This page intentionally left blank Principles of Contemporary Corporate Governance Second edition Following the success of the first edition, Principles of Contemporary Corporate Governance Second Edition maintains the delineation of core principles of corporate governance and provides a concise presentation of vital topics and emerging themes in corporate governance within the private sector This definitive book not only exposes the fundamental principles of corporate governance, it builds upon them by illustrating how they are applied It includes several prominent case studies, and directors’ duties and liabilities are illustrated by drawing on the most recent Australian court cases Although grounded in Australian corporate governance, the book will appeal to practitioners and students of law and business management internationally Principles of corporate governance are explicated for readers in all jurisdictions, with specific reference to the global financial crisis and the implications for corporate governance developments in the future The OECD Principles of Corporate Governance are addressed, and specific chapters on corporate governance debates in the United States, United Kingdom, Canada, Germany, Japan and China have been provided by expert contributors for this new edition Jean Jacques du Plessis is Professor in the School of Law at Deakin University Anil Hargovan is Associate Professor in the School of Business Law and Taxation at the University of New South Wales Mirko Bagaric is Professor in the School of Law at Deakin University Principles of Contemporary Corporate Governance Second edition Jean Jacques du Plessis Anil Hargovan Mirko Bagaric Contributors Vivienne Bath Christine Jubb Luke Nottage cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, S˜ ao Paulo, Delhi, Dubai, Tokyo, Mexico City Cambridge University Press 477 Williamstown Road, Port Melbourne, VIC 3207, Australia Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521138031 c Cambridge University Press 2011 This publication is copyright Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published by Cambridge University Press 2005 Reprinted 2007, 2009 Second edition 2011 Cover design by Jeni Burton, Divine Design Typeset by Aptara Corp Printed in China by Everbest Printing Co Ltd A catalogue record for this publication is available from the British Library National Library of Australia Cataloguing in Publication data Du Plessis, Jean J Principles of contemporary corporate governance / Jean Jacques du Plessis, Mirko Bagaric, Anil Hargovan 2nd ed ISBN 9780521138031 (pbk.) Includes index Corporate governance–Law and legislation Corporate governance–Australia Directors of corporations–Australia Bagaric, Mirko Hargovan, Anil, 1962– 346.94066 ISBN 978-0-521-13803-1 paperback Reproduction and communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act For details of the CAL licence for educational institutions contact: Copyright Agency Limited Level 15, 233 Castlereagh Street Sydney NSW 2000 Telephone: (02) 9394 7600 Facsimile: (02) 9394 7601 E-mail: info@copyright.com.au Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain, accurate or appropriate Contents Contributors xv Table of cases xvii Table of statutes xxi Preface xxiii Preface to the first edition xxv PART ONE BASIC CONCEPTS, BOARD STRUCTURES AND COMPANY OFFICERS 1 The concept ‘corporate governance’ and ‘essential’ principles of corporate governance 1.1 The meaning of corporate governance 1.2 1.3 1.4 1.5 1.1.1 Generally 1.1.2 Origins of the corporate governance debate and the stakeholder debate 1.1.3 Definition of ‘corporate governance’ 10 ‘Essential’ principles of corporate governance 11 Is ‘good corporate governance’ important and does it add value? Are corporate governance models converging? 18 Conclusion 19 14 Stakeholders in corporate governance and corporate social responsibility 20 2.1 Introduction 20 2.2 Stakeholders in the corporation: An overview 22 2.2.1 What is a stakeholder? 22 2.2.2 Discussion of different stakeholders 24 2.2.2.1 Shareholders 25 2.2.2.2 Employees 25 2.2.2.3 Creditors 29 2.2.2.4 Customers 30 2.2.2.5 The community 31 2.2.2.6 The environment 31 2.2.2.7 Government 35 2.2.2.8 All stakeholders have vested interests in the sustainability of corporations 35 v vi CONTENTS 2.3 Stakeholders’ interests and the corporation: The role of the law 36 2.3.1 The Australian position 36 2.3.2 Overseas position: A snapshot 40 2.3.2.1 OECD 40 2.3.2.2 European Union (EU) 41 2.3.2.3 United States 43 2.3.2.4 United Kingdom 45 2.3.2.5 Canada 49 2.3.2.6 New Zealand 49 2.3.2.7 South Africa 51 2.4 2.5 2.6 Stakeholder interests, good governance and the interests of the corporation: A mutual relationship 53 2.4.1 General analysis 53 2.4.2 Case study of James Hardie’s asbestos compensation settlement CSR and directors’ duties 65 Conclusion 69 56 Board functions and structures 71 3.1 Higher community expectation of directors 3.2 3.3 3.4 3.5 3.6 71 3.1.1 Initially low standards of care, skill and diligence expected of directors 71 3.1.2 Legal recognition of changed community expectation of directors The organs of governance 75 Board functions 77 Board structures 83 Board structures in the broader context of a good corporate governance model 90 3.5.1 Overview 90 3.5.2 Effective board structure 91 3.5.3 Effective support mechanisms to assist the board in properly fulfilling its functions 93 3.5.4 Effective statutory provisions 93 3.5.5 Effective regulators 94 3.5.6 Effective charters, policies and codes of best practice and conduct 96 3.5.7 Corporate governance rating systems for companies 98 Conclusion 100 Types of company directors and officers 101 4.1 Overview 101 4.2 Definition of ‘director’ 102 4.3 73 4.2.1 De jure and de facto directors covered 102 4.2.2 Shadow director 103 4.2.3 Nominee directors 104 Definition of ‘officer’ 106 4.3.1 Statutory definition 106 4.3.2 Senior employees and senior executives as ‘officers’ 4.3.3 Middle management as ‘officers’? 