In March 2003 the Australian Stock Exchange (ASX) Corporate Governance Council released a set of guidelines on Principles of Good Corporate Governance and Best Practice Recommendations. All co-operatives should obtain a copy of the guidelines.

The comments on the Report are preliminary without prejudice observations and may change. Readers are invited to email corrections, additions and/or queries.

The ASX Corporate Governance Council was formed on 15 August 2002 with the aim of developing and delivering an industry-wide, supportable and supported framework for corporate governance which could provide a practical guide for listed companies, their investors, the wider market and the Australian community.

The impetus for the development of the guidelines was corporate collapses in Australia and overseas.

The ASX Corporate Governance Council states that there is no single model of good corporate governance and that the guidelines articulate principles that underlie good corporate governance. Each principle is explained in detail with implementation guidance in the form of best practice recommendations.

Under ASX Listing Rule 4.10., companies are required to provide a statement in their annual report disclosing the extent to which they have followed the best practice recommendations in the reporting period. Where companies have not followed all the recommendations, they must identify the recommendations that have not been followed and give reasons for not following them.

This comply or explain model is partly aimed at preventing a legislative imposition of the guidelines.

Ten Principles

Ten essential corporate governance principles are identified and it is stated that a company should:

1. Lay solid foundations for management and oversight. Recognise and publish the respective roles and responsibilities of board and management.
2. Structure the board to add value. Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.
3. Promote ethical and responsible decision-making. Actively promote ethical and responsible decision-making.
4. Safeguard integrity in financial reporting. Have a structure to independently verify and safeguard the integrity of the company's financial reporting.
5. Make timely and balanced disclosure. Promote timely and balanced disclosure of all material matters concerning the company.
6. Respect the rights of shareholders. Respect the rights of shareholders and facilitate the effective exercise of those rights.
7. Recognise and manage risk. Establish a sound system of risk oversight and management and internal control.
8. Encourage enhanced performance. Fairly review and actively encourage enhanced board and management effectiveness.
9. Remunerate fairly and responsibly. Ensure that the level and composition of renumeration is sufficient and reasonable and that its relationship to corporate and individual performance is defined.
10. Recognise the legitimate interests of stakeholders. Recognise legal and other obligations to all legitimate stakeholders.

Co-operative Difference

The principles, however, do not sufficiently recognise the unique differences between co-operatives and investor owned companies. While not acknowledging the co-operative difference, the ASX does recognise that a "one size fits all" approach is inappropriate. Co-operatives, therefore, need to adopt the principles to the unique governance circumstances of co-operatives. There is a significant difference between co-operatives and investor-owned companies.

The discussion on Principle 1. Lay solid foundations for management and oversight emphasises that a company's framework should enable the board to provide strategic guidance for the company and effective oversight of management, clarify the respective roles and responsibilities of board members and senior management and ensure a balance of authority so that no single individual has unfettered powers.

For a co-operative, it is important to recognise the accountability of the board to the co-operative's member-owners and that this should include monitoring member education and involvement programs and recognition that induction training and continuing education arrangements for directors should include co-operative education.

The discussion on Principle 2. Structure the board to add value defines an independent director as a non-executive director that is not a member of management and that this includes:

1. is not a material supplier or customer of the company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer.
2. has no material contractual relationship with the company or another group member other than as a director of the company.

Co-operatives have the legislative option of appointing independent directors. But, the nature and desirability of independent directors for co-operatives is significantly different than independent directors for investor-owned companies.

Co-operatives require members to be active and this necessitates members being suppliers or customers. Co-operatives are owned and controlled by their member-users and, therefore, a majority of directors should be user-owners and this imposes an overriding obligation on directors and management.

The guidelines recommend independent chairs and a majority of independent directors on boards. This is inappropriate for co-operatives.

Most directors of co-operatives are not financially independent of their co-operative. They are members and customers and/or suppliers. It is a benefit to a co-operative that a director is a customer and/or supplier. The issue of independence for co-operative directors is about other interests beyond the relationship that every member has with a co-operative.

The discussion on Principle 6. Respect the rights of shareholders emphasises communicating effectively, ready access to balanced and understandable information and easy participation by shareholders in general meetings. For a co-operative, however, the obligation extends beyond this for the shareholding members are the users of the co-operative and their ownership is democratic and, therefore, there is a need to respect their rights as equal owners.

The nature of shareholding is substantially different in a co-operative and a company and, therefore, the rights and roles of shareholders are substantially different.

The discussion on Principle 8. Encourage enhanced performance emphasises that the board should be provided with the information it needs to efficiently discharge its responsibilities and the importance of performance management.

For a co-operative, it is critical that this information include membership education and involvement programs and reports on membership activities e.g. member churn and the number of members voting and attending general meetings.

The discussion on Principle 10. Recognise the legitimate interests of stakeholders emphasises legal and other obligations to non-shareholder stakeholders and the importance of a code of conduct.

Co-operatives, however, not only have a code of conduct as another policy but a social purpose that has clear and enduring values and principles that are integral to and guide co-operative practice. Read the International Co-operative Alliance's statement on co-operative values and principles.

Conclusion

Co-operatives cannot afford to ignore the work of the ASX Corporate Governance Council and the relevance to their own governance. It is an important guidelines for corporate, and co-operative, practice.

Governance is a central issue for co-operatives because they are democratic businesses - an alternative to the plutocracy of investor-owned companies with differing purposes and structures. The governance principles for co-operatives must be interpreted and applied consistently with co-operative values or principles and, therefore, the challenge is to learn from and build-on the work of the ASX but in a way that affirms and demonstrates the co-operative difference.

David Griffiths
Last updated: 05-Oct-2003 7:08 AM