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Accountability in the boardroom

by Simon Longstaff

Changes to the corporations law, either enacted or envisaged, have been designed to ensure that directors take far greater responsibility for the actions of the companies on whose boards they sit.

Whilst this fact may be the source of concern for some directors, members of the public are starting to ask questions concerning the extent to which directors display a sense of their accountability to shareholders. At the seat of the problem is a feeling that many boards seem to be relatively immune to the complaints and worries of the companies' owners.

If such a feeling is at all justified then it can only be as a result of accepting some pretty broad generalisations. Many directors are highly sensitive to their responsibilities to those who have entrusted them with the task of directing the company's fortunes. This sensitivity has been heightened by the observation of trends emerging overseas which show that shareholders are acting with considerably more vigour than has previously been the case. This change of approach has been especially evident in the behaviour of large institutional investors, some of whom have taken a policy of intervention to include that of forcing changes in the composition of the board.

This phenomenon may be worrying some directors as much as does the prospect of new obligations being established under the law. However, the prospect of pressure being exerted on boards by either regulators or shareholders is unlikely to allay the sense of grievance felt by some smaller shareholders. Needless to say, there is such a creature as the 'vexatious shareholder'. This is the person who turns up at every general meeting with a grab-bag of questions which seem designed for no purpose other than to embarrass members of the board.

In response to this menace, some boards have taken to organising the conduct of their annual general meetings so that they proceed without the slightest possibility of active dissent being aired or, more importantly, of its forming the basis for a critical or hostile resolution. It has even been known for a board to close its meeting to the public and the press lest the adverse comments be reported in terms not controlled by the public relations department.

Whilst no person could seriously argue against the need to have general meetings proceed in an orderly and business-like fashion, it may be time to question practices designed to control the meeting in ways that stifle justifiable debate. With the 'invention' and formation of joint stock companies in the middle of the last century there came a democratic aspect to the ownership of enterprises. Directors were quite properly seen to be the servants of the shareholders. It is an unfortunate inversion of this principle that some directors now see themselves as the masters.

Those who propose using the law as the primary means for creating more onerous duties for directors are probably failing to address this issue. Curiously enough, the more directors concentrate on the detail of legal minutiae, the less they may focus on the broader picture, which includes their duties to the shareholders.

Similarly, the more that directors feel themselves to have satisfied legal requirements, the less concerned they might be to worry themselves about the less onerous requirements arising from shareholder expectations and sentiment. It is quite possible that directors will tune in to the voices of the market and the regulators, becoming deaf to those arising from other concerns.

The market and the regulators may have enough strength to keep boards on track. However, if relied on exclusively, these forces may also cause a further reduction in any proper sense of accountability to shareholders (and the wider range of stakeholders). For example, when was the last time that a director resigned because of a sense of having failed the shareholders? Resignation may be painful; however, it is a clear signal of the acceptance of responsibility. Accountability and resignation are linked in the democratic structures of political government. Why is there no such link recognised in the democratic structures of corporate government? Alan Kohler recently observed in The Australian that:

Executives often are quietly forced to take early retirement and are sometimes sacked, but rarely, if ever, do directors resign on principle, except when they don't get on with the chairman.

Some might suggest that this is because there are so few directors of quality that no board can afford to let one go. Apart from being a fanciful suggestion, this seems to be more of an argument for ensuring that there are more people qualified to serve as directors. The pool should be enlarged not allowed to stagnate.

Whatever the case, there is a need for there to be greater attention given to the task of finding ways in which directors can express their understanding of their accountability to the shareholders.

A good first step might involve large public companies in setting an example by recognising that their annual general meetings should be an opportunity for the free exchange of ideas, questions and comments amongst and between directors and shareholders.

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