108 107 CONTENTS 4.4 vii Types of company officers 109 Executive and non-executive directors 109 Independent non-executive directors 110 Connected non-executive directors 116 Lead independent directors or senior independent directors 117 The managing director, managing directors, the chief executive officer and executive directors 117 4.4.6 Chairperson 118 4.4.7 Alternate director 120 4.4.8 Secretary 120 Training and induction of directors 122 4.5.1 Training 122 4.5.2 Induction of new directors 124 Ethical behaviour by directors 125 Remuneration of directors and executives 127 4.4.1 4.4.2 4.4.3 4.4.4 4.4.5 4.5 4.6 4.7 (with contributions by Christine Jubb) 4.8 4.7.1 A controversial issue 127 4.7.2 Disclosure of remuneration and emoluments in Australia 128 4.7.3 Investigations into excessive remuneration of directors and executives 128 Conclusion 129 PART TWO CORPORATE GOVERNANCE IN AUSTRALIA 131 Corporate governance in Australia – background and business initiatives 133 5.1 Background to the corporate governance debate in Australia 133 5.2 The Bosch Report 136 5.2.1 5.2.2 5.2.3 5.2.4 5.3 5.4 Background 136 The Bosch Report (1991) The Bosch Report (1993) The Bosch Report (1995) Divergence from UK practice: 1995 to early 2003 142 The Hilmer Report 142 5.4.1 Background 142 5.4.2 The Hilmer Report (1993) 5.4.3 The Hilmer Report (1998) 5.5 5.6 5.7 5.8 137 139 141 144 145 The virtues of good corporate governance in Australia between 1991 and 1998 146 The IFSA Blue Book 146 Standards Australia 152 Conclusion 154 Regulation of corporate governance 156 6.1 Overview 156 6.2 Regulation generally 157 6.3 Objectives in regulating corporate governance 159 viii CONTENTS 6.4 Sources of regulation in Australia 161 6.4.1 ‘Hard law’ 162 6.4.1.1 Statutory regulation – corporate law 162 6.4.1.2 Statutory regulation – other than corporate law 165 6.4.1.3 ‘Corporate governance and the judges’ – the place of judge-made law 165 6.4.2 ‘Hybrids’ 166 6.4.2.1 ASX Listing Rules 166 6.4.2.2 ASX Corporate Governance Principles and Recommendations 168 6.4.2.3 Accounting standards 169 6.4.2.4 Auditing standards 169 6.4.3 ‘Soft law’ 170 6.4.4 The role of market forces 172 6.5 Towards an effective supervision of financial markets regulatory framework in Australia – analysis 174 6.6 6.5.1 OECD’s guidelines for achieving an effective governance framework 174 6.5.2 Division of responsibilities between ASX and ASIC 176 Conclusion 178 The role of the regulators: ASIC and ASX 179 7.1 Introduction 179 7.2 The Australian Securities and Investments Commission 180 Overview 180 Statutory powers under the ASIC Act 181 The role of ASIC in corporate governance 182 ASIC enforcement patterns 185 The Australian Securities Exchange Ltd 187 7.3.1 Slow to get out of the blocks 187 7.3.2 Rapid change in attitude since the end of 2002 189 7.3.3 ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations 190 7.3.3.1 Changes in 2007 190 7.3.3.2 Structure 190 7.3.3.3 Recommendations 191 7.3.3.4 The roles and relationship between ASX and ASIC 193 Conclusion 195 7.2.1 7.2.2 7.2.3 7.2.4 7.3 7.4 Accounting governance 198 8.1 Overview 198 8.2 Background to the Corporate Law Economic Reform Program and some later developments 199 8.3 The Corporate Law Economic Reform Program 200 8.4 Impetus for CLERP 9: Responding to corporate collapses 202 8.5 Explanation of key CLERP reforms 205 8.5.1 Audit reform 205 468 BUSINESS ETHICS AND FUTURE DIRECTION Meanwhile, in the context of the global financial crisis, the next wave of corporate governance commentary could very much relate to regulators insisting upon a more formal and prescriptive approach to corporate governance regulation President Nicolas Sarkozy of France recently proclaimed, in the context of the global financial crisis, that ‘self-regulation as a way of solving all problems is finished’.66 Such sentiments only serve to guarantee that the cycle of regulation in this boom–bust period, prefaced in the opening remarks of this chapter, will continue into the future This will remain the case, notwithstanding the findings of one study, which refutes the popular belief that corporate governance ‘failed’ during the global financial crisis and that justification exists for sweeping corporate governance reforms.67 Cheffins concluded, after analysing the removal of 37 firms from the S&P 500 index during the market meltdown in 2008, that corporate governance functioned tolerably well in those companies, implying that the case has not yet been made for fundamental reform of current arrangements in corporate governance However, the next chapter in the evolution of corporate governance reform is yet to be written The wait is unlikely to be long, following the urge of lawmakers around the world to shine the law-reform spotlight upon corporate governance issues, yet again The challenge of regulating unethical corporate behaviour will remain, however 66 Quoted in Clarke, ibid 1, 67 Brian Cheffins, ‘Did Corporate Governance “Fail” During the 2008 Stock Market Meltdown? The Case of the S&P 500’ ECGI Law Working Paper No: 124/2009 (July 2009), available at http://ssrn com/abstract=1396126 Index 11–12, 81–82, 144, 176–7, 206, 324–5, 461–2 accounting governance 198–218 accounting standards 57, 152–4, 169, 215 acts and omissions doctrine 434–6, 437–8 accountability principle AIOD see Australian Institute of Directors Alberta Securities Commission (ASC) 333 American Law Institute (ALI) involvement