Excerpts from a Public Lecture delivered in 2004 by Nicholas Whitlam at the University of Wollongong....  

Companies may be large or small. They may be “private” or “public”. The legal definition of what is a private company and a public one may vary from time to time and among jurisdictions – but (whatever the legal niceties) we all have a feel for the difference. Companies may be new or well-established; even if they are well-established they may have been recently reconstituted for some reason such as a corporate take-over or consolidation. And, to add confusion to an already wide spectrum, they may be “mutual” companies – like most building societies or some insurance companies where there is no issued capital but the owners are depositors or policy holders.

Why do I enunciate this? Because: not all companies are alike . Not in their simple legal structure, let alone their purposes and history. A company formed by the local tradesman differs greatly in its purpose and complexity from a major bank with many shareholders, depositors and employees. A company just formed by a local tradesman may differ greatly from one formed a few generations ago by someone's grandfather, which has grown and prospered and now employs many people in several locations.

People are mortal and have a life cycle through which they live and ultimately expire. Although companies can technically live forever, like people they move through stages of development – indeed some of these stages can prove to be terminal stages or challenges – and anyone who has been involved in the management of companies knows that the correct answers to business issues at one stage of a company's development are not necessarily the correct answers at a later stage. (A simple example would be the optimal organization structure at the entrepreneurial stage versus the checks and balances needed in a mature business.)

The vast variety of companies means that, as a species, they have many more differences than the obvious similarities. It follows that the laws and rules that cover the governance of companies should accommodate the differences among companies as well as their similarities.


The Wallis Report recommended the creation of a new super prudential regulator, the Australian Prudential Regulation Authority (“APRA”), which would supervise banks and insurance companies, other deposit-taking institutions and most of the superannuation industry. It was established in 1998. To date it has not been a success. John Phillips, Chancellor of the University of Western Sydney , a former Deputy Governor of the Reserve Bank and a very wise man, had warned as much in 1997:  

“Such bodies tend to become huge bureaucracies, with all the problems that go with big bureaucracies – lack of flexibility, slowness to respond to problems, empire building, more concern with procedural matters than with underlying issues…”

The new supervisory entity had a large task – everyone acknowledged that – and, to put it bluntly, APRA's staff was not up to the job. For example, they didn't spot HIH, which has proved to be our largest corporate failure - which all the insurance industry knew to be in trouble. APRA and its staff were asleep at their posts.


The Australian Securities & Investments Commission (“ASIC”), the regulator of corporate and financial services laws, has also been a disappointment. David Knott was appointed its chairman in November 2000.


Knott resigned as chairman of ASIC last year, barely half way through his term, just two days before BRW magazine and theAustralian Financial Review disclosed his long-forgotten association with Ian David Sheffield Collie.

Let's hope that the new ASIC chairman, Jeff Lucy, gets his priorities right where Knott didn't and that he does the hard work necessary to establish ASIC as a truly credible outfit. I suggest his priorities should be:

  • First and foremost, to seek out and hire some really good new people. In the USA , a stint at the SEC enhances the CV of young professionals and also those already well-established in the financial services industry. Of course adequate remuneration is an issue throughout the public sectors of all Western democracies – but it has never stopped the SEC from hiring top people. At the SEC and at the UK 's Financial Services Authority public sector constraints on remunerating quality people are largely overcome because those authorities have a reputation for developing and insisting upon the highest standards. Regrettably, no-one could seriously say that of ASIC's present reputation - because, too often, ASIC's senior staff are seen to be refugees from law firms at which they have outworn their welcome or career public servants who could never have made it in the private sector. This must change. Mr Lucy should head hunt some key professionals from the financial services industry. They need not be lawyers or accountants: what about hiring some experienced practitioners – as well as some of the young stars - from the stockbroking and investment banking fraternity.
  • Next, Mr Lucy should encourage ASIC's staff to concentrate on the big issues – like when shareholders or creditors have lost money; or when employees have lost jobs; Ansett's failure would be a good subject to revisit; and 
  • Finally, of enduring importance, he should put the systems and processes in place that would ensure ASIC actually lives up to its goal of being an exemplar regulator with integrity and transparency - thereby completing a virtuous circle which would see the authority's reputation attract top staff.


