere with or could reasonably be perceived to materially interfere with the exercise of the Director’s unfettered and independent judgement”.

Conflicts of Interest

In accordance with the Corporations Act 2001 and the Company’s constitution, Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the Board believes a significant conflict exists, the Director concerned does not receive the relevant Board papers and is not present at the Board meeting whilst the item is considered.

Role of the Chairman

The Chairman is appointed by the Board and should be a non-executive director who is demonstrably independent from the business executives and operations.

The Chairman is responsible for:

  • leadership and effective performance of the Board;
  • setting the agenda for Board meetings, in consultation with the Managing Director and Company Secretary;
  • overseeing the provision of information by management to the Board, and ensuring the adequacy of that information; and
  • arranging regular evaluation of the performance of the Board, Board Committees, the CEO, COO & CFO as well as all Directors.

Responsibilities and Functions of the Board

The Board considers that the essential responsibilities of the Directors are to oversee the Company’s business operations and its management for the benefit of its shareholders, employees and other stakeholders and to protect and enhance shareholder value.

The primary responsibilities of the Board include the following:

  • chart the direction, strategies and financial objectives for the Company and monitor the implementation of those policies, strategies and financial objectives;
  • monitor compliance with regulatory requirements and ethical standards;
  • oversee the Company’s control and accountability systems;
  • appoint the Managing Director, the Company Secretary and ratify the appointment of the CEO, COO and CFO from time to time. To set criteria for, and evaluate at least annually, their performance;
  • monitor and assess management’s performance in carrying out any strategies, meeting any objectives and observing any budgets approved by the Board, and to ensure that sufficient resources are available to management for those purposes;
  • approve and monitor financial and other reporting;
  • ensure that appropriate internal and external audit arrangements are in place and operating effectively;
  • issue any shares or other securities of the Company;
  • approve the strategic plan, performance objectives and the budget;
  • approve the remuneration and conditions of service including financial incentives for any Executive Directors;
  • approve significant changes to organisational structure and the appointment of such senior officers as the Board may determine;
  • approve the acquisition, establishment, disposal or cessation of any significant business of the Company;
  • approve any public statements which reflect significant issues of the Company’s policy or strategy;
  • review on a regular and continuing basis the executive succession planning, in particular for the Managing Director and executive development activities.

The Board delegates responsibility for day-to-day management of the Company to the Managing Director.

The Board should also have Committees to assist in the carrying out its responsibilities in an effective and efficient manner.  The Committees typically include: Audit Committee, Finance Committee and Remuneration Committee.

Independent Professional Advice and Access to Company Information

Each Director has the right of access to all relevant Company information and to the Company’s executives and, subject to prior consultation with the Chairman, may seek independent professional advice at the Company’s expense.  A copy of advice received by that Director must be made available to all other members of the Board.

Performance Evaluation

The performance of all Directors, the Board as a whole, the Managing Director and the Executive Team should be reviewed at least annually by the Board.

Remuneration Committee

The role of the Board, or a Committee formed by the Board, in relation to remuneration is to:

  • Review and recommend to the Board as appropriate; remuneration policy, including employee share option plans and superannuation;
  • review and evaluate recommendations made by the Managing Director concerning remuneration and other conditions of appointment for executives reporting directly to the Managing Director;
  • Determine the broad structure and objectives of the remuneration policy and its relationship to Company performance;
  • Review prior to implementation any new executive incentive schemes and any proposed changes to existing executive incentive schemes, including the appropriateness of performance hurdles and the total payments proposed; and
  • Advise the Board on remuneration of non-executive Directors.

Audit Committee

The Board should establish an Audit Committee.  The Audit Committee assists the Board in fulfilling its overseeing and reviewing responsibilities.  The Audit Committee reviews the financial reporting process, the system of internal control and management of financial risks, and the audit process.

In performing its duties, the committee maintains effective working relationships with the Board of Directors, management and the internal and external auditors.

The Audit Committee reviews the scope and performance of the external audit and makes recommendations regarding reappointment of the external auditors to the Board. The independence of the external auditors is also reviewed, including the range of services provided in the context of all consulting services bought by the Company.

Risk Management

The Board acknowledges that it is responsible for the overall internal control framework but recognises that no cost effective internal control system will eliminate all errors and irregularities.

The Board periodically undertakes a review of business risks using the assistance of outside specialists and internal management to identify the source of the risk and loss, quantify the impact of these sources and control and reduce the risks through practical and effective control mechanisms.

These mechanisms include establishing procedures, guidelines, and organisational structures that provide an appropriate division of responsibility, a program of external audit, and the careful selection and training of qualified personnel.

The Board assigns the responsibilities for the operation and conduct of the business to the Managing Director who is directly accountable to the Board.

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3 Responses to What does Good Governance look like ?.

  1. This situation is familiar to me. I invite to discussion.

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