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Corporate governance principles

by Simon Longstaff

The recently published Corporate Governance Principles developed by the ASX's Corporate Governance Council are, in many respects, a most welcome development. At the most general level, the development of a principle-based approach, underpinned by prudent legal and regulatory regimes, is a victory for those who seek an effective response to the challenge of corporate governance.

In particular, a principles-based approach works to ensure that company directors and senior executives take personal responsibility for the conduct of the corporations that they govern. Alternative approaches, based exclusively on 'black letter' law and a weighty system of regulation and surveillance have the opposite effect as they reduce the span of corporate responsibility to a technical question of compliance to a set of rules externally developed and imposed by others. As such, the room for choice (and therefore the exercise of responsibility) is narrowed to the strict boundaries of the law.

The black letter law approach to regulation is ultimately self-defeating because it inadvertently weakens the ethical sinews needed to give strength to a system of compliance. In a world of mere technical compliance to rules the need to make ethical choices is made to appear redundant. In time, people give up on the task of developing and maintaining the skills of ethical discernment and therefore become more easily convinced by the dubious proposition that, “if it's legal it's right”.

Given all of this, the ASX Corporate Governance Council is to be congratulated for adopting a principles-based approach. Indeed, it would seem (at first glance) that the Council has gone even further in support of the idea that ethical commitments and competence should lie at the heart of any prudent and effective system of corporate governance. The third of ten Essential Corporate Governance Principles is quite explicit. Principle three requires corporations to “Promote ethical and responsible decision-making” and to do so actively.

So far so good. Unfortunately, the document goes on to offer commentary and guidance that betrays a very inadequate understanding of what best practice would require in this area. Indeed, the guidance offered goes a fair way to undermining the integrity of principle three. At the heart of the problem is an extremely limited understanding of what it actually means to engage in ethical and responsible decision-making.

For example, the guidelines are entirely silent about the role of values and principles in the decision-making process. Instead, the guidelines limit themselves to comments about standards of ethical behaviour – which are in turn further defined to apply in very limited areas included in suggestions for the content of a code of conduct being: conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection of and proper use of the company's assets, compliance with laws and regulations and encouraging the reporting of unlawful/unethical behaviour.

It is not that any of these areas of concern are unimportant. It's just that these defined areas are a breathtakingly narrow sample of what a sound ethical framework should apply to in a corporation seeking to develop and apply best practice.

Corporations need not only to develop a code of conduct – a kind of map of 'non-negotiables' – they also need to develop a code of ethics. Unlike a code of conduct a code of ethics is so fundamental as to be understood best as the equivalent of an organisation's DNA. As such, the core values and principles defined in a code of ethics should be expressed in everything (yes, I really mean everything) that is done by and within and for a corporation – across the full span of relationships on which it relies for success.

On one level it might be thought somewhat bizarre that a group committed to principle-based regulation would have completely ignored the role of values and principles in underpinning responsible and ethical corporate conduct. At another level it is only to be expected.

Despite more than a decade of talk about the role of ethics in business and the mounting evidence of its critical contribution to sustainable, superior performance the truth is that most people still do not understand the nature of what is required in order to master this area of management.

Too many people still think that it is just a matter of 'common sense' – and can be addressed without any of the expertise recognized as indispensable in other areas such as the law, accounting, engineering and so on. Still others believe that ethics can be reduced to a tool for compliance or risk management – something to stop potentially 'bad' people from doing ‘wrong’.

A proper understanding of ethics is useful for both areas. And yes, common sense and intuition are important. However, the level of understanding needed to address this issue is simply not there in most of corporate Australia. Ethics is not about fixing problems or constraining bad decisions. It is primarily about establishing that basis for making good decisions.

The failure to understand this and some of the more subtle implications that follow is the most likely explanation for why the ASX Corporate Governance Council has fallen short of what might have been expected – especially given their excellent work in developing such a fine overall framework.

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