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Calleja, Nicole --- "'To Delegate or Not to Delegate': Board Committees and Corporate Performance in Australia's Top 100 Companies" [1999] SydLawRw 1; (1999) 21(1) Sydney Law Review 5

‘To Delegate or Not to Delegate’: Board Committees and Corporate Performance in Australia’s Top 100 Companies


Despite the fact that companies in Australia are not required by law to establish board committees, they are flourishing in the current corporate climate. Board committees have become important outward and visible signs of adherence to the principles of corporate governance; however, few studies have scrutinised their impact on corporate performance. The empirical findings outlined in this article suggest that the number and composition of board committees are linked to corporate performance. There is some evidence to support the proposition that particular committees should be made mandatory. For example, companies with audit, remuneration and nomination committees tend to perform better than companies without these types of board committees.

1. Introduction

Section 226A of the Corporations Law [1] states that ‘... [t]he business of a company is to be managed by or under the direction of the directors.’ [2] However, in practice, this statement does not accord with reality. The business affairs of large listed companies are typically managed by the company’s officers, not its directors. [3] Boards meet infrequently and it has been observed that ‘a fast-paced business world filled with complex choices does not permit management by a group such as the board, or the leisure of decision-making on an intermittent basis.’ [4]

In actual fact, the way in which the board contributes to the management of its company is by governing to ensure the long term success of the company through supervision, review and policy making. In Australia, it has been acknowledged that ‘many companies today are too big to be supervised and administered by a board of directors except in relation to matters of high policy.’ [5] Therefore, the role of the board of directors is nearly exclusively a monitoring one, in that the board is responsible for the general oversight of the company’s activities, and does not actively supervise or scrutinise the company on a day to day basis. [6]

The fact that boards meet so infrequently means that they can only address a finite number of issues and often cannot devote the time that issues may deserve or demand. Board committees provide an opportunity for the board to delegate some of the more important issues to a taskforce for thorough consideration and attention.

Board committees are a burgeoning phenomenon and are very much in vogue. It has been observed that: ‘[t]he committee system is the cornerstone of the board process.’ [7] In addition, the 1997 Korn/Ferry International Study on the Boards of Directors in Australasia revealed that 99 per cent of public listed boards surveyed operated through committees. [8]

But what types of committees do Australian companies favour? Are committees an effective use of resources? Do they enhance or impede corporate performance? Are some committees more worthwhile than others? Who serves on these committees? Do committees usurp the board’s power and encourage directors to abdicate responsibility? These are just a few of the questions this paper will endeavour to address.

This paper highlights the links between the committee structure of boards and corporate performance. Previous studies have found no clear association between corporate performance and the overall composition of the board. [9] However, by delving to a deeper level and examining the inner workings of the board, that is, by analysing the number and composition of board committees utilised by the Top 100 Australian companies, a number of links to corporate performance become apparent.

In summary, this study found that almost 98 per cent of the Top 100 Australian companies have established an audit committee; approximately 75 per cent have established a remuneration committee and over 46 per cent have established a nomination committee. [10] There were 35 different types of committees in the sample (as defined in Section 3(A)). On average, each company had approximately three committees and the results suggest that in terms of corporate performance this is the optimal number. The results also suggest that companies with audit, remuneration, compliance, environment and occupational health and safety committees generally performed better than companies without these types of committees. However, the opposite is true for investment and finance committees. With respect to the issue of committee composition, corporate performance appears to be better in companies where there is at least one executive on the board committee. However, the opposite is true for audit and compliance committees. Generally, companies with smaller committees (three or fewer members) performed as well as or better than companies with large committees (four or more members). Finally, larger boards seem to have more committees but no link between the size of the boards and corporate performance was apparent.

2. Legal Requirements and Developments

Australian companies are not required to establish board committees, unlike companies in some other jurisdictions. However, corporate governance is a dynamic area of the law as evidenced by the recent initiatives discussed below. A proposal to introduce legislation which will make certain board committees mandatory is currently before the Parliamentary Joint Committee on Corporations and Securities (the PJCCS).

A. Australia

(i) Australian Stock Exchange (ASX) Listing Rules

Although there is no legal requirement that companies establish board committees, ASX Listing Rule 4.10, which was introduced on 1 July 1996, states that:

4.10 An entity must include the following information in its annual report. 4.10.2 Whether the entity had an audit committee as at the date of the directors’ (or trustee’s) report. If the entity did not, it must explain why. 4.10.3 A statement of the main corporate governance practices that the entity had in place during the reporting period. If a practice had been in place for only part of the period, the entity must state the period during which it had been in place.

All but two of the companies in the sample had established an audit committee. This is arguably in order to avoid the embarrassment of having to explain, as required by Listing Rule 4.10.2, why an audit committee has not been established.

