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Murray exposes decay of corporate board box-tickers

By Peter Swan  August 03, 2018

​David Murray has had a distinguished record as CEO of the Commonwealth Bank (CBA) from 1992 to 2005. He headed the recent inquiry into the Australian financial system.

He has now been handed a poisoned chalice in the form of the chair of AMP, whose share price has collapsed following the revelations of the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Murray does not blame the ASX Corporate Governance Council (CGC) entirely for the $6 billion lost by AMP since the revelations, but he says, rightly, that "the ASX corporate governance principles contributed to what happened to AMP and others in the financial sector".

So, is Murray correct when he asserts that subcommittees made up largely of independent directors are ineffective monitors and reduce accountability?

He says the ASX rules requiring committees chaired by independent directors covering audit, risk, remuneration and nomination fracture the work of boards and tie non-executive board members too closely to executives who help these subcommittees digest the often 1000 pages of 'stuff' they are required to grasp prior to each meeting.

Murray points out that these rules weaken the power and authority of the CEO as well as the accountability of the board by linking external board members to management.

He also points out that the financial regulator, the Australian Prudential Regulation Authority (APRA), has put into law the rules promulgated by the ASX CGC, whereas the council justifies itself by saying their guidelines are not laws because boards can opt out using the 'if not, why not', provision if the rules are unsuited in its circumstances.

Will the courts place Murray in jail for defying APRA if his new board structure for AMP contains no subcommittees?

Such a board is more likely to achieve the accountability and independence from management demanded by APRA than the very highly prescriptive structures that APRA has passed into law.

In fact, as Murray opines, most boards are harassed into following the supposed ASX CGC guidelines and recommendations even without APRA's heavy-handed legal sanctions.

So, is Murray correct when he asserts that subcommittees made up largely of independent directors are ineffective monitors and reduce accountability?

Research conducted into the boards of the top 1200 companies in Australia show that only audit subcommittees contribute to share value: but only when there is a significant shareholder (or representative) on the committee.

Who, other than significant shareholders, is likely to act on behalf of the long-term interest of shareholders? After all, genuine shareholder interest would soon put a stop to 'fees for no service' and other rorts at AMP instead of the short-termism promoted by most boards.

This is especially so of the previous AMP board that seemed to be more focused on short-term profit targets – allied with executive bonuses and option values – rather than with long-term shareholder value creation.

The ASX is arguably the only exchange in the world that delegates its listing requirements to a group of not-for-profits that are lobbyists for various vested interests such as professional generalist directors who stand to gain from weak governance.

Remarkably, in 2016, one of the most prominent organisations that makes up the ASX Council – the Australian Institute of Company Directors (AICD) – hired a prominent finance researcher to question my 2014 finding that independent boards had cost shareholders upwards of $50 billion during the previous decade.

My findings suggested that ASX governance guidelines, and proxy firms which push companies to appoint generalist directors, are robbing boards of vital industry insights and sapping shareholder returns.

Murray retired as CBA CEO in 2005 with a very successful record. One might think that he would have made an excellent board chair of the organisation he had largely created.

But no, the ASX guidelines require a majority of independent directors and the chair is supposed to be 'independent'.

So, are these Kafkaesque laws based on decades of solid and independent research into the performance of tens of thousands of boards worldwide?

No. Not a bar of it. The ASX CGC principles and recommendations do not cite evidence from the hundreds if not thousands of academic studies on board design and performance at all.

Where is the evidence showing that mandated subcommittees of boards are beneficial, or that alignment of interests between directors and the shareholders that supposedly elect them destroys value?

Research on the US system of board subcommittees – that requires all subcommittee members to be 'independent' – finds that the more time spent on subcommittee activity, the worse the firm's performance.

It was recently revealed that "five million superannuation accounts holding $260 billion and managed by the Big Four banks and financial services companies AMP and IOOF have delivered average annual returns less than the risk-free 'cash' rate over the past decade and many have performed below the rate of inflation".

Much of the underperformance is due to fee-gouging.

This is very poor performance by boards dominated by independents. To say the least it is far worse than industry funds whose boards are largely free of independent directors.

The boards of industry funds are made up of 50:50 employee (union) and employer representation. The Turnbull government is attempting to mandate that one-third of these outperforming boards be sullied by 'independents', putting even greater downward pressure on retirement nest eggs.

I wish to thank Murray for breaking ranks with professional directors to expose the deep underbelly of decay driven by highly prescriptive board rules and principles that, according to him, "haven't been of the slightest value".

Peter Swan is a professor of finance at UNSW Business School. A version of this post appeared in The Australian Financial Review.

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