in corporate governance debate 301–3 Principles of Corporate Governance and Structure 78, 300–1 aims 301 impact and importance 301–2 key topics 302–3 American Model Business Corporations Act 78 Anatomy of Corporate Law: A Comparative and Functional Approach, The 36 APRA see Australian Prudential Regulation Authority ‘arms length’ transaction 262 ASC see Alberta Securities Commission ASIC see Australian Securities and Investment Commission ASIC v Adler [2002] 41 ACSR 72 260–5 contraventions of civil penalty provisions 261–4 court orders 264–5 summary 260–1 ASIC v Macdonald (No 11) (2009) 256 ALR 199 (James Hardie litigation) 265–72 court orders 271–2 decision and significance 267–71 legal issues 266–7 summary and background 265–6 ASIC v Rich [2009] NSWSC 1229 272–7 background and facts 272–3 decision and significance 273–7 judicial criticism of ASIC’s case management 277 legal issue 273 ‘asset lock’ requirement (of CICs) 48 Assets Supervision and Administration Commission of the State Council (SASAC) 388, 391 ASX see Australian Securities Exchange ATO see Australian Taxation Office auditing/auditors audit committees 237–9, 333–4 audit oversight 236–7 audit reform 205–6 audit role 219–22 auditing standards 169–70, 235–6 auditor dependence 203 auditor independence 206, 223, 224–9, 307, 367–8 auditor rotation 228 disclosure of non-audit services 228–9 general requirement 225 auditors and the AGM 229 CLERP changes 222–4 Companion Policy 52—110CP Audit Committees 331–4 and conflict 225–7 cooling off period 227 duties 229–30, 231–2 Enron audit 223 Hilmer Report (1993) 144–5 liability of auditors 231–2 qualification of auditors 235 Ramsey Report—reform recommendations 204, 224 reducing legal exposure of auditors 231–5 role in corporate collapses 203–5 Australian Institute of Directors (AIOD) 128 Australian Prudential Regulation Authority (APRA) 128–9 469 470 INDEX Australian Securities and Investments Act 2001 (ASIC Act) 181–2, 280 Australian Securities and Investments Commission (ASIC) 75, 95, 180–7, 229–30, 232–3 158–9, 185–7, 447 approach 186 ASIC Enforcement Patterns litigation strategy comments 186–7 use of penal enforcement actions 185 Australian Securities and Investments Commission Act 2001 (ASIC Act) 181–2, 220 civil penalty enforcement 279–80 corporate governance role 182–5 disclosing and resolving conflict 226 enforcement of civil penalty provisions 243–60 financial markets framework role 175, 176–7 FRC’s functions 237 infringement notice power 208–9 injunctive relief 287–8 notification of conflict 227 orders ASIC may seek 243–4 and proportionate liability 233–5 relationship between ASIC and ASX–MOU 193–5 role of 179–95, 197 and SOX 306 transfer of ASX’s supervisory role to ASIC 194–5, 200 Australian Securities Exchange (ASX) 187–95 areas of required improvement 194 ASX Listing Rules 142, 166–8, 187–8, 198, 223 Best Practice Recommendations (2003) 36–40, 65, 170, 198, 199, 456 changes since 2002 189–90 conflicts of interest 194–5, 200 Corporate Governance Council 92, 142, 189 corporate governance definition Corporate Governance Principles and Recommendations (2007) and audit committees 238–9 financial objectives in regulating corporate governance 161 ‘soft’ law category 168–9 financial markets framework role 175, 176–7 Principles of Good Corporate Governance and Best Practice (Recommendations) 96–8, 106, 110, 118, 142, 147, 189, 190–5 2007 changes 190 assessment of independence 112–13 board responsibilities 80 CGC approach versus Combined Code approach 192–3 ethical behaviour by directors 125 recommendations 191–3 structure 190–1 privatisation and conflicts of interest accusations 176 Revised Corporate Governance Principles and Recommendations 26–7, 170 codes of conduct 30, 36–40 Principle 37–9 Principle 39 roles 179–95, 197 transfer of supervisory role to ASIC 194–5, 200 Australian Taxation Office (ATO) 95 36–40, 65, 76, 96–8, 313–14 boards (of directors) 395, 397–8, 455–6 accountability 81–2 ASX definition 76 board committees 149–50 company meetings 151 the company secretary 93, 120–1 competency 149 and continuous improvement 326–7 effectiveness of 81–2 best practice employee participation at supervisory board level 348–51 functions 77–83, 86–7, 93, 303 German two-tiered board 85, 87, 92, 342–5 Hilmer Report (1993) 144–5 integrity 327–8 legislation 93–4 organs of governance 75–7 performance of 81, 144–6, 150 responsibilities 80, 150 structures 83–99, 136, 325–6 supervisory role 303 UK Institute of Directors (purpose and roles of board) 80, 82 see also independence principle; shareholders 471 INDEX boardtorial revolution 6, 78 body corporate 291, 292 Bosch Reports 136–41, 170–1, 455 background 136 Bosch Report (1991) (original) 137–8 Bosch Report (1993) 139, 140 Bosch Report (1995) 141, 188 core differences between 1991 and 1993 reports 139–40 Working Group 136, 137, 139, 141 British Columbia Centre for Social Enterprise 49 burden of proof 275–7 business ethics concept 424–31 business judgement rule 245–7, 263, 270, 273–7, 372 Business Regulatory Advisory Group community interest company (CIC) Companies (Audit, Investigations and Community Enterprise) Act 2004 (UK) 47 Companies Act 1993 (NZ) Companies Act 2006 (UK) 49–51 46, 67, 68–9, 280 company law see corporate law comparative capitalism 353–9 compliance ASX Listing Rules 166–7, 187–8 and the auditor’s report 220 and the Bosch Report 139 compliance with law—corporations 436–7 compliance-based reforms of CLERP 200 207–8 ‘comply or disclose’ principle 88, 96, 110, 120–1, 122, 137, 170–1 and ALI principles 300 code of best practice 313–14 context 312–13 and corporate governance 312–16 influence on Bosch Reports 139, 140 call options 374 Cadbury Report (UK) CAMAC see