Appendix 4A to the Listing Rules provides an indicative list of the corporate governance matters to which 4.10.3 refers. The ASX has also published a Guidance Note to assist listed entities in the preparation of the statement required by Listing Rule 4.10.3. The Guidance Note states that it is not intended that particular practices be adopted, or that companies report against a prescribed checklist. Indeed, the ASX recognises that due to the diversity of companies listed on the ASX a homogenous approach is not appropriate. Companies are encouraged to make their own assessment of the corporate governance practices that they have in place in consultation with corporate governance guides to best practice. With respect to the issue of board committees, the ASX acknowledges that ‘a company may establish board committees to examine various issues and make recommendations to the board’.[11]

The ASX Guidance Note acknowledges that board committees can serve a multitude of purposes. For example, ‘committees can serve to implement and support a function of a board in overseeing the management of a company’. Board committees are also able, due to their smaller size, to ‘consider matters more effectively than a full board’. In addition, board committees can assist in involving non-executive directors in relation to matters in which executive directors may face conflicts of interest, for example, the remuneration of senior executives, and the preparation and audit of financial statements. [12]

It has been reported that there has been a high level of compliance with Listing Rule 4.10.3, and that a large proportion of companies have committee structures in place to handle corporate governance issues. [13]

(ii) Company Law Review Act 1998 (CLRA)

On 1 July 1998, the Company Law Review Act 1998 (hereinafter CLRA) came into force. The CLRA does not mandate the establishment of board committees. However, section 300A of the CLRA requires that listed companies disclose in their annual reports the details of remuneration packages for the directors and each of the five highest paid officers of the company including details of the nature and amount of each aspect of the package, a discussion of the broad policy for determining the remuneration of board members and senior executives and how remuneration policy relates to company performance. It may be that this new provision will be a catalyst, encouraging companies that do not already have a remuneration committee to establish one, in order to deal with this new burden of disclosure.

There has been a growing demand for greater accountability in relation to executive remuneration. [14] Therefore, the passage of this ‘toughened up’ version of the Company Law Review Bill 1997 (CLRB) has been heralded by the media as ‘a triumph for the corporate governance industry’. [15] However, this triumph may be shortlived. The Treasurer has asked the PJCCS to examine the consequences of, and receive public comment upon, a number of the amendments introduced by the CLRA, including section 300A. The Treasurer states that ‘a significant stream of complaints’ has been received about some of the amendments. [16] In addition, there appears to be some concern that these amendments were imposed on the business and investor community without consultation, [17] although this has been disputed by the Opposition. [18] And rightly so. It is difficult to see why more consultation is required concerning a practice that has been operating in other countries, such as the US, for many years. Nonetheless, the future of section 300A is uncertain.

(iii) Corporate Governance Issues Before the PJCCS

In addition to section 300A of the CLRA, a number of other issues and initiatives have been referred to the PJCCS for comment. Two of the proposed initiatives are particularly relevant to board committees, namely the mandatory establishment of an audit committee and a corporate governance board committee in all listed companies.

These amendments were proposed by the Australian Democrats on 5 May 1998 to be included in the CLRA. During debate in the Senate, it was acknowledged that ‘[t]he government thinks that audit committees are a very useful and important part of the corporate governance structure of companies.’ [19] Senator Cook, Deputy Leader of the Opposition in the Senate, expressed strong sympathy with the purpose of the amendment. However, he suggested that the issue be referred to the PJCCS for further inquiry and discussion in order to consider how best to implement such an amendment. Senator Margetts expressed a desire for clarification in relation to:

how many people would be on the committee that is, a minimum number; how those people are to be elected; and, very importantly, [whether there will be a duty imposed upon] committee members to inform the auditor if they suspect fraud or improper conduct. 20

Therefore, these proposed amendments were referred to the PJCCS in accordance with Senator Cook’s recommendations.

Ultimately, although board committees are not mandatory in Australia, there is an element of compulsion in relation to establishing an audit committee, in that a company without an audit committee must, in accordance with Listing Rule 4.10.2, explain why an audit committee has not been established. In addition, a company without any other board committees or corporate governance practices to report pursuant to Listing Rule 4.10.3 would be openly embarrassed. [21] Also, companies may find it helpful to establish a remuneration committee in order to comply with the new disclosure obligations imposed by section 300A of the CLRA. It will be interesting to see whether the PJCCS recommends legislating to introduce mandatory audit and corporate governance committees.

B. Other Jurisdictions

Contrary to the approach adopted in Australia, other countries such as the United States, Canada and Singapore have made the establishment of audit committees mandatory. [22] However, the Listing Rules of the London Stock Exchange are similar to that of Australia. Section 4.3 of the Code of Best Practice (the Cadbury Code) states that the board should establish an audit committee. [23] Further, companies incorporated in the United Kingdom must include a statement in their annual report detailing whether they have complied throughout the accounting period with the Cadbury Code, and if it has not, the company must explain why. [24]

In most other countries, board committees are not mandatory. However, a recent survey of 65 major companies in Europe found that despite a lack of formal legal or stock exchange requirements there is a high rate (60 per cent) of voluntary adoption of audit committees. [25]

3. What are the Types of Board Committees?

A. Sample Description

Empirical testing was conducted using Australia’s Top 100 listed companies ranked by market capitalisation on the ASX at 31 December 1997. [26] Information about board committees used by these companies was collected from the 1997 annual reports of the companies.

