(1.8) Sources of corporate power
(1.8.2) TESTING THE BALANCE OF POWER BETWEEN THE SHAREHOLDER MEMBERS AND THE BOARD OF DIRECTORS
In both corporate and non-profit organisations, Chait believes that boards, which have sound and workable governance practices in place, generate successful organisations. 228 Thus, to achieve good governance practices, Tricker believes that the balance of power between the members of a public company and the board of directors needs to be correct. This factor is tested through a consideration of seven basic principles: 229
(1.8.2.1) Board Membership
Nominations to fill places on corporate boards of management typically originate from the incumbent chairman and are supported by the board. Because shareholder attendance at meetings is often poor, the appointment of new directors is determined by the existing board rather than by the owners (shareholders) themselves. Thus,
(b)oard meetings are the critical event in which trustees … determine what impact an organisation will have on society. Robert Frost voiced perhaps the best perspective on board members. ‘The world is full of willing people,’ said the American poet, ‘a few willing to work, the rest willing to let them’. 230
Fleming notes that the board size and composition have always been regarded as important components of the governance process. 231 He states that the board should be composed of both executive and non-executive directors. Executive directors usually hold both a board and a senior management or executive position within the company and are able to bring their wide knowledge of the corporation to board meetings. However, their independence from management may be impaired, as they may be subject to greater influence by the company’s CEO than are outside
228 RP Chait (1994), “How to help your board govern more and manage less”, National Center for Nonprofit Boards, above n 227, 14.
229 Tricker, above n 8, 76-79.
230 Mueller, above n 227, 19.
231 Fleming, above n 162, 201.
directors. Additionally, non-executive directors are usually appointed for their industry expertise and their decision-making abilities. 232
Fleming also notes that during the last forty years in Australia, both board size and board composition have increased by about 30 to 40 percent while the number of share block-holders quadrupled. Additionally, most corporations maintained a majority of non-executive directors, due to the professionalisation of governance practices in large organisations. Fleming further suggests that the appointment of non-executive directors has contributed to an improvement in decision-making and governance practices generally. 233
With regard to board size and composition, in August 2002, the Australian Stock Exchange Corporate Governance Council was formed to develop a framework for corporate governance, which would ‘provide a practical guide for listed companies, their investors, the wider market and the Australian community’. The council comprised representatives from 21 stakeholder groups including major investors, firms and professions and delivered a set of principles and best practice recommendations in March 2003. 234 These principles were ‘not prescriptions’ but designed to ‘produce an efficiency, quality or integrity outcome’. However, all companies listed on the stock exchange were encouraged to use the principles for
‘re-examining their corporate governance practices’. These recommendations were not designed to be peremptory and companies may opt out of implementing them simply by indicating why they needed to do so. 235
The Australian Stock Exchange (ASX) corporate governance council has indicated that board composition should in terms of its principle number 2 be structured as follows: 236
1. A majority of the board should be independent directors;
2. The chairperson should be an independent director;
232 Ibid 202.
233 Ibid 203–204.
234 Ibid 205. See also ASX Principles of good corporate governance and best practice recommendations (2003), <http://www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf>.
235 Ibid 207. See also ASX Principles, above n 234.
236 Fleming, above n 162, 206. See also ASX Principles, above n 234, principle 2, recommendation 2.1-2.4, 19-21.
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3. The same person should not hold the roles of chairperson and chief executive officer; and
4. The board should establish a nomination committee.
The council, however, does not specify whether the boards could be composed of other stakeholders within the corporation, such as the employees. However, the ASX does provide a note on how independence should be assessed. Consequently,
(a)n independent director is a non-executive director and … is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the company. 237
Since these ASX principles of corporate governance and its recommendations are not mandatory, a company could, in terms of the “comply or explain” principle, attempt to make such an appointment and then explain it. The ASX does, however, in terms of principle number 10, recognise the rights and interests of all stakeholders by suggesting that corporations establish and disclose a code of conduct in order to facilitate ‘compliance with legal and other obligations to legitimate stakeholders’. 238
Furthermore, Tricker’s comments suggest a possible way forward to improve shareholder attendance at board meetings. Principle number 6 of the ASX corporate governance council makes sound suggestions that the corporation should respect the rights of shareholders by designing and disclosing
… a communications strategy to promote effective communication with shareholders and encourage effective participation at general meeting. … (Also the board should) request the external auditor to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s Reports. 239
(1.8.2.2) Remuneration of Directors
It is usually the board rather than the shareholders that determines the remuneration for the directors.
237 ASX Principles, above n 234, principle number 2, box 2.1, 20.
238 Fleming, above n 162, 207. See also ASX Principles, above n 234, principle 10, recommendation 10.1, 59.
239 Fleming, above n 162, 206. See also ASX Principles, above n 234, principle 6, recommendations 6.1 and 6.2, 42-43.
Principle number 9 of the ASX corporate governance council suggests that the corporation should remunerate fairly and responsibly and 240
1. Provide disclosure of the company’s remuneration policies to enable investors to understand the costs and benefits of the policies and the link between remuneration paid to directors and key executives and corporate performance.
2. Establish a remuneration committee.
3. Distinguish the structure of non-executive directors’ remuneration from the other executive directors.
4. Ensure that equity-based executive remuneration is made in accordance with shareholder-approved plans.
Additionally, Principle number 8 of the ASX corporate governance council makes the suggestion that the corporation should encourage enhanced performance by disclosing the process for board performance evaluation, its committees, individual directors and key executives. 241
(1.8.2.3) Raising of Capital
Members in a general meeting do have to approve significant changes in the structure of capital or in any other significant matter. Such actions, which are required by the Companies Acts, seek to protect investors rather than supervising the management of the board. Hence, directors may not change fundamentally the nature of the corporation’s business. However, because objects clauses are written very widely for many modern companies, effectively, this frequently fails to act as a major constraint.
(1.8.2.4) Allocation of Resources
240 Fleming, above n 162, 207. See also ASX Principles, above n 234, principle 9, recommendations 9.1-9.4, 54-59.
241 Fleming, above n 162, 207. See also ASX Principles, above n 234, principle 8, recommendation 8.1, 47.
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The directors of public companies are able to allocate resources between subsidiary companies as they deem fit. Approval of its members is only sought when required by the Articles of Association or when the change would result in fundamentally restructuring the company.
(1.8.2.5) Acquisition of Other Companies
Directors have discretion to undertake the acquisitions of other companies provided any constraints indicated in the articles of association are complied with. At the same time no fundamental change in the financing or basic nature of the company must take place.
(1.8.2.6) Appointment and Remuneration of Top Executives
Many directors believe that a primary duty of the main board is to ensure that the management of its subsidiary companies is effective. In this way, appropriate subsidiary company management policies are formulated for the appointment and remuneration of top executives.
(1.8.2.7) Oversight and Control of Management Performance
Board members accept the responsibility for executive management performance. In large public companies, members’ knowledge of the corporation is often limited to an awareness of some of the corporation's products and services. Therefore, the annual general meeting is not regarded as an appropriate method for the supervision of the executive management team.
Consequently, although members retain certain powers, significant power in public companies is placed in the hands of the board and its executive. In terms of the proposed model of corporate governance, power should be divested from the board and the executives and placed into the hands of other stakeholders, especially those of the employees.