Corporations and Markets Advisory Committee Canadian Securities Administrators (CSA) 322–3 capitalism 353–9 CGC see Corporate Governance Council Chartwell Enterprise Group 95 chief executive officers (CEOs) 34, 79–80, 113, 117–19, 269–70 chief financial officer (CFO) 271 China Securities Regulatory Commission (CSRC) 388–9, 401–3, 408, 412 CIC see community interest company citizenship see corporate citizenship civil liability 258–60 climate change 31–2, 34–5, 444 codes of conduct 30, 33, 36–9, 40, 96–8 co-determination concept 89, 348–51 Combined Code (UK) 92, 96, 111, 124–5, 192–3 common-law derivative action 281–2 communication 148–9, 347 Communist Party 389–90, 391, 410 community 31, 35–6, 45, 47–9, 71–5 45, 47–9 346, 347 ‘comply or else’ principle 307–8 ‘comply or explain’ regime 168–9, 346 corporate governance 37–9 regulatory compliance ‘pyramid’ 158–9, 447–51 conduct 284–7, 291, 292–3 conflict 213, 225–6, 248–9, 264, 396, 420 conflicts of interest 104–5, 176, 194–5, 200, 226–7, 328, 406 consequentialist moral theories 420 contracts 231, 283 corporate citizenship 8, 12, 443 ‘corporate constituency’ concept 43–5 corporate disclosure 206–13 Corporate Disclosure: Strengthening the Financial Reporting Framework 204 corporate governance accounting governance 198–218 Anglo-American models 300–12 aspirational ideals (of good corporate governance practices) 455–6 ASX Revised Corporate Governance Principles and Recommendations 4, 26–7, 30, 36–40 audit role – corporate governance link 221–2 in Australia 131–55 1991–1998 146 background 133–6 Bosch Reports 136, 137–8, 139–40, 141, 170–1 472 INDEX corporate governance (cont.) divergence from UK practice (1995–2003) 142 Hilmer Report 142–5, 146, 170–1 IFSA Blue Book 146–51 Standards Australia 152–4 and board structures 90–9 in Canada 320–36 future direction 334–6 National Instrument 52 –110 331–4 National Instrument 58 –101 330–1 National Policy 58 –201 323–30 regulatory environment 321–3 charters, policies and codes of best practice and conduct 96–8 in China 386–415 committees 402–3 Communist Party 389–90, 391, 410 391, 392–5, 397–401, 403–8, 409 and conflict 396 consequences of breach 410–13 Company Law 1993 controlling shareholder issue 403–6 corporate entities 390–5 direct intervention—dividends 409–10 enforcement 410 foreign-investment enterprises 392–3 government and legislation 387–90 improved disclosure requirements 406–8 398–401 independent directors 401–2 issues and resolutions 395–7 key pillars policy 406 Law on Industrial Enterprises owned by the Whole People 390–1 National People’s Congress (NPC) 387–8 requirements of sponsors of public offerings 408 Securities Law 393–4, 406–8 standards of accounting 408 state-owned enterprises 390–2, 410 405 356 convergence of corporate governance models 18–19, 353, 356, 357, 359 97, 111, 115–16, 117, 345–8, 402–3, 405 cultural differences 18–19 debate origins 5–10 definitions 3–11 employee participation 27–9 framework 339–40 in Germany 342–52 background 342–5 Baums Commission 344–5 Corporate Governance Code Draft Bill (Aktienrechtsreform 1997) 343–4 German Code – structure and nature 347–8 IFSA Blue Book definition 147 implications of trustworthiness research 463–4 in Japan 352–86 Commercial Code 359–60, 369–70 companies – committees versus boards of auditors 365–9 comparative capitalism and corporate governance debates 353–9 core employees 382–5 corporate law and practice transformations 359–63 Daiwa Bank judgement 370 derivative suits 370–2, 373 directors’ duties and derivative actions 369–73 increasing duties of directors supervisory boards compliance 37–9 contestation of governance structures 395, 397–8, economic stagflation 362 ‘five ways forward’ proposal 353 German influence 359, 360 ‘grey’ outside directors 366–7 human resource management (HRM) practices 383, 384 Japanese corporate forms and internal governance mechanisms 363–73 kabushiki kaisha (KK) company 363–5 lifetime employment practice 361, 382–5 main banks 361, 379–82 Meiji-era Code 359 ‘micro-fit’ and ‘macro-fit’ of law 370 356, INDEX Occupation period 360–1, 371 partnership company (goshi kaisha) 363 share-class diversification 374–5 shareholder versus bank finance 373–82 yugen kaisha (YK) company 360, 363–4 and the judges 165–6 managerial pyramid/governance circle distinction 91–3, 447–51 ‘managing the corporation’ concept and market forces 172–4 norms and behavioural analysis 457–65 OECD Principles of Corporate Governance 9, 17, 21, 27, 29–30, 40–1, 65, 66, 338–42 OECD-recognised stakeholders 22–35, 36 community 31, 35–6 creditors 29–30, 35–6 customers 30–1, 35–6 employees 25–9, 35–6 environment 31–6 government 35–6 shareholders 25, 35–6 organs of governance 25, 27, 75–7 paradigms 21 and performance 16 policy guidelines 148 principles 11–14 public disillusionment 426 rating systems for companies 98–9 regulation of 94–6, 156–61, 178, 465–8 role of ASIC 182–5 and share-price (or share-price returns) 17 significance 14–18 solutions to ‘bad corporate governance’ 135–6 stakeholders 24, 53–65 statutory provisions 93–4 ‘stewardship theory’ 458–61 systems 27 in the United Kingdom 312 in the United States 300–12 background 300–1 Securities Exchange Commission 303–4 and the wealth creation concept 28 Corporate Governance Council (CGC) 92, 142, 189 corporate law 473 36, 52, 162–5, 198, 199, 359–63 Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP Act) 94, 108–9, 128, 135–6, 198–9, 202, 448 auditing standards 169–70 auditor rotation obligation 228 auditors’ duties 229–30, 231–2 CLERP reform program 200–2, 456 audit reform explanation 205–6 background 199–200 changes to audit role 222–4 disclosure of remuneration and emoluments in Australia 206–7 impetus – responding to corporate