However, the sample was reduced to 86 companies after the following were excluded:

Each company in the sample had, on average, 3.07 committees. Table 1 summarises the number of committees that various Top 100 companies have and shows that the median number of committees was 3.0:

Table 1

Average Number of Board Committees

Number of Committees
Number of sample companies
Percentage of sample companies
Average board size of sample companies with that number of committees

Table 2 demonstrates the popularity of various types of committees among Australia’s Top 100 companies:

Table 2

Popularity of Different Types of Board Committees

Type of committee
Number of companies with committees
Number of companies without committees
Percentage of companies with committee
Investment/ Finance
Occupational Health & Safety
Corporate governance

Note that in some cases a committee could fit into two or more of the above categories. For example, many companies combine the remuneration and nomination functions into a single committee. Similarly, environmental and occupational health and safety functions are often combined, as are audit and compliance functions. In these circumstances, if only two functions are combined, the committee has been credited in Table 2 with each type of committee which related to those functions. However, where a single committee had functions which could fit into three or more of the above categories, the committee was only included in Table 2 if the name of the committee was one of the types of committees in the table. Therefore, a committee called a ‘remuneration committee’ in the annual report which also dealt with nominations and corporate governance would only be included in the remuneration category in Table 2, as this would usually be the primary function of the committee. If the committee which dealt with these three matters was referred to in the annual report by some other name not found in Table 2, none of the activities would be included.

The Section below will provide an overview of the different types of board committees that were found in the sample.

B. Types of Board Committees

There were 35 types of board committees in the sample (assuming committees which have different names but perform the same functions are a single type of committee). Of the myriad of board committees that have been established, three are particularly relevant to corporate governance issues. They are the audit, remuneration and nomination committees. These three committees and a selection of some other popular committees are described below.

(i) Audit Committees

An audit committee facilitates improved financial reporting and controls, and assists in effective management and accountability. Audit committees also provide an ‘internal control framework’ which enables ‘directors to have reasonable assurance that their company is “in control.”’ [28] More specifically, an appropriately constituted audit committee can improve the quality, objectivity and credibility of financial reporting. It may facilitate the maintenance of independence for both the internal and external auditors, while enhancing communications between the board and the internal and external auditors. It can also assist directors to fulfil their legal responsibilities and strengthen the role of non-executive directors. [29]

The key to establishing an effective audit committee is its membership. The Best Practice Guide on Audit Committees recommends that the chairperson of the audit committee and the majority of committee members should be independent non-executive directors. [30]

Only two of the companies in the sample did not have an audit committee. [31] In most cases, audit committees were comprised predominantly of non-executives. Approximately 65 per cent of the companies in the sample had audit committees comprised exclusively of non-executives.

However, it should be recognised that audit committees are not a panacea for all of the problems and financial difficulties a company faces. [32] It is widely recognised that audit committees were designed to protect non-executive directors from being misled by management, not to protect shareholders or stakeholders. [33] Therefore, at best, the presence of an effective and properly constituted audit committee may encourage the maintenance of and adherence to good corporate governance practices, and the identification of and attendance to potential accounting, finance or audit related problems at an early stage.

(ii) Remuneration Committees

The charter of a remuneration committee varies widely. Committee members are often involved in many kinds of decisions, ranging from reviewing the nature and amount of remuneration (including bonuses, benefits, pensions and options), to recommendations, and to actual approval of remuneration packages for the CEO and the senior executives as well as the directors. [34] The remuneration committee may also consider executive recruitment, promotion and dismissal as well as management development and personnel matters generally. [35]

Although companies are not required to have remuneration committees, external pressures may induce boards to establish remuneration committees comprised of independent non-executive directors. In particular, media scrutiny and the resulting community outrage at what are perceived to be excessive and irresponsible remuneration levels, have focused attention on this issue. [36] Similarly, the new burden of disclosure introduced by section 300A of the CLRA may encourage companies to establish a remuneration committee. About three-quarters of companies in the sample had a remuneration committee, and approximately two-thirds of companies which had a remuneration committee had only non-executive directors on that committee. However, remuneration committees are by no means a complete answer to perceived problems in this area. Non-executive directors may be less impartial than it appears, whether out of loyalty to colleagues or for some other reason. [37] In addition, it has been suggested that remuneration committees may not be economically feasible for smaller public companies. [38]

(iii) Nomination Committees

The nomination committee is a relative newcomer to the trio of key oversight board committees. [39] The main functions of the nomination committee are to weaken the traditional stronghold of senior executives, namely the CEO, when it comes to selecting board members, and to improve and formalise the process by which board membership needs are assessed and candidates are located and screened. [40] In addition to locating and assessing potential candidates, the nomination committee also considers how best to achieve a balance between the board’s executive and non-executive members as well as related issues such as tenure.[41]

Those that place importance upon the role of the independent non-executive director believe the task of the nomination committee is particularly critical because director selection may have major effects upon the potential of the board to exercise independent judgment.

