Directors are critical to organisations’ long-term success. Regulators and other stakeholders are also increasingly looking to directors to provide ethical corporate leadership as well as strategic oversight. But how do organisations – or potential directors – decide who should fill this role?
A recent report by Mr Patrick Gallagher (FCPA) and Prof. Nonna Martinov-Bennie – Who Should Be A Director? – addresses this question. The report is the first in a new series of thought-leadership papers by IGAP and CPA Australia on contemporary national and international governance issues.
The report is a primarily a guide to, and discussion of, the 3rd edition of the Australian Security Exchange’s (ASX) Corporate Governance Principles and Recommendations (ASXPR) (2014). The report covers three main areas:
- The main principles of ASXPR2014, with a comparison to international governance standards;
- The skills and characteristics directors and boards need, including character, knowledge and formal ‘independence’ requirements; and,
- The benefits of board diversity.
Understanding ASXPR (2014).
ASXPR 2014 applies to all listed entities in Australia. It has eight principles and 29 more specific recommendations, with additional explanation and recommendations in accompanying commentaries.
According to Gallagher and Martinov-Bennie, the most important ‘foundational rules’ about should be a director are contained in ASXPR Principle 2, which emphasises that:
a listed Entity should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively.
This principle requires that all directors bring skills, character and insight that enable the board to meet its responsibilities.
Director skills and characteristics
While any person can legally be a Director, Gallagher and Martinov-Bennie emphasise that good corporate governance requires close attention to the skills of both individual directors and the board as a whole.
ASXPR Principle 1 provides further insight into these skills. Gallagher and Martinov-Bennie highlight the value of the commentary to Principle 1, which ‘effectively states a range of expected functions that directors must fulfil’.
This commentary indicates attributes a Director must bring, which include leadership, strategic understanding and financial knowledge, and also the personal skills and character to challenge powerful individuals or interests when required.
Gallagher and Martinov-Bennie also outline important formal requirements for directors to be ‘independent’. However, they stress that – in itself – being independent is not enough to be a good director: Directors must also bring the right mix of skills, knowledge and capabilities.
Benefits of board diversity
ASXPR2014 (1.5) recommends that boards should have a diversity policy, disclose this policy and report on their performance in encouraging diversity.
Gallagher and Martinov-Bennie state that the wording of this recommendation implies that ‘gender diversity is at the heart of ambitions for new corporate governance thinking within Australia’.
While some may view diversity as an imposition, Gallagher and Martinov-Bennie highlight key benefits of greater gender diversity that have emerged from extensive research. These benefits can include:
- Improved board performance;
- A better mix of leadership skills; and
- Access to a wider talent pool.
Final thoughts: Setting the tone
So ‘Who should be a Director?’
ASXPR2014 sets out key principles that ASX-listed boards must understand and apply. But Gallagher and Martinov-Bennie also observe that ‘every corporation is different and faces different circumstances from time to time’.
Hence, they argue, the good director not only understands the fundamental principles of good corporate governance, but is also attentive to the ‘needs of the corporation, its shareholders and other stakeholders’.
For Gallagher and Martinov-Bennie, two key principles encapsulate the approach that directors and boards should be able to enact:
- The board must set the tone for the whole corporation; and
- The tone needs to ensure an ethical and responsible organisation.
Prospective directors need to ensure they have the skills and knowledge to meet these challenges.