collapses 202–5 initiatives 207 key principles 201–2 miscellaneous 213–14 policy proposal papers 200–1 common-law derivative action difficulties 281–2 see also statutory derivative action Corporations Act 2001 amendments and IFSA Blue Book 147, 160–1 design 199 effects of CLERP reforms 199 enforcement 214 independence requirements 226–7 self-regulation to formal regulatory approach shift 171 corporate social responsibility (CSR) 8, 24, 39, 41–2, 442–4 and directors’ duties 65–9 European Alliance for CSR 42 relevance during hard economic times 70 corporations acts and omissions doctrine 434–6, 437–8 ‘agency problem’ 461–2 application of moral principles to business 432–44 application of the Code to bodies corporate 291 codes of conduct 151 company constitution 50–1, 162–5 company dissolution 405 company secretary 93, 120–1 complaints-resolution process 442 474 INDEX corporations (cont.) corporate collapses 95, 126, 134–6, 169, 183, 185, 426, 450 as CLERP impetus 202–5 investigations into 146 corporate culture 291–2 corporate entities in China 390–5 corporate social responsibility 8, 24, 39, 41–2, 442–4 duties benevolence duty 434–41 compliance with law 436–7 extreme wealth and duty not to frustrate access to justice 441–2 extreme wealth and maxim of positive duty 437–9 levels 432–3 proscriptions against causing harm, lying and environmental damage 432–4 ethical obligations 419–45 Japanese corporate forms 363–73 judgment in the best interest of the corporation (directors) 246 ‘managing the corporation’ concept managing versus directing 78–9 regulator – ASIC 180–7 replaceable rules 162–5, 217 requirement to pay social dividend 439–41 size and socioeconomic power 54–5 and stakeholders 22–3, 36–52, 53–65 sustainability of 35–6 ‘transaction cost’ theory 453–4 see also corporate citizenship; corporate governance; corporate social responsibility Corporations Act 2001 (Cth) 26–7, 30, 51, 67, 76, 77, 94, 102, 163 amendments and the IFSA Blue Book 147, 160–1 and the auditor’s report 220 Case Studies – civil/pecuniary penalty provisions 260–77 Chapter 2D 287–8 Chapter 6CA – continuous disclosure 255 civil liability relief 258–60 CLERP reforms – mandatory corporate governance rules 199 corporate governance – excesses of the 80s 134–5 corporate law 162–5 criminal liability of directors 290–4 criminal offences – directors and officers 293–5 disclosure of remuneration and emoluments in Australia 128 duties of directors 109, 242 general requirement for auditor independence 225 and managing directors 117–18 Part 2E – related party transactions 249–50, 261–2 Part 2F.1 – oppressive conduct of affairs 284–7 applicants for relief 285–6 nature of relief 286–7 type of conduct covered 284–5 Part 2F.1A – statutory derivative action 281–4 case to introduce 281–2 cause of action 283 eligible applicant 282–3 leave of court required to institute 283–4 Part 2H – shares 250–1 Part 2J.3 – financial assistance 262–3 Part 2M.2, 2M.3 – financial records and reporting 251 Part 5.7B – insolvent trading 251–4 Part 5C – managed investment schemes 254–5 Part 7.10 – market misconduct 255–8 Part 9.4B 243–60 s 180: Duty of care and diligence 244–7, 263, 272–7 s 181: Duty of good faith 247–8, 263 s 182, s 183: Duty not to use position or information to gain personally or cause detriment 248–9, 264 Schedule 4, Subclause 29(6) – disclosure for proposed demutualisation 258 Section 188(2) 121 Section 201K – replaceable rule 120 Section 1324 – injunctions 287–90 court’s discretion 288–9 remedies 289–90 Section 1324(1) 287–8 Corporations and Markets Advisory Committee (CAMAC) 65, 66–9, 108–9 INDEX crassa negligentia (gross negligence) 71–3 creditors 29–30, 35–6 categories 29 creditor interests and insolvency law 29–30 Criminal Code Act 1995 290–2 application to bodies corporate 291 corporate culture 291–2 ‘default’ fault elements 291 establishing ‘authorisation/permission’ (offence) 291–2 criminal liability 290–4 and the Code 290–2 criminal offences – directors and officers 293–5 business judgement rule 475 245–7, 263, 270, 273–7, 372 continuous disclosure duty 255 corporate governance and the Hilmer Report 142–4 and CSR 65–9 delegation and reliance 247, 271–2 disclosure for proposed demutualisation 258 due care and diligence 241–2, 244–7, 263, 272–7 duty not to be involved in market misconduct 255–8 duty of good faith 247–8, 263 duty to prevent insolvent trading 251–4 importance of criminal sanction in corporations law 290–3 CSA see Canadian Securities Administrators CSR see corporate social responsibility CSRC see China Securities Regulatory Commission customers 30–1, 35–6 enforcement 281–94 fiduciary duties 240–1, 248, 399 financial records and reporting duties debt 251–4 Delaware General Corporation Act no-conflict rule 248, 249, 264 related party transaction duties 251 increasing duties of directors 398–401 managed investment schemes duties 254–5 78 demutualisation 258 derivative action see statutory derivative action director primacy model 9, 78 directorial revolution 78 directors 124–5, 367–8, 455–6 alternate directors 120, 140 chairperson 113, 118–20, 149 chief executive officers 34, 79–80, 113, 117–19, 269–70 competency 326 connected non-executive directors (CNEDs) 116 and ‘corporate constituency’ laws 43–5 criminal offences under the Act 293–5 definition 102–3, 106 de jure and de facto directors 102–6 nominee directors 104–6, 140 shadow directors 103–4 duties 45–6, 49–51, 67, 68–9, 240–78, 369–73 ASIC enforcement 279–80 breach of duties 245–7, 283 249–50, 261–2 share capital transactions duty 250–1 statutory duties 242 election and appointment 150 equity participation 150 ethical behaviour by directors 125–7 executive and non-executive directors 109–10, 139, 140, 267–9 ‘grey’ outside directors (Japan) 366–7 higher community expectations of directors 71–5 Hilmer Report (1993) 144–5 independent non-executive directors 110–16, 140, 145, 149, 314, 319–20, 332–3, 401–2 judgement- and decision-making guidelines 82–3 lead/senior independent directors 117 liability 39–40, 184, 240–78, 290–4 managing versus directing 78–9 and mere errors of judgement 274–5 permissible directorships 149 remuneration 127–9, 206–7, 307–8 476 INDEX directors (cont.) trading 150 training of 122–3 types of company directors and officers 101–30 151, 206, 272–7 166–7, 187–8 Australian Accounting Standards 57 and CLERP 201, 211–13 ‘comply or disclose’ principle 346, 347 continuous disclosure 208–9, 255 corporate disclosure 206–13 disclosing and resolving conflict 226 National Instrument 58 –101 (Canada) 330–1 of non-audit services 228–9 for proposed demutualisation 258 of remuneration and emoluments in Australia 128 and transparency 341–2 dividends 409–10, 439–41 duty of benevolence 434–41 duty of care 73–4, 263 development – relevant cases 73–4 director protection – business judgement rule 245–7, 263, 270, 273–7, 372 directors and the Act: Section 180 244–7, 272–7 247–8, 263 duty of good faith EEIG see European Economic Interest Grouping employees 35–6, 248–9 and CLERP amendments 108–9 employee participation 27–9, 348–51 Japan’s lifetime employment practice 361, 382–5 legislation and regulations protecting 26–7 Mallin’s theories 25–6 nature and corporate governance role 25–9 powers within corporations 76–7 and the wealth creation concept 28 ‘whistleblower’ employees 26–7 ‘enlightened shareholder value’ 45–6, 67, 68–9 304–9 Enterprise State Assets Law (China) 391–2 see also boards (of directors); shareholders discipline principle 11–12 disclosure 39, 52, 94, 127–8, 140, 149, and ASX Listing Rules Enron collapse 203, 223, 317, 448 US response – Sarbanes-Oxley Act (2002) environment 31–6, 148–9 Environment Protection Act 1970 (Vic) 32 Environment Protection and Biodiversity Conservation Act 1999 (Cth) 32 equal opportunity legislation 26 Equator Principle, the 34 ethics business ethics and compliance principle (CLERP) 202 business ethics concept 424–31 application of moral norms to business 429–30 business–ethics link 431 business/ethics argument disunity 427 history 424–6 internal settled rules 428–9 justification for excluding moral principles 430–1 universalisability of moral judgements 427–9 codes of conduct 30, 33, 36–9, 40, 151 ethical behaviour by directors 125–7 ethical obligations of corporations 419–45 and justice 441–2 European Economic Interest Grouping (EEIG) 47 European Union (EU) 41–2 inclusive approach to protecting stakeholders’ interests 42 Expert Panel on Securities Regulation 321–2 Fair Work Act 2009 (Cth) 26 fairness principle 11–12, 215 false trading 256 financial markets framework 174–7 financial ratings systems 98–9 financial reporting 207–8, 251 Financial Reporting Council (FRC) 236–7, 314–16 financial services 184, 213, 255–8 first-party sanction 460 ‘for-benefit’ companies 69 Ford’s Principles of Corporations Law [publication] 172–3 INDEX general counsel 270–1 global economic crisis 69 global financial crisis (GFC) 10–11, 49, 69–70, 95, 127–8, 154, 308, 343 Global Impact program (UN) 443 governance see corporate governance government 35–6, 387–90 Greenbury Report (1995) 316 greenhouse gas emissions 31–2 gross negligence (crassa negligentia) 71–3 Hampel Committee (1998) 111 Hampel Report (1998) 316–17 Higgs Report (2003) 88, 111, 124–5, 317 HIH Royal Commission HIH Insurance Ltd collapse 203, 204, 260–5, 448 Owen Report 4, 14–16, 25, 27, 88, 91, 95 importance of auditor independence 221, 224 observations of middle management 108 offence provisions in Acts 290 and organs of governance 75–7 Hilmer Report 142–6, 170–1 background – AWA Ltd v Daniels; Daniels v Anderson 142–4 Hilmer Report (1993) 144–5 summary of recommendations aspects 144–5 Hilmer Report (1998) 145–6 Appendix – ‘The Fallacy of Independence’ 145 IAASB see International Auditing and Assurance Standards Board IASB see International Accounting Standards Board IFRS see International Financial Reporting Standards IFSA see Investment and Financial Services Association Ltd IFSA Guidance Note No 2.00: Corporate Governance: A Guide for Fund Managers and Corporations (IFSA Blue Book) 146–51 indemnity 58, 233 independence principle 11–12, 112–13, 140, 145, 149, 314 477 206, 223, 224–5, 228–9, 307, 367–8 insider trading 257–8, 396 insolvency 29–30, 251–4, 288 defences to insolvent trading 253–4 rebuttal presumptions (the Act) 252 intention (‘default’ fault element) 291 auditor independence International Accounting Standards Board (IASB) 198 International Auditing and Assurance Standards Board (IAASB) 198 International Financial Reporting Standards (IFRS) 198, 215 ‘fair value’ emphasis 215 International Standards on Auditing 198 Investment and Financial Services Association Ltd (IFSA) and ASX Listing Rules 187 IFSA Blue Book 146–51, 161, 170, 188 James Hardie asbestos scandal 39–40, 53 ASIC’s proceedings 183 Case Study – James Hardie’s asbestos compensation settlement 56–5 aftermath 62–5 background 56–7 impetus for corporate restructure 57–8 Jackson Report and its significance 60–2 key features of the separation plan 58–9 public announcement of the separation 59 scheme of arrangement and relocation to The Netherlands 59–60 judicial discretion 288–9 Mauer-Suisse approach 289 key performance indicators (KPIs) 33 King Reports, the (1994, 2002, 2009) 11–12, 16, 88, 90–1, 92, 96–7 291 knowledge (‘default’ fault element) Kyoto Protocol 31–2 L3C see ‘low-profit limited liability company’ law behavioural analysis 457–65 compliance with law – corporations 436–7 