Slightly less than half of the companies in the sample had a nomination committee, and only about 45 per cent of companies which had a nomination committee had only non-executives on that committee. However, this is a vast improvement on the position just a few years ago. In 1994 Korn/Ferry found that only 3 per cent of its survey respondents had established a nomination committee. [43]

(iv) Environment Committees

As environmental issues increasingly become a topic of concern, companies face a greater burden, both socially and legally, in taking adequate precautions against pollution and the other negative environmental consequences of doing business. [44] In order to minimise potential environmental problems some companies monitor and measure their ‘impact’ on the environment and the community. [45]

Environment committees play an important role in establishing company policy in relation to environmental issues, exercising environmental due diligence and ensuring that adequate and proper procedures are in place to support environmental policies. Environment committees often monitor and report to the board in relation to the observance of various environmental systems, initiatives and regulations.

Only 15 per cent of companies in the sample had an environment committee, and less than one-quarter of companies which had an environment committee had only non-executives on that committee. However, it appears that particular types of companies are more likely to have environment committees. Of the 13 companies in the sample with environment committees, four were in the ASX industry code ‘Energy’. Three other companies were involved in mining or metals, and the remainder were a mix of industrial companies.

(v) Compliance Committees

Compliance committees are often combined with the audit committee, and where a separate risk management committee does not exist, the compliance committee often performs this role. [46] Only one-third of the 15 compliance committees in the sample were separate from the audit committee in both name and composition. However, unlike audit committees, separate compliance committees usually had at least one executive on the committee.

The complex legal web of Acts and Regulations that govern companies in the current corporate climate means that boards need assistance to ensure that they are complying with their obligations pursuant to Acts such as the Corporations Law, the Industrial Relations Act, the Environment Protection Act, the Equal Opportunity Act, the Workplace Relations Act, the Trade Practices Act and other relevant legislation covering issues such as sex and disability discrimination, superannuation, affirmative action, occupational health and safety and tax. [47]

Although some legal issues may be dealt with by specific committees, for example, the audit committee may ensure that the Corporations Law financial reporting requirements are being complied with and the environment/occupational health and safety committee may deal with legal issues in these areas, companies in particular industries have specific needs. For example, in addition to the laws already mentioned, companies in the banking sector must comply with privacy and consumer credit legislation as well as a myriad of banking acts, whereas companies involved in the newspaper industry are more likely to require advice pertaining to defamation, contempt and legal issues arising in connection with the advertising services they provide.

A compliance committee is better placed than the board as a whole to liaise with in-house corporate counsel as well as external legal advisers to ensure that the company is complying with its legal obligations.

(vi) Occupational Health and Safety Committees

Occupational health and safety committees tend to be responsible for establishing company policy on health and safety issues and monitoring the company’s health and safety initiatives. Occupational health and safety committees review potential liabilities, changes in legislation and community expectations. They may also consider the implications of research findings and technological changes. Only eight companies in the sample (that is, less than 10 per cent) had an occupational health and safety committee.

(vii) Other Committees

There were a number of other committees found in the sample. For example, there were 11 companies in the sample with investment and finance committees. The tasks of the investment and finance committee generally include reviewing major investment decisions, considering funding submissions and monitoring the company’s investments. In many cases the investment and finance committee also deals with managing financial risks and hedging policies.

There were also three companies in the sample with strategy committees. Strategy committees generally focus on the development and implementation of corporate objectives and strategies, such as potential major acquisitions or disposal of assets, the strategic alternatives available to the company and the forecast consequences of those alternatives for the company and its shareholders. Strategy issues are sometimes dealt with by the executive committee.

There was a surprising absence of executive committees in the sample. The role of executive committees vary greatly. However, a primary responsibility is to deal with urgent issues that arise between board meetings. Executive committees are sometimes used as a sounding board in relation to general management issues. Only four companies in the sample had executive committees, although one of those companies, Publishing & Broadcasting Limited, actually had two executive committees. It is interesting to note, by way of comparison, that in the US approximately 75 per cent of companies have executive committees. [48]

None of the companies in the sample had a separate ethical standards committee although many companies stated that they had a code of ethical standards. In addition, some companies provided a list of the various industry codes of conduct to which they adhere. [49] Five companies in the sample had separate risk management committees, although the issues covered by ethical standards and risk management committees are often part of the mandate of the audit or compliance committees. It has been observed that ‘illegal, or questionable, practices have caused great loss to many organisations’. [50] Establishing an ethical standards committee helps to minimise such loss by reinforcing ‘internal control procedures by influencing employee behaviour and facilitating disciplinary measures’. [51]

Some companies in the sample had donations committees to deal with donations policy and consider requests for corporate contributions, sponsorships and political donations. [52] These types of special functions committees are useful in order to deal with questions of lesser importance which do not warrant the time and attention of the full board.

