Key Issues
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International corporate
governance — a road to
competitive advantage for
boards of Australian globals
By Jonathan Bates, Managing Director, Institutional Design
and Patrick Ryan, Manager Australia, Institutional Design
• International best practice seeks
to align drivers of governance
systems with business goals and
environment
• Company secretary’s office has central
role in assisting board and CEO
• Competitive advantage to companies
that have efficient, effective
outcomes
L
ittle debate exists that the challenges that face
company secretaries, senior management and
the board are greater once revenues and
operations are geographically dispersed from the
parent principle head office. At each level of the
organisational chart, the monitoring and
assurance gaining activities are larger in number,
often more complex with potential uncertainty
and variables which in turn require enhanced
monitoring and assurance processes and systems.
The traditional subject of ‘international
corporate governance’ tends to have a compliance
orientation; this is fuelled by comparative studies
and opinions on national company governance
regimes.1 This results in the subject becoming
known either as:
• an exercise in seeing how single organisations
meet various governance norms and standards
in various geographies or
• an exercise in working out which systems are
more favourable (less costly), and as part of
that noting the convergence and divergence
between various national regimes.
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The results can mask the real value of the
practical tools available to deliver competitive
advantage through leadership in international
governance. A welcoming development has been
some movement away from ranking methods to
more qualitative comparisons, which is perhaps a
reflection of a growing maturity in the subject area.2
The opportunity (and more likely the
imperative) for truly international companies (and
those seeking to go global) are beyond both of
these exercises described above and to focus on
performance against best practice, rather than
compliance with an external code. In assessing
performance, we consider that all companies
which are playing on the international stage, or
seek to in the near future, need to have a practical
understanding of best practices of leading
international companies.
The most compelling practical insight of
corporate governance failure in recent Australian
corporate history adopts a definition of corporate
governance which holds true globally. His Honour
Owen J’s definition is appropriate and is adopted for
this article. He described corporate governance as:
the framework of rules, relationships, systems and
processes within and by which authority is
exercised and controlled in corporations.
Understood in this way, the expression ‘corporate
governance’ embraces not only the models or
systems themselves but also the practices by
which that exercise and control of authority is in
fact affected.3
A unitary system will deliver
organisational and governance
benefits
One of the central issues that confront leaders of
global companies in relation to international
corporate governance is the design and
implementation of a unitary organisational
system which:
K e y I s s u e s A P P L I E D C O R P O R AT E G O V E R N A N C E
•
•
supports the delivery of the company’s business
goals and
meets applicable governance norms and
regulations in the places where it chooses to
operate.
Securing these business goals requires clear and
shared understanding of how to achieve them.
Parameters of the desirable unitary organisational
system include:
• fast and efficient decision-making by
management
• transparency of operations and information
across the whole company
• rigorous monitoring and assurance processes (at
both management and board level) to test the
quality of decisions and choices.
While a unitary organisational system which
works well is desirable, it must be sufficiently
flexible to allow for regional creativity, innovation
and cultural norms in the businesses and
environments in which the company functions.
Confronting the challenges head-on
A greater number of variables results in greater
uncertainty which is a practical issue confronting
international companies as they have greater
diversity in most areas of operations internally and
externally.
Potential challenges4 which need to be taken
into account when addressing a unitary approach
include:
• different information — local managers are ‘closer
to the action’ and have information which is
often more in tune with local conditions
• drivers — it is often more difficult to assess the
reason for the outcome of a result when further
away from the ‘coalface’
• diversity in culture, products, legal terms and
conditions, customers and suppliers.
International companies will devote additional
resources to informational processing to address the
range of information and varying drivers for
commercial decisions. The manner in which this
occurs is reflected in alterations to reporting and
governance systems arising from international
changes in operations. International best practice
seeks to align the international corporate
governance system to deliver the organisational and
governance benefits stated above. The drivers of the
system are the business goals and the environment
in which the business operates.