In recent years we have had various government committees and business groups tell us much about the appropriate roles of the board and how it should be structured – they're great for prescriptions, even proscriptions. We hear that size matters: what's too large, but rarely what's too small. We hear about the split (almost always necessary in their eyes) between the role of CEO and that of chairman; about gender balance, and so on. Let's look at the roles of CEO and chairman.

The British tradition is that the roles should be split. Whatever the merits of the argument, and I believe that for large publicly-listed companies there is much to be said for the split, let us have no illusions about its origins: the British class system had the owners and their friends on the board and, until the last generation, the system had the managers off it. Now that the managers are on the boards of public companies, the owners want “non-executive directors” to form a majority. This has led to the cult of the non-executive director.


Pundits will tell you that the role of the company board is limited –

To supervise

  • To interface with shareholders; and
  • To set strategy.

Further, these pundits will tell you, as a consensus, that “independence” is a virtue that should be sought in directors. Such independent directors have no past or on-going association with the company. They are not large shareholders, or suppliers. They are not former chief executives. They are people who come to the job “pure”. Think about it. Is this the sort of person you'd want to supervise your company?

Now, of course, there is merit in finding new faces to review complex issues, particularly when they bring relevant experience or knowledge to the exercise. But the cult can be self-defeating and should be challenged to ensure it is appropriate to the needs of the company in question.

The guidelines now promoted in the USA and the UK tell us that, as a matter of course, a board should include the CEO but otherwise should be heavily weighted in favour of the aforementioned non-executive director. (There is even an acronym – NED – for it.) Much is made of the need to monitor management, and that in order to do so directors must be independent, as defined, from the management and the company. Again, it must be hard to monitor performance if you don't know anything about the industry. Often, in truth, suppliers or persons involved in the industry would be best served to do such monitoring. Retirees are a good place to start, even from competitors (given a decent break from their previous employment.

In order to comply with “corporate governance” guidelines – too often this means board composition guidelines - check lists are provided. Companies will take pages of their annual report to describe their corporate governance practices; again, this equals board composition. And all this – well, why? Because it is correct form? Because it improves a company's performance?


The Australian Stock Exchange (“ASX”) has a check list which covers the ground. To be listed on the ASX you must comply with a fairly-standard template of chairman/CEO split, a majority of “independent” NEDs, a proper audit committee and so on – or explain why you've decided to do otherwise. Fair enough. Importantly, in its first principle -  

“Lay solid foundations for management and oversight”

- the ASX explains that a company should “recognise and publish the respective roles and responsibilities of board a management.” Ironically, when the then CEO of IAG and I worked out what we thought our respective roles and responsibilities should be at IAG and took our proposal to the board (which approved it), the Sydney Morning Herald attacked me - asserting that the articulation of the respective duties of the chairman and CEO was a manifestation of a dysfunctional relationship between me and the then CEO!

But does this prescriptive stuff improve performance? Because, if it doesn't, then by all means go through the process of observing correct form – it gives us all confidence, a right to be a bit more relaxed – but don't kid yourself that the company will actually perform better than it would otherwise.


Two theories compete for our adherence. This is capitalism. The regulators have made their choice in favour of agency theory. This is politics.

One theory must be better than the other. Which gives the best results? We need to know the answer. Well, while the research – both here and abroad – is not definitive, it clearly favours stewardship. To quote the AGSM's Lex Donaldson and James Davis:

“The empirical evidence is that the ROE returns to shareholders are improved by combining, rather than by separating, the role-holders of the chair and CEO positions.”  

This should not surprise the normally rational observer. Are not Rupert Murdoch and Frank Lowy executive chairman of News and Westfield respectively? So it can work. And it does.

I suggest the answer lies in people not prescriptions. If you accept what has sometimes been called the Napoleonic theory of history, in this case, corporate history, you will accept that individuals can make a difference. And these two giants of industry – Murdoch and Lowy – have made a difference, and brought great fortune to those who have supported or followed them.