An emerging committee that is gaining popularity is the corporate governance committee. [53] There were seven companies in the sample with such a committee. Corporate governance committees generally deal with reviewing corporate governance principles, monitoring compliance and acting as a resource for individual directors and the company as a whole on questions of corporate governance and ethics.

Some companies also appear to have introduced particular committees in response to media criticism about those companies in certain areas. For example, Coles Myer, which was the subject of considerable adverse publicity about its corporate governance practices following the so called ‘Yannon transaction’, is one of only seven companies in the sample with a corporate governance committee. Similarly, News Corporation, which, following a proposed issue of super voting shares in 1994 received attention about the issue of securities to keep the Murdoch family at the helm of the company, is one of only a handful of companies which have a committee dealing with share options or issuing shares. [54]

Other committees appear to be formed as the need arises and then disbanded when no longer required. Examples of such committees include due diligence committees for prospectus-type issues, share allotment committees following a float or capital raising, and succession committees where a key executive is to retire.

4. Composition of Board Committees

There are a number of commissioned reports and publications that have generated guidelines and codes of best practice in relation to the composition of committees. The following is a summary of comments and recommendations that six of the key UK and Australian reports and publications offer on the issue of the composition of board committees. A consistent theme of these reports and publications is the central importance of the independent non-executive director. Although the definition of what constitutes an independent non-executive director differs depending upon which report or publication is consulted, an independent nonexecutive director is generally considered to be a director who has not been employed by the company or an affiliate company in an executive capacity during the previous three years; is not a paid adviser or consultant to the company or its affiliates; is not employed by a major customer or supplier; does not have a personal service contract with the company or any other relationship with the company’s executives. [55]

The empirical study in Section 5 of this article distinguishes between executive and non-executive directors; however, distinguishing between independent non-executive directors and non-independent non-executive directors was beyond the scope of this article. Therefore, while the distinction is made between independent non-executive directors and non-independent non-executive directors in the discussion of the reports and publications below, no distinction has been drawn between these two categories for the purposes of the empirical study or the ensuing discussion in Section 5.

A. Report Recommendations – UK

(i) The Cadbury Report

The Cadbury Committee was restricted by its remit, which was to deal with the issue of financial reporting. The Cadbury Report recommended that companies should have an audit committee and a remuneration committee. [56]

The Cadbury Report advocates that the audit committee be comprised of a minimum of three non-executive directors, a majority of whom should be independent, and the remuneration committee should consist wholly or mainly of non-executive directors. [57]

Although the Cadbury Report states that nomination committees should have a majority of non-executive directors, the Report does not make a formal recommendation that companies establish a nomination committee. [58]

(ii) The Greenbury Report

The Greenbury Committee, like the Cadbury Committee, was restricted by its remit to issues of boardroom pay and was unable to deal fully with the wider issues of corporate governance. [59] In relation to board committees, the Greenbury Committee only considered the remuneration committee. It recommended that all listed companies establish a remuneration committee and that those companies that do not ought to explain why not in their next annual report. [60] The Greenbury Committee advocates that the remuneration committee be comprised exclusively of non-executive directors. [61] However, the Greenbury Committee states that the members of the remuneration committee need not be independent, so that they have no association with the company other than through the remuneration committee. The Greenbury Committee justifies this approach by stating that in order to determine the remuneration of directors, the members of the remuneration committee must have a good knowledge of the company and its directors. Independent non-executive directors are not necessarily well placed to make an accurate assessment of the directors’ contributions. [62]

(iii) The Hampel Report

The Hampel Report was released in January 1998. The Hampel Committee was formed in 1995 following the recommendations of the Cadbury and Greenbury committees that a new committee should review the implementation of their findings. [63]

However, the Hampel Committee has been criticised as being ‘substantially deficient as an examination of the real issues in the corporate governance field’. [64] This is because, despite the fact that the remit of the Hampel Committee was unfettered, it failed to take a pro-active approach to corporate governance and restricted its remit to those issues addressed by the Cadbury and Greenbury committees. [65]

The Hampel Report endorses the Cadbury Report recommendation that ‘the board should establish an audit committee of at least three non-executive directors with written terms of reference which deal clearly with its authority and duties’. [66]

In relation to the issue of remuneration committees, the Hampel Report states that remuneration committees should be adopted in accordance with best practice. On the issue of the membership of the remuneration committee, the Hampel Report goes further than both the Cadbury and Greenbury Reports by advocating that members be ‘wholly independent non-executive directors’. However, it is recognised that there will need to be attendance in some circumstances by executive directors for appropriate items. [67]

The Hampel Report states that it supports the Cadbury Report’s endorsement of the nomination committee. However, it does not deal with the issue of membership to the nomination committee.

