Interview with Dr Phillip Lowe, Chair – Advisory Group (Corporate Governance), ASX

I think the first point to make is Australian companies are well governed. So there's not a fundamental governance issue here. Internationally, Australian companies are well governed. They're governed. They're well respected. They have the trust of capital markets. But these principles had become a bit outdated. In truth, they become too complicated. In parts, they were too prescriptive. So our goal here is to simplify them, modernize them. And there are a number of areas where corporate government standards have improved or been lifted over recent times, and we seek to address that. They've been in the areas of diversity, in remuneration, and in culture. So they're very much the focus areas of the revisions.

Well, there's no particular area. The one that I want to focus on is culture because companies perform well if they have a culture of doing the right thing, a culture of high standards, a culture of excellence. And the previous set of standards didn't really focus very much on culture. They had said the board need to oversee some policies. But what's really important is that a board oversees a strong resilient culture of doing the right thing. And we've modified the recommendations in this area to make it clear that the board has a responsibility to instill a culture of doing the right thing. So that's really important because if you look across the corporate scandals over the past four or five years, they've often come down to culture.

I think it really starts from the top. So that's the top management but also the board sending a clear message to the organization that they expect people to act ethically, responsibly and legally and that if you do not do that there'll be consequences. So that really needs to kind of be part of the DNA of the organization. You know reminding people what they're there to do. They're there to do the right thing to build long-term shareholder value and to treat people with respect and ethically. So if you can do that, that sets the company up for success. But if you don't do that, if people don't act responsibly or ethically, if they don't treat people well, then it might work for a while, but you get found out and the company will suffer and the shareholders will suffer. So acting ethically, responsibly and having that part of the DNA of the organization I think is really successful, the foundation for success of any company. And really as a director of the company you have a responsibility to make sure that management do this because ultimately it's management's responsibilities and it the board has to monitor the management and help and encourage the management to establish a strong culture of acting ethically and responsibly. It's foundational.

Well, I don't want to kind of highlight any particular company, but there have been failures where the company drifted from its core purpose and for whatever reasons the board wasn't able to help get management back onto the right path. So I don't want to kind of single out any particular companies but there I think people know the kind of the examples that but the fundamental point is that a strongly performing company starts with a strong culture and that's management's responsibility but the board has a responsibility to monitor the management and to help and assist the management and to let them make sure the management know that if the culture isn't aligned with the firm's values then there are consequences for the management.

Well, there was a lot of overlap with regulatory requirements. So, there was a principle that you had to have a whistleblowing policy. Well, that's set out in law. The same with AML. There were principles about disclosure of climate and sustainability risks. Well, that's all set out in the law. So we went through the principles with a fine tooth comb and where an issue was already covered in the law we decided to take it out because it was just adding to confusion and what wasn't adding any value. So that was a simplification. Another simplification was that we have sought to clarify the guidance. The principles have eight principles which is fine. Then they have 40 plus recommendations and then there's a set of guidance notes. Often the guidance notes were in effect adding more recommendations. So it was all a bit confusing and people were saying to us well look this is we're not really sure what we're supposed to do here. We've made it very clear the eight high level principles, the recommendations and then guidance which is exactly that it's not providing more requirements that you have to meet. So that hopefully makes it easier and simpler for people to use and to report against.

We've spent a lot of time talking about diversity because you know culture is important but diversity is important as well. All the evidence is that more diverse boards give better value for the company. So we want to have diverse boards. In my view too much of the diversity discussion is focused on the issue of gender. It's very you know gender is incredibly important but it's only one aspect of diversity. You don't want a board made up of 10 men or 10 women or 10 people from the same private schools or 10 people from the same background or 10 engineers. So the best boards are going to be boards that are constituted to people who come from different backgrounds because they can bring different perspectives to issue and you know monitor management more effectively. So the recommendations now focus a lot on the importance of having diversity of experience, perspective, skills. So that's new and what we expect boards to do is to assess how they're treating diversity and succession planning and talk to their shareholders to the investors about how they're ensuring that there's a diverse set of members on the board. One gender. We've kept the 30% expectation that you know 30% of directors are women. We kept it because it's really worked well. Now before this was brought in maybe only a quarter of Australian companies had more than 30% of their directors as women. Today in the ASX 300 around 75% so three-quarters of companies have more than 30% of directors women. So that's really worked. It's been successful and I think Australian companies are better governed as a result of that. The issue we discussed quite a lot and I know a lot of your members will have an interest in this is whether we should go further go up to 40% because there are some people who advocate that. We haven't ruled that out as a future change but at the moment we wanted to broaden the concept of diversity to these other characteristics I talked about. But we also want the 25% of companies that don't have 30% women as directors to get there. And I think if we can get them there over time, which I hope we do, then there can be a conversation about lifting it to 40. But it's been successful. We want everyone to get there and then if everyone gets there then we can lift the floor. And of course if an individual company thinks that 40% is the right target for it, they can do that. This is these are not mandatory requirements. This is kind of a minimum and if you're outside the ASX 300, we expect you to set a target and to lift that target over time.

Yeah, I think kind of having the lift from up to 30% has been really important. But having people from different perspectives as culture as well. It's not just gender that kind of brings perspective. It's people's education. It's their life experience. It's their industry skills. It's their kind of their whole mindset. So each of these things are important. The floor for women's 30%. Hopefully that will lift up over time. But let's get everyone there first and do some work in the interim on these other aspects of diversity because we don't want all people from the same private schools in Sydney and Melbourne sitting on boards. You want people from different backgrounds, you know, them all together go the same university. So you'll get I think a stronger culture if you've got people from different perspectives and hopefully we'll do that.