Governance Systems; Towards an integrated approach Professor Peter Little Executive Dean Faculty of Business Queensland University of Technology Special Counsel McCullough Robertson, Lawyers

What might some famous people think of Good Governance

The recalcitrant director's view of corporate governance “I can't understand it.  I can't even understand the people who can understand it”   - Queen Juliana (1909 - ), of the Netherlands

Message to the overzealous manager “Society has always seemed to demand a little more from human beings than it will get in practice” - George Orwell, A Collection of Essays

Who to target when changing culture “Reasonable people adapt themselves to the world.  Unreasonable people attempt to adapt the world to themselves.  All progress, therefore, depends on unreasonable people” - George Bernard Shaw

The philosophical approach to good governance “Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws" - Plato (427 - 347 B.C.)

The truth about corporate governance “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident” - Arthur Schopenhauer (1788 - 1860)

Key Issues Good corporate Governance and compliance systems are often conceptualised negatively “Restricting behaviour to meet legal and ethical standards” Less attention is paid to positive benefits Creating value Developing better culture Prolonging the life of the organisation Maintaining organisational reputation Avoiding or reducing the negative effects of litigation and regulatory intervention

The demand for good governance and systems will intensify not diminish Regulation / over regulation Demands for accountability from communities, governments, stakeholders and victims

Background Important Developments 1992 – Cadbury Report (UK) 1999 – OECD Principles of Corporate Governance 2002 – Sarbanes-Oxley Act (United States) 2002 – ASX Corporate Governance Council – “Principles of Good Corporate Governance and Best Practice Recommendations” (Australia) 2003 – CLERP (Australia) 2003 – The Combined Code on Corporate Governance (UK) (Based on the Higgs Review) 2003 – Standards Australia suite of 5 Standards

Background The principles of good governance apply to all organisations Private sector Public sector Not-for-profit sector Universities Even Regulators – increasing pressure…

Does Good Governance and Compliance Cost? Good compliance and governance systems cost Now part of cost of doing business Initial costs more intense Ongoing costs reduced when embedded into day-to-day systems and activities Not a choice between making profits and box ticking

Creating Value Good governance can increase firm value McKinsey Quarterly studies (2000, 2002) KPMG study (2003) Harvard study (2003)

Performance Good governance may improve profitability and overall performance Harvard study (2003)

Benefits of Managing Critical Risks Organisations that have governance systems adequately prepared for crises: Suffer significantly fewer crises Perform better financially Have higher return on assets 2003 Study – Harvard Business Review

Insurance Benefits A good governance system and risk management may assist to obtain fair price insurance Alternatively insurance may be declined without appropriate governance

Staying in Business Risk of business failure Increasingly responsive stakeholder environment Eg. HIH, One.Tel, Arthur Andersen, NSW Grains Board

Improving Work Environment Attracting and retaining quality staff Employee wellness and job satisfaction The absence of a culture of compliance exposes employees to the threat of workplace, safety or product failures Calamities (eg. NASA)

Value of a Culture of Compliance and Good Governance NSW Grains Board investigation identified five specific integrity risks: Leadership allowed a culture of fear and intimidation to operate within the organisation Leadership failed to fulfil responsibilities in fraud prevention The organisational culture which developed as a result of the actions of the leadership valued commercial imperatives over public duty interests, outcomes over process, expediency over accountability and autocratic direction over participatory decision making Failure of a number of staff to provide strong ethical leadership Poorly implemented and ineffective operational procedures

Value of a Culture of Compliance and Good Governance NASA – Columbia Accident Investigation Board ‘In the aftermath of the Challenger accident…contradictory forces prompted a resistance to externally imposed changes and an attempt to maintain the internal belief that NASA was still a “perfect place”…managers strove to maintain their view of the organisation, they lost their ability to accept criticism, leading them to reject the recommendations of many boards and blue-ribbon panels…External criticism and doubt, rather than spurring NASA to change for the better, instead reinforced the will to “impose the party line vision on the environment, not to reconsider it”...This in turn lead to “flawed decision making, self deception, introversion…the board views this cultural resistance as a fundamental impediment to NASA’s effective organisational performance’. Source: Columbia Accident Investigation Board Report Volume 1, August 2003 [102]

Other Value Reducing Corporate Liability Leniency of Regulators and Court Avoiding Personal Liability

Building a Good Governance System Standards Australia 5 new governance standards Holistic approach to good governance AS8000 Good Governance Principles AS8001 Fraud and Corruption Control AS8002 Organizational Codes of Conduct AS8003 Corporate Social Responsibility AS8004 Whistleblower Protection Programs for Entities

Building a Good Governance System Elements Structural Operational Maintenance

Building a Good Governance System Structural Elements Commitment to effective governance from people at all levels Clearly documented governance policy Board should accept responsibility for overall governance Philosophy and strategy of continuous improvement

Building a Good Governance System Operational Elements Identification of governance issues and operating procedures Integration of requirements of laws and codes of best practice into day-to-day operations Systems to detect, record and deal with governance breaches Record keeping Identification and rectification of recurring governance breaches Reporting governance failures to those with sufficient authority to correct them

Building a Good Governance System Maintenance Elements Initial and ongoing education and training for board members and senior management System should be visible and communicated through out the organisation Ongoing monitoring and review of system Our assessments show that this area is the weakest

Role of Leadership Leadership and commitment are the key elements in the development of a successful governance system

Why Integrate Governance Systems? Many standards promoting quality, good governance, compliance, risk management etc follow similar ideology and methodology An integrated or holistic approach should be more effective Allows more co-ordinated training, monitoring and reporting

Why Integrate Governance Systems? Allows better management of complexity Should give directors greater assurance that governance, compliance and ethical obligations, like core-business, are being properly managed Should promote a better culture through consistency and transparency

Groucho's view of corporate values “Those are my principles.  If you don't like them I have others”