B. Report Recommendations – Australia

(i) Corporate Practices and Conduct

The Working Group on Corporate Practices and Conduct is chaired by Henry Bosch, AO. On the topic of board committees, the Working Group considers that it is ‘particularly important that boards exercise, and are seen to exercise, independent judgement, such as in the areas of company accounts, remuneration practices and the selection of board members’. [68] The Working Group shares the insistence of the Cadbury Committee that audit committees have a majority of independent nonexecutive members; however, the Working Group merely suggests that boards consider the appointment of remuneration and nomination committees. [69]

With respect to the issue of membership of board committees other than the audit committee, the importance of independent non-executive directors is emphasised. [70] The Working Group states that it is ‘very desirable’ that the membership ‘be seen to be predominantly independent’. [71]

(ii) The Hilmer Report

The aim of the Hilmer Committee was to remodel the corporate governance debate which some believed had become preoccupied with the compliance based functions of boards. [72]

In relation to the audit committee the Hilmer Committee suggests that it be comprised of non-executives of which the chair and a majority of members should be independent. [73] However, the Hilmer Committee does not offer any guidelines in relation to the composition of the remuneration or nomination committees.

(iii) Australian Investment Managers’ Association (AIMA) Guidelines 74

AIMA is a representative association for the major investment management organisations in Australia. The AIMA Guidelines state that ‘[c]ommittees of the board of directors should ... generally be constituted with a majority who are independent directors’. [75] AIMA recommends that each company should have an audit committee, a remuneration committee and a nomination committee. [76] The AIMA Guidelines state that the audit committee should be chaired by an independent director and be composed entirely of non-executive directors, of whom a majority ought to be independent. [77] In relation to remuneration and nomination committees, it is suggested that the chairperson be an independent director and that at least a majority of the committee be comprised of independent directors. [78]

These Guidelines accord with the view of many institutional investors who advocate that companies ought to have at least an audit committee and remuneration committee which should be ‘primarily composed of suitably experienced independent directors’. [79]

C. Rationale for Non-Executive Committee Members

The findings of this study suggest that over 90 per cent of Australia’s large listed companies have a majority of non-executive directors on their boards. [80] It has been suggested that this is largely a result of the fact that ‘[i]n recent years the pendulum of corporate influence has swung away from management towards nonexecutive directors’. [81] Although executive directors generally have a more thorough knowledge of their company’s business, its problems and its aspirations, the reports and publications canvassed in the previous Section recognise that non-executive directors, and particularly independent non-executive directors, also have much to contribute. It is important to note that non-executive directors:

are not bound to give continuous attention to the affairs of the corporation. Their duties are of an intermittent nature to be performed at periodic board meetings, and at meetings of any committee of the board upon which the director happens to be placed. 82

This means that non-executive directors are ideally placed to contribute to the governance of large companies through participation on board committees.

(i) Objectivity and Independence

The key difference between the role of an executive director and a non-executive director is that non-executive directors are endowed with an independence and an ability to assess the company objectively, as a critical observer. [83] An objective and independent non-executive director is better able to provide new perspectives thus helping the board to think through its underlying strategies and to examine the options. [84] It is now almost universally accepted that ‘an effective governance structure requires input from objective and independent outsiders who bring a broader view to the assessment of where the company is going and how it is performing’. [85]

(ii) More Able to Act in the Best Interests of the Company

In addition to facilitating new perspectives, the ‘objective’ quality of non-executive directors manifests itself in other ways. For example, all directors have a responsibility to act in the best interests of the company. Therefore, all directors, whether they be executive or non-executive, must assess the strategies and activities of their company objectively, considering at all times the interests of the company as a whole. However, as a practical matter, executive directors, since they spend virtually all their available time and energy working on the company’s business, find it much more difficult to view their company in a dispassionate manner. Furthermore, this is not encouraged by the company, which wants its executives to be absolutely committed to its success.

Therefore, it is unrealistic to expect that executive directors will ‘exhibit the detachment and wider experience that can be brought to bear by a non-executive director’. [86] Although from a legal viewpoint directors cannot put themselves into a position where there is a potential conflict of interest, this is often difficult to avoid for executive directors and for non-executive directors who lack independence.

