Introduction

In this chapter we give a brief overview of corporate governance in the US, the UK, New Zealand, Canada, South Africa and India, some of the major Anglo-American corporate governance jurisdictions that are based on the unitary (one-tier) board model. In Chapter 12 we deal with corporate governance developments in the European Union (EU), the OECD principles of corporate governance, and corporate governance in Germany, China, Japan and Indonesia. The OECD principles include traditional Anglo-American corporate governance principles, but go wider – including principles applying to a traditional unitary board structure and principles applying to a typical two-tier board structure.

United States (US)

Background to the corporate governance debate in the US

Corporate governance has been a topic for discussion in the US for a very long time, and the materials written on corporate governance in the US are extensive. As such a dominant world economy, US debates on corporate governance will almost invariably influence corporate governance debates in other jurisdictions. It is, therefore, important to deal with corporate governance debates in the US in order to understand corporate governance models in other parts of the world.

The debate on corporate governance in the US started as early as 1932, when Adolf Berle and Gardiner Means published their book, The Modern Corporation and Private Property. The importance of this debate was emphasised by Myles Mace's book, Directors: Myth and Reality, published in 1971, but the discussion became really heated in 1982 with the publication by the American Law Institute (ALI) of its Principles of Corporate Governance and Structure: Restatement and Recommendations. The project was designed as a restatement of the law, but as corporate law (and hence corporate governance law) in the US is based on state law developments, the exact applications of these broad principles vary from state to state. This project, which had started off quite modestly, resulted in a stream of publications on the topic of corporate governance in the US.

The meaning of corporate governance

Generally

Corporate governance is as old as the corporate form itself. However, the phrase ‘corporate governance’ was scarcely used until the 1980s. Issues of corporate governance first gained international prominence in the late 1990s and early 2000s in the wake of a series of corporate accounting scandals, most notably Enron in the US and HIH in Australia. The focus on corporate governance increased after 2008, in the aftermath of the Global Financial Crisis. Inasmuch as a discussion of the principles of contemporary governance requires a closer description of ‘corporate governance’, the concept remains one that does not lend itself to a single, specific or narrow definition. Corporate governance, by its very nature, is organic and flexible, constantly evolving in response to a changing corporate environment.

A comparison of older definitions or descriptions of corporate governance, such as those used in the South African King Report (King I) in 1994, and more recent definitions, such as those used in the G20/OECD Principles of Corporate Governance and the King IV (2016) Report reveals how the focus has shifted from a narrow, inward-looking approach that primarily addresses internal director-related rules within the corporation to an outwardlooking, more inclusive and multi-faceted approach that recognises that corporate governance is about much more than managing the manner in which directors exercise and control authority in corporations.

Early attempts at a definition focused on ‘corporate governance’ as a ‘system’: the UK Cadbury Report (1992) and King I both defined ‘corporate governance’ as ‘the system by which companies are directed and controlled’.

Overview

It will be clear from Chapter 3 that we consider regulation of corporate governance to be prominent in a good corporate governance model. This chapter builds upon that model by focusing on the regulation of corporate governance in particular. It deals specifically with the various mechanisms, legislative and non-legislative, which regulate the corporation and which set in place, collectively, a framework by which good governance can be achieved. Overall, this collective body of mechanisms forms part of what has recently been described as an emerging ‘law of corporate governance’.

The regulation of corporate governance in Australia is achieved through binding and non-binding rules, international recommendations and industry-specific standards, the commentaries of scholars and practitioners, and the decisions of judges. The legislature acts to facilitate the achievement of good corporate governance directly by refining corporate law, and indirectly through the entire panoply of rules and regulations which have an impact on the corporation and its activities. There are other agencies that also assume a role in the regulation of corporate governance.

Section 5.2 of this chapter provides a working definition of ‘regulation’, to clarify what is meant by references to the ‘regulation’ of corporate governance throughout this chapter. It also introduces the influential ‘pyramid’ of regulatory compliance developed by Ian Ayres and John Braithwaite. Section 5.3 explores the common and unifying aims and objectives of regulation, with reference in particular to the Organization for Economic Co-operation and Development's (OECD's) Principles of Corporate Governance (2004), and similar statements made when corporate governance reforms were introduced in Australia: namely the CLERP 9 Act (2004), and the Australian Securities Exchange's (ASX) CG Principles and Recommendations. These sources emphasise the strong financial objectives underpinning the recent formalisation of corporate governance regulation.

Overview

No matter which corporate code of conduct or corporate governance framework is used, the issue of ‘transparency’ is referred to, either directly or by implication. The application of ‘transparency’ to the reporting to the public by companies of their financial and non-financial conduct and performance for a period has come under increasing scrutiny from corporate stakeholders. The single most significant reform in this area in Australia came in response to the high-profile corporate collapses of the early 2000s. On 1 July 2004, the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) came into effect. This Act is commonly referred to as ‘CLERP 9’, as it was the ninth instalment under the government's Corporate Law Economic Reform Program (CLERP).

The CLERP 9 Act, together with the amendments made to the Australian Securities Exchange (ASX) Listing Rules and the ASX Corporate Governance Council's first edition (2003) of the Principles of Good Corporate Governance and Best Practice Recommendations (now called CG Principles and Recommendations) represent the most significant reforms regarding regulating corporate governance practices of companies in Australian since the first Companies Acts were introduced here. Since 2003 other important reforms in Australia have been the adoption of International Financial Reporting Standards and International Standards on Auditing, based on those promulgated by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB) respectively.

No book on corporate governance in Australia could do justice to its topic without devoting at least some discussion to accounting governance in terms of CLERP 9, and accounting and auditing reforms and their place in the broader context of corporate governance, and in the regulation of corporate governance in particular.

Overview

Comparing the first two opening quotes of this chapter with current realities illustrates very well how things have changed over a relatively short period of time. In the previous chapter we saw that there are nowadays much higher community expectations that all types of directors fulfil their duties of care and diligence meticulously. No longer may directors hide behind ignorance or inaction; nor are the duties of non-executive directors seen as being of an intermittent nature.

Introduction

Australia has a long tradition of shareholder activism. What has changed in recent years is the nature of the shareholders who are taking activist positions. Large public corporations in Australia have long been criticised by individual activist shareholders such as retired schoolteacher Jack Tilburn, who has attended over 500 annual general meetings (AGMs) over the past 25 years, and Australian Shareholder Association and high-profile media commentator Stephen Mayne. In recent years, however, it is more common to speak of activist hedge funds, activist sovereign wealth funds (such as Australia's Future Fund) and activist fund managers (such as Allan Gray).

Institutional investors have always exercised some measure of influence with the management of large public corporations, but recent developments in shareholder activism have brought these manoeuvres into the public spotlight. Australia's corporate landscape has featured a range of high-profile boardroom battles with activist investors, including fund managers advocating the break-up of interlocked listed companies Brickworks and Washington H. Soul Pattinson, the Future Fund putting pressure on Telstra, and a consortium of institutional investors advocating change at Qantas. In recent times Australia has seen a rise in US-style activism tactics with public criticism of existing board members and overall denouncement of management strategy being played out through both traditional and social media.