Some commentators seek to argue that there are
universal norms applicable in a homogenous
manner for companies that are global which can be
used as a prescriptive guide to companies seeking to
expand internationally. This may be regarded as
overly prescriptive and failing to take sufficient
regard for the sector specific demands of a particular
business. Guidance is framed by reference to sectorspecific comparables rather than the mere fact of
commonality in breadth of operations. By way of
example, the proliferation of subsidiary boards is
likely to be greater in the global financial services
sector where domestic regulation requires it, than in
the global pharmaceutical industry which tends to
have more centralised decision and governance
processes.
Design and implementation in
practice
Over time, companies operating regionally and then
globally work toward an integrated approach.
Characteristics or behaviours which are often
seen include the following.
1. Company governance may be seen as an
investor/stakeholder issue and a disclosure
exercise. The disclosures and written documents
have a life of their own rather than being seen
in the context of the business goals and
organisational and governance benefits. Leading
practice demonstrates that disclosure is simply
an outcome or output of a robust internal
system. The collective documents and the
people that work with them have the business
goals and organisational and governance
benefits at the forefront of every decision they
make, whether small or significant. By way of
example, some senior executives use what others
may perceive as ‘compliance-only documents’ to
aid in their decision making process. The
document is used as a reference point to the
extent of carrying the document to meetings as
a ‘healthy reminder’ rather than a prescriptive
tool.
2. Some companies have non-executive directors
with true international experience to match a
truly international company, while others do
not. This is not a problem per se but it requires
more effort to equip non-executives with the
learning to play a leadership role. Often the
induction and ongoing development programs
are not as closely tied to this objective as they
should be, and focus overly on domestic formal
items, and technical subject areas.
3. A third issue, and a fundamental one, is that the
structure of the business itself does not generate
the right conditions for setting in place the
framework and subsequent processes described
above5. Companies becoming increasingly
international sometimes stick to organising their
businesses and the leadership of them by
reference to geography whereas a product- and
revenue-based approach might be more
appropriate and in line with achieving the
strategy. Although it is the board’s job to set a
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criterion for the way the business is organised,
without a fit, the major obstacle created is a
lack of transparency and quality information
for a parent board to put its arms around the
organisation.
Leading global companies invest in shaping
behaviours along common lines because it is a
commercial response to a business challenge and
allows for the business goals to be generally
satisfied. Meeting international governance norms
along the way is an associated benefit.
Board and management leadership
Where do these systems start and finish in the
truly international company? Who takes
leadership? And how do they fit with
conventional commentary on corporate
governance by boards supported by company
secretaries?
The function of governance — setting the goal
and ensuring that it is pursued — is the unique
function of the board.
The CEO, while emulating much of what the
board has set for the company and its business, is
doing something very different, that is managing.
The processes of managing toward ends and inside
boundaries set by the board, with all the
accompanying pressures and resources to deal
with them, are naturally very different from the
processes of governing.
The company secretary, along with the
assurance leaders in management, has a central
task of bringing the governing and managing
functions together, and this is made more
complex and interesting for a truly international
company.
Leadership in international governance starts
with the parent board adopting an approach to
governance which has demonstrable effects on the
way in which decisions and choices are made all
over the organisation. The only plausible way for
this to occur (in the time available and the
capacity of part-time non-executive board
members) is through creating a framework of
engagement between the board and the CEO. And
then, through the course of its work, the board
must create a healthy working relationship with
the CEO and senior management to aspire to the
values of that framework.
Common themes for governance
professionals in Australian global
firms
Four common themes continue to emerge from
our experience in working with boards and
company secretariat offices of international
companies addressing international corporate
governance issues.
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1. Non-executive directors will not and cannot
become expert in the various regulatory and
national regimes in which the international
business operates. Their role is part time and
whose value to the company is greater with
focus elsewhere.
2. The corporate governance code in place in the
home domicile is of even less practical
relevance as a guide to practice than it is now
when the company becomes more
international.
3. The company secretary’s office has a key,
central role in helping the board set the
framework for engaging with the CEO and the
wider organisation.