(iii) The ‘Conscience’ of the Company

Another benefit of having non-executive directors, particularly those who are independent of management, on board committees is that they can afford to ask questions which others might be too embarrassed or too involved to ask. Although non-executive directors may face social and financial pressures which cause them to be uncritical of management, non-executive directors are generally more likely to ask for explanations and information without fear of ‘loss of face, loss of position, loss of money, loss of status or damage to the working relationships which are a necessary part of a cohesive management team’. [87] In this way, nonexecutive directors function as the ‘conscience’ of the company and monitor the company’s performance from outside the sphere of management.

While the reasoning behind the inclusion of non-executive directors appears compelling, there are some who argue that it would be preferable to have greater executive influence and follow the US model of ‘powerful management, advisory board’ rather than ‘powerful board, weak management’. Some commentators are of the view that boards have been stacked with non-executive directors as a result of the ‘excesses of the eighties’ when management acquired too much power and misused it. [88] This view is supported by the fact that greater participation by nonexecutive directors has been encouraged by powerful stakeholders, such as institutional investors, who have emerged as the guardians of corporate governance in the 90s. [89] However, it has been suggested that: ‘maybe the pendulum has swung too far towards checks and balances and too far away from entrepreneurial drive and expertise. Maybe the only thing worse than a chief executive out of control is a chief executive under the thumb’. [90]

5. Board Committees and Corporate Performance

The previous Section reviewed the rationale for including non-executive directors on board committees. This section considers theories that link the participation of non-executive directors on board committees to both positive and negative corporate performance.

A. Theories Linking Board Committees to Positive Corporate Performance

(i) Effective Use of Resources

The main board has limited time available. Therefore, it does not have the capacity or a structure that lends itself to considering important issues in depth. In this way, committees act as ‘a filter for the board, researching and discussing issues thoroughly before presenting recommendations to the main board’. [91] Moreover, ‘several committees working simultaneously can digest and form solutions for several times as many problems as can the board working as a whole’.[92]

In addition, because specific roles are assigned to various committees it is likely that continuing attention will be paid to recurring problems. This is preferable to responding to crises intermittently. [93]

It should be recognised that in certain circumstances board committees, particularly if they are not properly constituted or organised, can lead to ‘duplication and waste of effort without making a commensurate contribution.’ [94] However, the complexity of issues which arise in large companies present a substantial challenge to non-executive directors, particularly given the limited amount of time they have available to them. Therefore, a well-conceived board committee equips non-executive directors with both the procedure and the power to take personal initiative and probe more deeply into areas of concern than is possible in the arena of the main board.

It has been stated that ‘[t]he committee system is the cornerstone of the board process. In this manner, the functional expertise of each individual director is able to be utilised to its fullest.’ [95] Thus, board committees enable companies to take full advantage of the skills and experience of their directors.

(ii) Improve the Flow of Information

As well as ensuring that the issues which confront the board are afforded the time, attention and skilled personnel they deserve, committees also help to strengthen the channels of communication between non-executive directors and management, which in turn discourages an ‘us and them’ mentality. [96]

Further, non-executive directors who may be inhibited by the group dynamics of the main board may find it easier to participate in a smaller, more informal and interactive group, such as a board committee, where it is often easier to ask questions. [97]

(iii) The Role of Monitor

Committees of non-executive directors provide an ideal vehicle to monitor the company objectively and independently in areas where conflicts of interest can arise. Audit committees are a case in point.

It has also been suggested that the role of non-executives as monitors is enhanced if their names are published in the annual report as this increases the likelihood that the directors will deal with the issues referred to them objectively, thoroughly and independently. [98]

(iv) Legal Implications

The amount of information that companies are required to digest, analyse, report and disclose is far greater than ever before. The establishment of committees can help companies to fulfil their legal obligations and sends a clear message to shareholders, stakeholders, regulators and the community at large that ‘the company takes its legal obligations seriously and ... is doing everything possible to ensure that all interests are considered and, where possible, protected.’ [99]

Therefore, it can be seen that utilising the services of non-executive directors has the potential to positively impact upon a company’s performance.

B. Theories Linking Board Committees to Negative Corporate Performance

(i) Usurping the Board’s Power

Some commentators argue that a proliferation of board committees weakens the power of the board. It has been suggested that boards are in some cases establishing committees which have no useful purpose:

Traditionally, we speak of boards and committees in the same breath. Boards are supposed to have committees, aren’t they? Boards have told me they determined their size on the basis of how many members were needed for committees! And these were governing boards with nothing to do but govern; they did not need or use committees to make up for lack of staff. Committees can serve a useful function, but the propitious path is to start with no committees and add them only when clearly needed. 100

There are also those that argue that the delegation of responsibility in relation to some issues, such as strategic planning, is ‘dangerous and can supplant board deliberations’. [101] It should be recognised that there are some issues in which all directors must be briefed and involved.