36, 52, 162–5, 290–3, 359–63, 391 corporate law 478 INDEX law (cont.) criminal law (China) 411–12 framing of laws in terms of rules ‘hard’ law 162–6 ‘hybrid’ regulation mechanisms proportionate liability 435 166–70 see also James Hardie asbestos scandal litigation 283–4, 410–13 ‘low-profit limited liability company’ (L3C) 44–5 accounting standards 169 auditing standards 169–70 implications of trustworthiness research 463–4 insolvency law 29–30 judge-made law 165–6 law and norms discourse 451–65 legal recognition of expectations of directors 73–5 ‘soft’ law 168–9, 170–1 takeover laws 43–5, 373, 375–9 see also legislation law of negligence 71–4, 231 development – relevant cases 73–4 negligence as ‘default’ fault element 291 leadership 12 legislation corporate governance and statutory provisions 93–4 equal opportunity legislation 26 Fair Work Act 2009 (Cth) 26 government and legislation (China) 387–90 interpretation (excesses of the 80s context) 134–5 occupational health and safety legislation 26 protecting employees’ interests 26–7 statutory regulation 162–5 see also Corporations Act 2001 (Cth) (the Act); law liability 44–5, 47–9, 83, 208, 404 of auditors 231–2 breach of statutory duties 231–2 and contract 231 law of negligence 231 civil liability 258–60 concurrent wrongdoer 234 criminal liability 290–4 of directors 39–40, 71–5, 184, 240–78 disclosure of liabilities 57 and insolvency 253 limited liability companies 394, 404–5 for mere errors of judgement moral liability 433 214, 232, 233–5 274–5 Making Boards Work [publication] 172 managed investment schemes 254–5 management of the corporation’s business – ALI 302–3 IFSA corporate governance definition 147 Management Buyouts 377 management discussion and analysis (MD&A) 207–8 managerial pyramid/governance circle distinction 84–6, 91–3, 447–51 middle management as ‘officers’ 108–9 register of ‘relevant interests’ 213–14 stakeholder management 8–10, 23, 54–5 strategic management 54–5 supervision of management – boards 81 three-tier structure of management (China) 394 Management Buyouts (MBOs) 377 managerialist theory 172–3 market rigging 256 markets Corporations and Markets Advisory Committee (CAMAC) 65, 66–9, 108–9 financial markets framework 174–7 market forces 172–4 market freedom principle (CLERP) 201 market misconduct 255–8 dissemination of illegal transactions information 257 false trading and market rigging 256 insider trading 257–8, 396 market manipulation 255–6 regulator – ASIC 180–7 material prejudice 262–3 MBOs see Management Buyouts Ministry of Commerce (China) 388 Ministry of Economy, Trade and Industry (METI) 366, 368, 369, 376, 377 Ministry of Justice (MoJ) 366 minority shareholder protections (MSPs) 353–5, 373 479 INDEX morality 419–24, 437–8 application to business 429–30, 432–44 core moral principles 431, 109–10 433–4 independent non-executive directors moral liability 433 moral neutrality of business 436–7 promise-keeping and the harmony thesis 430–1 universalisability of moral judgements 427–9 110–16 lead/senior independent directors 117 managing director(s), chief executive officers and executive directors 117–18 utilitarianism 422–3 see also ethics MSPs see minority shareholder protections nation state 439–40 National Australia Bank (NAB) 34–5 National People’s Congress (NPC) 387–8 negligence see law of negligence New York Stock Exchange (NYSE) 309–12 background 309–10 corporate governance rules 310–12, operational participation 29 oppressive conduct (of affairs) 283–7 Organisation for Economic Cooperation and Development (OECD) OECD effective governance framework guidelines 174–6 OECD Principles of Corporate Governance 9, 17, 21, 27, 29–30, 40–1, 65, 66, 338–42 aims and application 338–9 background 338 board responsibilities 80 corporate governance framework 339–40 456 no-conflict rule (the Act) connected non-executive directors (CNEDs) 116 executive and non-executive directors 213–14, 248, 264 non-consequentialist moral theories 420–2 norms 451–65 development 454–5 significance 451–7 NPC see National People’s Congress NYSE see New York Stock Exchange occupational health and safety legislation 26 OECD see Organisation for Economic Cooperation and Development officers (company) chief executive officers 34, 79–80, 113, 117–18, 269–70 definitions CLERP definition of ‘senior management’ 214 middle management as ‘officers’ 108–9 senior employees and senior executives as ‘officers’ 107–8 statutory definition 106–7 types 101–21, 130 alternate directors 120 chairperson 113, 118–20 company secretary 93, 120–1 disclosure and transparency 341–2 division of responsibilities (ASX and ASIC) 176–7 financial objectives in regulating corporate governance 159–60 recognition of market forces role 174 structure 339 OECD-recognised stakeholders 25–35 recognition of stakeholders in corporate governance 21, 40–1 Owen Report 4, 14–16, 75–7, 88, 91, 95 Appendix G – offence provisions 290 audit role – corporate governance link 221, 224 observations of middle management 108 ‘organs of governance’ discussion 25, 27 Parliamentary Joint Committee on Corporations and Financial Services (PJC) 67 participatory management philosophy 28–9 pluralist approach (to shareholders’ interest) 43–5, 68 376, 377, 378, 379 ‘poison pills’ 480 INDEX policy 406 compensation policy 329–30 corporate governance policy 96–8, 148 307–8, 316, 348 ‘prima facie’ 430–1 Productivity Commission 129 profit(s) 57, 436–7 ‘low-profit limited liability company’ (L3C) 44–5 maximisation of 6, 427, 430–1 Program-Related Investment (PRI) 44 Project Green 58 proportionate liability 214, 232, 233–5 recklessness (‘default’ fault element) 291 Redefining the Corporation: Stakeholder Management and Organizational Wealth [publication] 