4. The company secretary’s role as a conduit6 is
crucial in seeing that both directors and senior
management are equipped to meet the
standards being set.
The role of the board
In terms of the solution to securing board
leadership of governance in an international
setting, the need for a unitary organisational
system throughout the company becomes clear.
How does the parent board interface with
that?
A first step is the definition and framework for
the board’s interaction with the CEO. This needs
to cover the behaviours that are expected from the
organisation no matter what it is doing and no
matter where in the world. Often this is taken
forward and complemented by senior
management in the form of codes of conduct and
statements of values and ethics: but there is no
substitute for a direct and clear framework
between the board and the CEO.
Increasingly, we observe these behaviours
moving from traditional financial, control and
operating disciplines to non-financial areas that
are recognised as key to securing the ‘licence to
operate’ in various markets, and the reputation of
the company.
A second step is a planned series of board or
committee interventions over a period of time,
and spread over the business as a whole. These
would test the performance of the CEO and
organisation in meeting the behavioural
standards, and would combine snapshots across
the whole business with ‘deep dives’ on particular
businesses or geographies of operations or on
particular issues (for example, environmental
responsibilities).
A third step is the process of equipping nonexecutives to be effective members of the team in
engaging with the CEO and management, and to
keep the spirit of the framework it has set up. This
may include visits to key sites and countries, and
exposure to sessions on the businesses and the
K e y I s s u e s A P P L I E D C O R P O R AT E G O V E R N A N C E
functions which support them. Taking the
• Exposure to international regulatory action and
environmental example, it is important to enable
investigations is a function of international
non-executive directors to understand the challenge
operations no matter what the sector (from
of meeting environmental responsibilities and local
mining and oil and gas through to
expectations in developing
biotechnology, IT and financial services).
countries with no formal
Unitary systems that promote a way of doing
framework in place. This
things, or a culture, provides a far richer and
Leadership in
becomes relevant to the board
stronger protection of shareholder interests
international
making judgments about
than piecemeal compliance with rafts of
whether the CEO and company
regulation per se.
governance starts
as a whole are performing well
For instance, it is now imperative when
with the parent
in that respect.
being supervised by any of the federal
A fourth step is the
board adopting an
agencies8 with responsibility for certain
exposure of senior and regional
markets or commercial activities that
approach to
business and function leaders
companies can explain their overall
to the board and its
governance which
governance framework and processes, how
committees to enable various
that system enables real and effective
has demonstrable
points in the overall
governance. Section 303A of NYSE Listing
organisational system to be
effects on the way in
Standards on corporate governance mandates
tested for consistency of
that foreign issuers explain whether their
which decisions and
approach. (This process also
national regimes and own systems on
serves another goal of enabling
choices are made
governance and board structure and
the non-executive directors to
processes differ from the US norm9.
all over the
assess the quality of talent
Companies that are able to adopt unitary
development and senior
organisation.
systems to meet regional needs are likely to
management succession
remain ahead of their competitors who are
planning in a real, legitimate
reactive to regulatory calls. Compliance costs
environment).
in monetary terms and time are significant.
Towards competitive advantage
Competitive advantage flows to those companies
that have a system design process which yields
We have set out why an integrated internal
efficient and effective outcomes in comparison to
governance system makes business sense. Why is it a
reactive and bureaucratic prescriptive cultures.
good thing to go down this road to meet external
Cross-border governance norms are often able to
scrutiny?
be implemented earlier and easier especially with
Some reasons are as follows.
the ‘comply or explain’ provisions by companies
• Reputation drives the capability to operate in
who have a unitary approach. Implementation
various parts of the world to which investors like
occurs more easily when supported by an internal
being exposed. Reputation is of direct interest to
culture which encourages constructive and
institutional investors.
challenging debate in the context of delivering the
• Issues and information affecting reputation flow
company’s business goals.
quickly over national boundaries and therefore
Reward for innovation
systems for building and protecting reputation
have to be undertaken on an integrated basis.