That they are both effectively founding entrepreneurs and that the companies they have “created” will live on beyond them provides both a lesson and a dilemma. The lesson is, as noted, that an individual can make difference. The dilemma is that all individuals are mortal.

Not that we need only examine the extremes of the executive/non-executive spectrum. Look at Macquarie Bank, for example. Its executive chairman, David Clarke, spends half his time on the bank's business. He is an executive of the bank but not a full timeexecutive. He's an important shareholder and certainly not “independent”. And the results are terrific! Surely here is another example of stewardship working.


So, still sticking here with the rules that govern a company, i.e. how a company chooses to govern itself within the company law - it seems sensible to have flexible rules. This is what most guidelines for corporate governance lack. They assume a static state; a one size fits all - as if all companies were the same and at the same stage of development - when in fact flexibility is what is required. (I note here that the aforementioned Frank Lowy, when asked last month who might succeed him as chairman, named one of his sons and a former academic as candidates – “ but they will not be an executive chairman ” [ AFR , 13-14 November 2004, page 15]. The company will move on. The board structure and responsibilities will change with the retirement of the founder/entrepreneur. It all sounds perfectly sensible to me.)


I've heard that the board meetings of at least a few major listed companies are perfunctory affairs; that they are “rubber stamps”. If this is so, the shareholders should know. They should also know, so far as it is possible, how diligent a director is in performing his duties. Surely one measurement of diligence is his preparation for, attendance at and participate in board discussions. In this regard I well remember the antics of one NRMA director. He rarely attended a board meeting for its full term - but he'd invariably turn up. At least for a while. This meant that, in the summary sheets constructed for the annual report, he was recorded as having attended most board meetings – despite the fact that he was neglecting his duties. It seems to me that there is a strong argument for the publication of board minutes. Perfunctory meetings and the true attendance records would be there for all to see. There might be an argument for delay before publication, and it would certainly be necessary to maintain the confidentiality of commercial-in-confidence matters – at least for so long as the confidentiality remains commercial. The US Federal Reserve Board delays publication of its minutes for three months, and it seems to me that that would be a suitable delay. Surely few commercial matters are a sensitive as US interest rates.


Consider the company where the management is bright, considerate and ethical; where the company prospers and grows; where employees are demonstrably happy and customers fulfilled. By any measure, the exercise of the authority and control of such a company, as administered day-to-day by the company's management, is a shining light of good corporate governance. Could anyone seriously argue that this is because of good corporate law? Or good corporate governance guidelines? No, it's because of good management.

In such circumstances, the management will enjoy degrees of freedom that a less successful management would be denied. And the board of such a company would have a much easier time than might otherwise be the case.

Now I don't propose to set out here what is good management. There are a thousand theories on how to achieve that. And as with companies, there are countless varieties of good management. Equally, what constitutes good management and appropriate management practices will vary through the life and development of a company.

But I do say this: you know good management when you see it. And you know the opposite too. More than anything else, in the achievement of good corporate governance, boards must seek out and insist upon good management and good management practices. A board's navel-gazing - perfecting its own board governance - is a waste of time if the management is no good.


The Harvard Business School doesn't teach or research corporate governance as a separate subject; its focus is on what it calls the “interrelated areas” of governance, leadership and values . Jeffrey A Sonnenfeld concludes that if following good-governance regulatory recipes doesn't produce good boards – and there's absolutely no evidence that it does – it is the importance of the human element that does.

“The key isn't structural, it's social,” says Sonnenfeld. It's difficult to disagree.


Thus corporate governance, I suggest, is not the simple topic so often debated by the pundits. It is much more than the composition of its board and the roles of that board.  

In my view, good corporate governance goes to the very heart of how a company is managed - day-to-day, from top to bottom. (And equally importantly, from bottom to top.) It cannot be prescribed or proscribed by laws or regulations, important as they are. Good corporate governance needs good people, well-intentioned and hard working, who, when they are at work on company business, work in the interests of all stakeholders. It is an art not a science.  

© Nicholas Whitlam