Requirements or inducements for (especially listed) company boards to adopt a minimum number or proportion of “independent” directors (IDs), who are not executives as well as free from other relationships that might impede their capacity to exercise independent judgement on behalf of the company as whole, are spreading through the Asian region. This is rather curious, as many countries (including in fact Australia) have a tradition of large non-institutional blockholders, which typically have the capacity and incentive to exercise shareholder rights to extract information and influence the management and direction of the company. The need for IDs is therefore reduced, compared to countries with more dispersed shareholders, such as the US and especially the UK. However, blockholders can take advantage of dispersed shareholders, so the latter (or policy-makers more generally) may still press to have more IDs on boards. Yet blockholders can be expected to lobby to resist such measures, and anyway the impact of IDs on corporate performance may be less in such jurisdictions.
This backdrop may explain the difficulties in introducing requirements for IDs into Japan, despite calls for more IDs in the wake of corporate failures (such as Olympus) and the enactment of the Companies Reform Act on 20 June 2014 (after extensive deliberations). But it is also consistent with the history and reality of IDs in Australia’s listed companies. Below is the Abstract for a detailed draft paper comparing Australian developments, co-authored with my colleague Fady Aoun, for the Berlin conference / book project on “IDs in Japan and other Major Asian Jurisdictions” (click here for a PDF of our Powerpoints), as well as the third joint research conference for USydney, UGeneva, Harvard and Renmin Law Schools (hosted in Beijing over 11-12 July: click here for an audio file of my 13-minute presentation by video link).
Australia has a tradition of surprisingly large non-institutional blockholders in companies listed on the Australian Securities Exchange (ASX). This has arguably impacted on the roles and composition of boards. As explained in Part B of our paper, there has been some longstanding tension between those preferring a narrower view of directors’ roles and duties (focused on corporate performance) and those advocating a broader view (including more emphasis on risk management, which may favour smaller shareholders with less information about their firm’s activities). Nonetheless, there has been a shift since the early 1990s away from executive boards towards “monitoring” boards, with fewer members and more independent directors (IDs), who are expected moreover to maintain minimum standards across a variety of roles.
Yet this transition has not been rapid or particularly smooth (Part C). Following the corporate excesses of the late 1980s, in 1992 the ASX suggested the introduction of mandatory requirements for IDs. Following business opposition, it then proposed a UK-style “comply-or-explain” regime in 1994, but eventually had to settle on an even weaker disclosure regime from 1996. Only after a wave of much more serious corporate failures from around 2001, including one (One.Tel) harming very influential blockholders, did the ASX implement (from 2004) a requirement for listed companies to adopt a majority of IDs on an “if not, why not” basis. Minor revisions were made in 2007, but somewhat more stringent standards were implemented from 2014. The latter changes occurred in the shadow of some post-GFC legislative initiatives and case law that generally expanded the scope of directors owed by directors (including IDs), even though for various reasons Australia did not suffer major bank failures or a recession.
As explained in Part D, the cornerstone remains these ASX “Principles and Recommendations, underpinned by Listing Rules (which furthermore mandate an audit committee since 2004, and a remuneration committee since 2011 albeit only for the largest 300 companies, each requiring a majority of IDs). There are comparatively and increasingly detailed criteria for assessing independence, such as whether the director has direct (or, since 2014, “family”) links with “substantial” (5%+) shareholder. This factor differs from the US and appears to be derived from the UK, but it makes more theoretical sense in Australia given its significant blockholder tradition. Another interesting development has been a compromise reached in the 2014 ASX Principles regarding length of tenure, partly influenced by developments further afield including in Singapore and Hong Kong.
Nonetheless, there is still only weak empirical evidence in Australia of positive effects from IDs, with respect to enhancing risk management and particularly corporate performance overall (Part E). A controversial econometric study published in 2013 concluded that over $69 billion in corporate value had been destroyed over 2003-11 even by the (largely) “if not, why not” ASX requirement for a majority of IDs on listed company boards. The authors were particularly critical of the ASX’s view that major shareholders (or nominees etc) would lack independence as directors, arguing that they instead have incentives to monitor management better. However, this criterion was not changed significantly in 2014, with one concern being that a relaxation might disproportionately benefit large over smaller shareholders.
There has also been little impact on policy-makers and regulators from a few other academic papers in Australia, which have recently queried the received wisdom about IDs from a variety of perspectives. Though speculative, a subconscious “status quo bias” may be at work, as well as interest group politics – there is now a large (and well-networked) anointed group of incumbent IDs, as well as various professional associations involved in “training” them. This lack of public discussion is unfortunate, as many problems remain to be properly explored from theoretical, empirical and comparative perspectives (Part F), in order to potentially improve corporate governance in Australia and impact on developments abroad – especially in the Asian region.