No matter how sophisticated a system, how
• Shareholder activism which plays an important
‘seamless’ the document trail is, no system will work
‘balancing’ exercise is sometimes led by ‘singlewithout a strong cultural underpinning and a sense
issue’ shareholders, whose advocates have a
of constructive challenge and questioning
particular issue with aspects of a company’s
throughout the company at all levels. International
performance. The role that such single-issue
companies and their leadership who have
shareholders bring to the table in highlighting
confidence in their international governance
negative externalities of companies’ actions has
regimes will go on the front foot to explain the
proven valuable. A unitary international system
internal processes to stakeholders. Establishing
which is responsible and efficient directs
unitary systems, continually striving to improve
resource to address the stakeholder / shareholder
them and having systems meet the companies’
issue at the management and operating level is
business goals allows leading international
more efficient and effective in meeting the needs
companies to be proactive in explaining and
of shareholders and other stakeholders, rather
understanding their international corporate
than permitting it to become debated by
governance systems. This leads to quality decisions
shareholders.7
and choices at both management and board level.
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Corporate governance stems from the
Shareholder Wealth (January 2007) Fisher College of
Business Working Paper
common interest in governance of those within
and outside the company. The various recent
2
Methodology for Assessing the Implementation of the
efforts by national regulators, and policy makers
OECD Principles of Corporate Governance December 2006
both in Australia and overseas reflect this, in
<http://www.oecd.org/dataoecd/58/12/37776417.pdf>
[1 November 2007]
varying ways. To be concrete, the best practice
codes in Australia and the UK (which invariably
3
of HIH: a corporate collapse and its lesson (4 April 2003)
end up being statements of common rather than
best practice) invite companies to ‘comply or
explain’. This is explicit recognition that the
<http://www.hihroyalcom.gov.au> [1 November 2007]
4
corporate governance and accountability? A perspective
processes must be suited to the particular
from MNEs’ Journal of International Management, (2005)
circumstances of the individual company.
Vol 11, pp 19-41
5
Financial Services Authority, Regional Governance Global
6
R Willcock, ‘Adviser, counsel, conduit — wearing many
ingredient to business success. Boards and
management of Australian global firms who adopt
Investment Banks Roundtable, 21 November 2005
innovative practices to corporate governance are
different hats’ Keeping good companies, Vol 59, No 8, pp
taking a significant step on the road to
establishing competitive advantage in one crucial
For a theoretical discussion identifying some of these
challenges see Y Luo ‘How does globalization affect
systems of board governance and related assurance
Innovation is generally accepted as a crucial
Report of the HIH Royal Commission — Vol 1 The failure
471–474
7
Significant debate is currently occurring with respect to
shareholder participation via the Parliamentary Joint
area of international operations.
Committee on Corporate & Financial Services Inquiry
For more information, see
into Shareholder Engagement and Participation. The EU
http://www.institutionaldesign.com.
Commission and the USA regulator are also in the midst
of considering these issues
8
Notes
1
Report on the application by the member states of the EU
The US is used by way of illustration with most western
countries having similar regulatory parameters
9
Some exceptions do exist such as some notification
of the Commission Recommendations on the role of non
provisions in the manual and also Rule 10A-3 of the
executive or supervisory Directors of listed companies and
Securities Exchange Act. Further illustrations of a raft of
on the committees of the (supervisory) Board, 13 July
other regulators in the US which companies who seek to
2007, <http://ec.europa.eu/internal_market/
operate in that jurisdiction include: Federal Energy
company/directors-remun/index_en.htm>
Regulatory Commission, Federal Communications
[1 November 2007]. See also R Aggarwal, I Erel,
Commission, Federal Trade Commission, United States
R Stulz and R Williamson, Do U.S. Firms Have the Best
Environmental Protection Agency, US Food & Drug
Corporate Governance? A Cross-Country Examination of
Administration, US Securities & Exchange Commission,
the Relation between Corporate Governance and
US Commodity Futures Trading Commission G
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