23, 54–5 regulation Australian sources 161–74 ‘hard’ law 162–6 ‘hybrid’ regulation mechanisms 166–70 role of market forces 172–4 ‘soft’ law 168–9, 170–1 Australia’s regulatory framework ‘boom–bust–regulate’ cycle 448–50 of corporate governance 94–6, 202, 216 ‘cycle of regulation’ 448–50 definitions 157–8 financial markets regulatory framework – analysis 174–7 division of responsibilities (ASX and ASIC) 176–7 OECD guidelines 174–6 neutrality and flexibility principle (CLERP) 202 protecting employees’ interests 26–7 regulatory compliance ‘pyramid’ 158–9, 447–51 439 responsibility principle 11–12 rights doctrine 420–3 risk 39, 328–9 governance risks 81–2 investor protection principle (CLERP) 201 risk-aversion and directors 184 Royal Commission into the Tricontinental Group of Companies 143 ‘safe-harbour rule’ see business judgement rule SAIC see State Administration for Industry and Commerce Sarbanes-Oxley Act (2002) (SOX) 94, 97, aims and objectives 305–7 and collapse 304–9, 317, 448 and formalisation of corporate governance perspectives 307–9 SASAC see Assets Supervision and Administration Commission of the State Council Securities Act 1933 449 Securities and Exchange Act 1934 449 Securities Exchange Commission (SEC) 303–4 shadow directors 103–4 share capital transactions 250–1 shareholder primacy model 78 shareholders/shares 35–6, 432 actions against directors 280, 281–94, 400–1 role of regulators 179–97 self-regulation 166, 171, 442–4 enforced self-regulation 166–70 pivotal role of corporate governance 139 see also law; legislation 135–6 replaceable rules 162–5, 217 reporting 148–9, 207–8, 251 resources 32–3, 54–5, 174, 218 156–61, 178, 465–8 cost effectiveness principle (CLERP) 137, 139, 141 disclosure of remuneration and emoluments in Australia 128 excessive remuneration debate 127–9, 456 36–40 Working Group – Bosch Report related party transaction 249–50, 261–2 reliance defence 247, 271–2 remuneration 127–9, 150, 206–7, 136, auditors and the AGM 229 call options 374 controlling shareholder issue 403–6 and dividends 409–10 and the Dodge theory ‘enlightened shareholder value’ 67, 68–9 45–6, INDEX IFSA corporate governance definition 147 Mallin’s theories 25 and ‘members’ 286 minority shareholder protections (MSPs) 353–5, 403–6 models 78 nature and corporate governance role 25 and ‘ownership’ model inaccuracies 54–5 powers conferred upon by the Act 76 share-class diversification 374–5 shareholder participation 205, 209 shareholder versus bank finance (Japan) 373–82 shareholders’ meeting 394–5 shareholders versus stakeholders 21 share-price (or share-price returns) 17 ‘tunnelling’ problem 396 and the wealth creation concept 28 see also boards (of directors); stakeholders Smith Report (2003) 317 social dividend 439–41 social responsibility principle 11–12, 24, 432 corporate social responsibility 8, 24, 39, 41–2, 442–4 stakeholder management 8–10, 23, 54–5 ‘instrumental stakeholder theory’ 55 stakeholders 5, 147–8, 302, 330, 432, 462 corporate governance role 24 definitions 22–4 ‘external’ and ‘internal’ stakeholders 24 importance of 8–10 models 23, 53–65, 78 OECD recognition 21, 25–35 shareholders versus stakeholders 21 stakeholder debate origins 5–10 stakeholders’ interests – role of the law 36–52, 65 Australian position 36–40 Canadian position 49 EU position 41–2 New Zealand position 49–51 OECD position 40–1 overseas position 40–52 South African position 51–2 UK position 45–9 USA position 43–5 and sustainability of corporations 35–6, 52 481 see also shareholders Standard and Poor (rating agency) 99 Standards Australia 152–4, 170 AS 800 Corporate Governance series 152–4 parts and appendices 153–4 State Administration for Industry and Commerce (SAIC) 388, 392 statutory derivative action 281–4 ‘stewardship theory’ (of corporate governance) 458–61 implications 460 stock market 448–50 strategic participation 29 Strictly Boardroom: Improving Governance to Enhance Company Performance (Hilmer Report) 142–6, 170–1 supervisory boards 395, 397–8, 405 actions against directors 400–1 see also boards (of directors) sustainability 12, 32–3 of corporations 35–6, 52 Global Impact program (UN) 443 Suzuki Report (Japan) 90 ‘tipping’ 257 Tokyo Stock Exchange (TSE) 366, 368–9, 373 tort of negligence 73–4 Trade Practices Act 1974 (Cth) 30, 232 ‘transaction cost’ theory (corporations) 453–4 transparency principle 11–12, 176–7, 201, 341–2 ‘triple bottom line’ concept 52 TSE see Tokyo Stock Exchange ‘tunnelling’ problem 396 two-tier board structure 83–90, 136 UK Combined Code 314–16, 317–20 unitary board structure 83–90, 136 United Nations Environment Programme Statement for Financial Institutions on the Environment and Sustainable Development 34 universalisation (of moral judgements) 427–8 exception 428–9 utilitarianism 422–3 victimisation 209–11 voting 148–9, 209, 394–5, 398 482 INDEX wealth creation 28, 32–3, 437–9 extreme wealth and duty not to frustrate access to justice 26–7, 115, 205, 209–11 Working Group (Bosch Report) 136, 137, 139, 141 441–2 nation state 439–40 redistribution of wealth ‘whistleblowers’ WorldCom collapse 440 448 203, 304–9, 317, ... debate 1.1.3 Definition of corporate governance 10 ‘Essential’ principles of corporate governance 11 Is ‘good corporate governance important and does it add value? Are corporate governance models... governance and ‘essential’ principles of corporate governance 1.1 The meaning of corporate governance 1.2 1.3 1.4 1.5 1.1.1 Generally 1.1.2 Origins of the corporate governance debate and the stakeholder... Conclusion 336 13 OECD Principles of Corporate Governance, and corporate governance in Germany, Japan and China 337 13.1 Introduction 337 13.2 OECD Principles of Corporate Governance 338 Background