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WHY DO WE HAVE A BOARD?

[1000] Introduction

A company is formed when shareholders come together and pool their resources in a common endeavour. They elect some oftheir number to a board of directors and delegate almost all of their powers of ownership to the board, either by way of the

companys constitution or by accepting the replaceable rules in the Corporations Act 2001 (Cth). (It should be noted that some

companies retain Memoranda and Articles of Association instead of adopting a constitution).

In The Rights of Shareholders, Annotations to the OECD Principles of Corporate Governance (1999), it is observed:

As a practical matter... the corporation cannot be managed by shareholder referendum... In the light of these realities

and the complexity of managing the corporations affairs in fast moving and ever changing markets, shareholders are

not expected to assume responsibility for managing corporate activities.

The directors remain accountable to the shareholders who have the legal right to remove them and to set the remuneration they

receive in their capacity as directors.

The Corporations Act 2001 (s 198A(1)) makes clear the responsibility of directors:

The business of the company is to be managed by or under the direction of the directors.

Therefore, the board of directors is responsible for corporate governance and managing the affairs of the business, which will

include involvement in strategic policy, risk management and performance assessment. The directors should determine the

appropriate corporate governance practices, and put in place the necessary procedures to ensure the governance objectives are

met.

This process involves use of the knowledge and experience of the directors to establish:

responsibilities who should do what;

accountabilities to whom those with responsibilities must account and how; and

checks and balances the system of supervision, control procedures and communication flows.

It is clear that the corporate governance practices adopted by different corporations will vary depending on the issues facing the

board of directors, which will relate to the operations of the business. Therefore, it is neither possible nor appropriate to regulatecorporate governance in a prescriptive, tickthebox manner. However, some governance matters will be an issue for all

companies, and these form the basis of the following discussion.

[1010] Public companies

In a public company, it is not practical for the majority of shareholders to actively participate in the companys management, and

the board of directors assumes almost all of those powers.

The shareholders delegate their powers to the board collectively, not to individual directors. Therefore, the board can act only

when it meets. The typical Australian board schedules regular monthly meetings, and the average board meeting lasts about five

hours, so the typical board arranges to be in formal session about 60 hours per year. In addition, there will be ad hoc or

emergency meetings from time to time to deal with special situations as they crop up.

As management is a continuing process, with frequent demands for rapid decisions, it is not possible for boards to meet

frequently enough to manage the company. To properly discharge their duties they must employ management to carry out the

daytoday business of the company. It follows that they must delegate to the Chief Executive Officer (CEO) a sufficient

proportion of the powers that they have received from the shareholders to allow management to carry out its duties. As a

consequence, management must be accountable to the board for the discharge of these powers.

Delegation by the board

The board has more flexibility than shareholders in exercising its power of delegation and it is usual for very considerable

powers to be delegated to individuals. Most are delegated to the CEO, but considerable authority is usually delegated to the

chairperson and the company secretary, as well as to committees of the board.

Section 198D of the Corporations Act 2001 (Cth) contains a replaceable rule specifically recognising the power of the board to

delegate any of its powers to: a committee;

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an individual director;

an employee; or

any other person.

If the company chooses to adopt a constitution, it will normally contain a similar provision in relation to delegation.

Case law, includingDaniels v Anderson (1995) 13 ACLC 614, has established the principle that directors are entitled to rely on

information given to them provided that reliance is reasonable. This guidance is legislated in s 189 of the Corporations Act 2001

(Cth), which states that a directors reliance on information or advice is taken to be reasonable (unless the contrary is proven) if

it was made:

in good faith; and

after making an independent assessment of the information or advice (having regard to the directors knowledge of the

corporation and the complexity of its structure and operations).

It is therefore essential for a director to make inquiries regarding the information or advice received, and to remain informed

about the companys business activities and financial position.

Laying solid foundations for management and oversight

Principle 1 of the principles and recommendations issued by the ASX Corporate Governance Council requires companies torecognise and publish the respective roles and responsibilities of the board and management.

Recommendation 1.1 states:

"Companies should establish the functions reserved to the board and those delegated to senior executives and disclose

those functions."

The guidance provided in relation to this recommendation suggests that:

there should be a clear statement of the respective roles and responsibilities of the board and management, balancing

responsibilities between the chairperson and the CEO;

the board should have a formal statement of matters, or charter (see 1280) detailing its functions and responsibilities;

all directors should receive a formal letter of appointment setting out the key terms and conditions of their appointment;

the CEO (or equivalent) and the Chief Financial Officer (CFO) should have a formal job description and letter of

appointment describing their duties, rights and responsibilities, and entitlements on termination.

In Principle 5, the ASX corporate governance principles recommend that companies should put in place mechanisms designed to

ensure compliance with the ASX Listing Rule requirements such that all investors have equal and timely access to material

information concerning the company including its financial position, performance, ownership and governance.

[1020] Other entities

Whollyowned subsidiaries

Where there is only a single shareholder (for instance, in a large multitiered group) it is possible, and indeed common, for far

greater powers to be reserved for exercise by the shareholder, and for much less to be delegated to the board, than in publiccompanies. It is common for the parent company to appoint the board chairperson, who may be given far greater powers than is

usual for a public company chairperson. It is also common for parent companies to require that major policy matters be referred

up the hierarchy for decision or guidance.

Joint ventures

In the case of joint ventures it is quite usual for the joint venture agreement to restrict the matters delegated to the board and for

considerable powers to be reserved for decision in meetings of the joint venturers. In practice, the extent and shape of delegation

varies widely.

Proprietary companies

Since 1995, proprietary companies have not been required to have more than one director and there are now a very large number

of singledirector companies. Many of these have only a single shareholder who is often the chief (and only) manager as well. Insuch cases the notion of accountability is blurred and, where the same person is simultaneously the shareholder, director and

operator, it becomes irrelevant.

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Government boards

It is usual for there to be special legislation covering government boards and for considerable powers to be reserved for the

relevant Minister or department. It is also common for the Minister to appoint the chairperson, and sometimes the CEO, directly

and for special authority and responsibility to be delegated to either or both of them. In such cases the authority of the board is

diminished, and serious governance problems often arise. No single model applies in the public sector and it is necessary to

study the specific legislation, and any Ministerial Directives, in order to understand the position of any individual board.

Member organisations

There are many organisations, such as trade associations, professional bodies and charities in which Presidents, and other

officers, are elected individually by the members and are given specific powers by the constitution. In such cases they are

accountable personally, and the accountability of the board (or council) is diluted. It is not uncommon for special difficulties to

arise in the governance of such organisations as a result.

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