Peter Swan AO: David Murray exposes decay of corporate board box-tickers

David Murray has had a distinguished record as CEO of the Commonwealth Bank 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 financial sector.

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”.

He says that 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 that help these subcommittees digest the often 1000 pages of ‘stuff’ that 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, has put into law the rules promulgated by the ASX CGC, whereas the council justifies itself by saying that 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.

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 over the previous decade. The findings, reported in these pages, 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.

David Murray retired as Commonwealth Bank 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 world-wide? 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 United States 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 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 David 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 AO is professor of finance at UNSW Business School. This op-ed first appeared in the Australian Financial Review. 
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10 Responses to Peter Swan AO: David Murray exposes decay of corporate board box-tickers

  1. stackja

    Once most boards worked fine. A few that did’t created the call for change. The change has not helped.

  2. Texas Jack

    Hard to beat the cash rate if the lookback performance timeframe incorporates a pre-GFC starting point, but whatever.

    The really big issue is that if you treat people like mindless automatons, incapable of thinking for themselves, you’ll destroy the last vestiges of individual responsibility. The expansion of our various swamps, all vying to make life mindless and riskless, have created the bigger risk that people no longer have a clue what caveat emptor means and the simple wonderful life giving pursuit of profitability has been turned into a marker of pure evil. The erosion of conservative politics has a price and we’re paying down payments on it already.

  3. mareeS

    We had to suffer independent auditors every 2yrs through,our media business, and we were squeaky clean always. How do bigger companies get away with this stuff? Probably because auditors today are just out of uni.

  4. H B Bear

    Never understood the whole idea of the non-executive director as the saviour to the problem of corporate governance. The difficulty was summed up by John Singleton when he described the then Chairman of Fauxfacts Roger Corbett as merely “a competent canned beetroot salesman”. Long, deep industry knowledge matters. Fauxfacts is (was) arguably one of the worst managed companies in Australian corporate history – including a stint under Fred Hilmer, who has returned to academia to pass on his knowledge to the next generation.

    David Murray is in place at AMP as one of the ultimate insiders to provide the best possible firewall against the regulators for past mis-deeds, including those under another insider David Gonski’s diversity hire. Expect a lot of, “That was in the past but now under David Murray … “.

  5. Habib

    So boards made up of larcenous union thugs perform slightly better than ones filled by doctors wives pursuing a hobby. A startling revelation.

    Or could it be that the ACCC, APRA and the entire edifice of regulation, let alone the mandated creation of extortionate monoliths like “industry” super funds are yet another abominable government fuck-up, further proof that their bailiwick needs to be trimmed to a stump. Then burnt.

  6. tgs

    I am 100% sympathetic to the argument that independent directors mostly have too little skin in the game, regualrly have an overinflated sense of entitlement, often don’t put in the work required and can very easily destroy shareholder value.

    But I question whether using David Murray as an example in this argument is a good tactic. The RC is showing just how asleep at the wheel the CBA board was for a significant period of time.

  7. Rossini

    tgs
    #2791462, posted on August 17, 2018 at 10:35 am
    But I question whether using David Murray as an example in this argument is a good tactic. The RC is showing just how asleep at the wheel the CBA board was for a significant period of time.
    David Murray has had a distinguished record as CEO of the Commonwealth Bank from 1992 to 2005.
    What length of time is significant re the above.
    Murray has been gone for 13 years.

  8. .

    The difficulty was summed up by John Singleton when he described the then Chairman of Fauxfacts Roger Corbett as merely “a competent canned beetroot salesman”.

    Brutal. He’s comparing him to Alex Jones.

  9. Tim Neilson

    So boards made up of larcenous union thugs perform slightly better than ones filled by doctors wives pursuing a hobby.

    Well, that’s what the published accounts say at present.

    I wonder about the valuations of the “industry” funds’ “renewable energy” investments.

    There’ll need to be a lot of colossal “too big to fail”/”won’t someone think of the workers?” bailouts if ever the taxpayer funded spigot gets switched off for wind/solar money pits, and the “industry” fund members start asking to be paid their supposed “entitlements” only to find that the whole lot has disappeared into the pockets of CFMEU bruvvers and assorted troughing maaaates.

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