How should companies behave? The dilemmas of corporate governance

Companies need to articulate realistic values and stick to them

In May 2018, all hell broke loose when the ASX Corporate Governance Council issued a draft revision of its corporate governance principles, just as the business sector was reeling from damning revelations emerging at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The most contentious change to the principles, which apply to all ASX-listed entities, was the suggestion that companies should have a social licence to operate, and should behave in the way the council said was socially responsible.

ASX chief compliance officer Kevin Lewis said the council was recognising “in very explicit terms that a listed entity social licence to operate is one of its most valuable assets”.

The concept was slammed by many in the business community as politically correct nonsense that would create problems for companies in industries such as gaming, alcohol and mining.

 The criticism stuck and in the final version of the fourth edition of the principles, released in February this year, “social licence” was dropped. Instead, principle 3 of the guidelines focused on a listed entity’s values.

 The recommendations now include that a company must articulate and disclose “the guiding principles and norms that define what type of organisation it aspires to be and what it requires from its directors, senior executives and employees to achieve that aspiration”.

Aligned direction

 The fourth edition of the principles will likely be a help rather than a hindrance, says Pamela Hanrahan, professor of commercial law and regulation at UNSW Business School and adviser to the Royal Commission. They are important, she says, because they set the tone of what the community can expect.

“If the guidelines go too far they raise expectations that business can’t fulfil,” says Hanrahan, a leading authority on financial services law and regulation who has published widely on corporate governance.

“The ASX council must be honest about what business is for,” she says. “Not every business has the same ethos.”

Hanrahan has been talking about the need for companies to articulate a values proposition since 2016; that is, the way in which a board balances competing stakeholder interests. 

'Listed entities must avoid weasel words or motherhood statements they cannot deliver on. Authenticity is everything'


This provides clear direction for making sure everyone in an organisation is aligned with that proposition.

Hanrahan is one of a number of academics at UNSW Business School undertaking front-line research into corporate governance, such as the role of independent directors and diversity on boards.

Work done by Salih Ozdemir, a senior lecturer in the school of management, and PhD student Jiping Niu, for example, has shown that boards with more independent directors on their strategy committees are more likely to adopt innovations.

AGSM scholar and professor of organisation and employment relations Stephen Frenkel, and his PhD student Jaco Fourie, are studying the Australian Modern Slavery Act and its implications for a company’s behaviour.

 Confidence and trust

UNSW academics ensure their work has real-world impact by working with policy bodies, regulators and government, says Hanrahan, who speaks regularly at conferences and to the media.

 She has noted a change in the debate about corporate governance during the past decade, with the post-GFC focus shifting from the impact of corporate misconduct on investors to its impact on public confidence and trust in powerful institutions.

 In a speech last September, Hanrahan warned of the danger of adopting the language of social licence, a concept that has been kicked around for decades.

 “The governance community generally was concerned with the language in the ASX Corporate Governance Council’s consultation draft. There was a view that the commentary was too prescriptive about the things a socially responsible company should do – for example, in relation to wage justice,” she says.

“The criticism was that it amounted to a form of social engineering and a lot of business people said it wasn’t helpful. The drafting in the final version of principle 3 strikes a more appropriate balance.”

Requiring companies to disclose their values is helpful only if they stick to them, says Hanrahan. What the Hayne Royal Commission showed, she notes, was that corporate conduct was often clearly at odds with the financial institutions’ stated commitments to lawful, ethical and responsible behaviour.

“If the new recommendation [from the ASX] about values is to make a positive difference, listed entities must avoid weasel words or motherhood statements they cannot deliver on. Authenticity is everything.”


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