1. Boards: Asset or Liability? Your Dividends at Corporate Governance Risk Presentation to Australian Shareholders Association by Lynn Ralph, Managing Director Cameron Ralph 17 July 2003

2. Today’s topics: What is governance risk? The Governance Challenge What makes a good board How can you assess governance risk? A new paradigm for directors/boards

3. What’s your view of the world? OPTIMISTS People basically good Power inspires Ethics & compassion Well meaning incompetence Progress, albeit slow Trusting Boards are only human PESSIMISTS People basically weak Power corrupts Greed & self interest Intentional conspiracy History repeats Sceptical Boards are paid to get it right 100% of the time Readers’ Digest Survey finds: optimists live 19% longer than pessimists!

4. Disclosure of interests Cameron Ralph assists boards to improve their performance by undertaking an independent assessment of their effectiveness We are engaged by the company and typically report to the Chairman Our principals are ex-Regulators, ex-fund managers, company directors, and individual shareholders

5. What is “Governance Risk” The risk that decision(s ) or action(s ) taken (or omitted to be taken) by the board results in significant negative impact on shareholder value What it’s not: –The sole predictor of share price, earnings or creditworthiness –The only contributor to good or bad results

6. The Governance Challenge Balancing competing demands is a difficult task: –Maximise corporate performance (long term) through the board’s contribution (as opposed to mgmt’s) –Minimise risk of loss from governance risk (along with all other forms of risks….) –Keep (competing) stakeholders happy! Doing it as a ‘group’ adds complexity!

7. What goes wrong with boards? Sidney Finkelstein “Why smart executives fail’ Three reasons of failure - greed, cronyism and denial Denial is the most common! how executives perceive reality for their companies how people within an organization face up to their reality how information and control systems in organizations are mismanaged how organisational leaders adopt spectacularly unsuccessful habits.

8. What makes a good board? (minimises governance risk) Cadbury –Openness, accountability, integrity Cameron Ralph –All of the above plus: –Consistently high quality decision making

9. Critical Components

10. Business acumen, courage, integrity, diligence, independence of thought, wise use of social capital Relationships between board, and board/mgmt

11. The right amount about the right things Agenda setting, problem scoping, decision criteria, alternatives, risk analysis Overseeing implementation; assessment of the board and senior management

12. Assessing governance risk What are your current options? –Assess compliance with codes/guidelines –Follow external assessments by research firms –Your own research about the people/company

13. Limitations of the current options What external assessment can’t measure : –business acumen –courage / social skills –integrity (or greed….) –independence of thought –group dynamics ( social skills, collegiality, etc ) –“denial” or other poor decision processes –quality of information being used –rigor of decision making

14. So are guidelines useful at all? For boards – as guides to improve? to the degree that they provide ‘structural support’ to some directors – a bit  to the extent they force a ‘one-size-fits-all’ solution – probably not to the extent they distract boards from genuinely embracing continuous improvement – not at all

15. So are guidelines useful at all? For shareholders – protect rights/assess risk Don’t account for differences between companies Too blunt to detect real issues emerging Not proven effective (see academic literature!) Not consistent (see heaps of failed co’s….) Generates lots of disclosure, but can we read it all? Doesn’t tell you which director to vote against ? Do you sell your shares for any breach of guidelines or accept a ‘please explain’

16. So where does that leave investors? Governance risk is real Governance risk is very complex Almost impossible to genuinely assess from afar –But then you wouldn’t try that with credit risk either! Disclosure overload a real possibility We need a commonly accepted, but effective risk assessment standard!

17. What are boards currently doing? Assessing the suitability of applying the ASX guidelines in their context –A review already underway…… Assessing their performance –Chair, self-assess, independent assessment Improving risk management systems Improving disclosure of what they’re doing

18. A changing board paradigm 50’s +, diversity Generational Change 60’s +, monoculture Point in Career peak earning years retired with pension still learning Attitude all seeing; all knowing Board Role hire/fire CEOStrategy/Values

19. “ From the standpoint of the community, the welfare of the community, and the welfare of the workers in the company, what is called the democratisation in the ownership through the distribution of stock is positively harmful. Such a wide distribution of the stock dissipates altogether the responsibility of the shareholders, particularly those with five shares, ten shares or fifty shares. They recognise that they have no influence in a corporation of hundreds of millions of dollars capital. Consequently they consider it immaterial whatever they do, or omit to do. The net result is that the men who are in control of it become almost impossible to dislodge, unless there should be such a scandal in the corporation as to make it clearly necessary for the people on the outside to combine for self-protection. Probably even then that necessity would not be sufficient to ensure a new management. That comes rarely except when those in control withdraw because they have been found guilty of reprehensible practices resulting in financial failure. Minority stockholders rarely have the knowledge of the facts which is essential to an effective appeal, whether it be made to the directors, to the whole body of shareholders, or to the courts. Besides, the financial burden and the risks incident to any attempt of individual stockholders to interfere with an existing management is ordinarily prohibitive.” Testimony of Supreme Court Justice Louis Brandeis Senate Committee on Interstate Commerce December 1911 A new era of accountability, openness & integrity…… or history repeating itself?

20. “In today’s competitive environment, good corporate governance is a key strategic advantage. Like almost any team, most boards, even those in charge of successful companies, can improve the quality and effectiveness of their performance.” Alan Cameron, Chairman, Cameron Ralph Pty Ltd 2002

21. Thank you for your time!