Another way in which the board’s power may be usurped is through over-reliance on the executive committee. ‘An executive committee tends to become the real board within the board [since] executive committees authorized to act must take power either from the board or from the CEO.’ [102] In addition, sometimes creating subgroups like committees can lead to divisions or factions resulting in conflict. The chairman, as leader of the board, has an important role to play in minimising such problems, although rotating members on committees and having overlapping membership can also assist in alleviating such problems. [103]

(ii) Abdicating Responsibility

When board committees are assigned tasks that make them essentially oversee, become involved in, or advise on management functions, it becomes less clear who is in charge of these activities. 104 In this way, board committees may encourage directors to be inactive and rely on the information and recommendations put forward. As a director of BHP pointed out recently, ‘[o]ne of the problems [with] committees is people say, ‘Well the compliance committee is looking at it. I don’t have to worry about it’ .... I think the whole board should get involved....’ [105]

It is imperative that directors do not forget that although they can delegate their authority and powers they cannot delegate their responsibility. [106] For example, the recent amendments to the Corporations Law have introduced a new provision which expressly provides that ‘[t]he directors may delegate any of their powers to a committee of directors’. [107] However, committees must exercise the powers delegated to them in accordance with any directions of the directors and the effect of a committee exercising its powers is the same as if the directors exercised that power. [108] Therefore, these recent amendments make it clear that all directors are legally responsible and liable for all actions taken by committees or management on the board’s behalf. Therefore, all directors must read the papers and proposals from committees diligently, not just to protect themselves, but also to take advantage of the hard work of the committee. [109]

There are additional proposed legislative amendments and it will be interesting to see whether these changes are implemented. The first proposed change concerns reliance by directors on information and advice provided by others. Proposed section 189 provides, inter alia, that a director’s reliance on information, or professional or expert advice, given or prepared by a committee of directors on which the director did not serve, is taken to be reasonable (unless the contrary is proved), provided that the information or advice given or prepared was within the committee’s authority, and the director’s reliance was in good faith and proper inquiries were made (if the circumstances indicated the need for inquiry).

The second proposed change provides specific legislative authority as to the circumstances in which the board may validly delegate their powers or duties to others. Proposed section 190 provides that if a director validly delegates a power then the director is responsible for the exercise of that power by the delegate as if it had been exercised by the director, even if the delegate acts fraudulently or outside the scope of the delegation, unless the director believed, on reasonable grounds, that the delegate would exercise the power in conformity with the duties imposed on the director by the Corporations Law and the company’s Constitution, and the director monitored, by reasonable and proper methods, the exercise of the power by the delegate.

C. Empirical Testing – Methodology

Empirical testing was conducted to determine, among other things, whether companies with particular types of board committees performed better than companies without those particular committees.

The sample described in Section 3(A) was used for this purpose. However, the sample was reduced to 83 companies because three companies in the sample had been listed on the ASX after 1 January 1997, and therefore the one year shareholder returns for those companies at 31 December 1997 (described below) could not be calculated.

The performance measure used was the one year adjusted shareholder return for each company. Initially, percentage shareholder returns for each company were found by converting the value at 31 December 1997 of a $1,000 investment in the company one year earlier. The value of this investment was obtained from the ASX Journal and it incorporates all capital gains and dividend payments over the 12 month period. It is adjusted for capital changes and assumes that dividends are reinvested. The adjustment factor used was the change in the relevant ASX accumulation index for each company’s industry between 31 December 1996 and 31 December 1997. This was done in an attempt to eliminate any industry factors that may have biased the results by favouring companies in industries which had performed well over 1997. It also indirectly adjusted returns to take into account general increases in the ASX accumulation index.

More precisely, the formula used to calculate the adjusted percentage shareholder return for each company in the sample was:

Value $1,000/10 x 1996 ASX code accumulation index ] – 100/1997 ASX code accumulation index

During 1997, Healthcare and Biotechnology was introduced as a new ASX industry code and Miscellaneous Industrials was reclassified to include Miscellaneous Services, which itself was previously an ASX industry code. For companies in these industries, changes in the ASX overall accumulation index were used instead of changes in the industry accumulation index.

The use of shareholder returns as a performance measure, rather than other measures such as growth in earnings per share, is justified by AIMA and the Australian Institute of Company Directors (AICD). These organisations recently said in the context of executive share option schemes:

The principle of executives sharing the benefits of the Company’s success with the shareholders is supported. Consequently, linking such schemes to the total return received by shareholders (ie, shares price growth plus dividends) is preferred. 110

D. Types of Committees and Corporate Performance

Once adjusted performance measures were calculated, empirical testing was conducted to determine whether the existence of certain types of board committees leads to better corporate performance. The study also sought to determine whether particular types of board committees impact on corporate performance to a greater extent than others.

Table 3 shows the average adjusted shareholder returns for companies with, and companies without, particular types of board committees. Although the small sample sizes in some cases make it difficult to draw firm conclusions, Table 3 indicates that in some cases companies with particular types of board committees generally performed better than companies which did not have those types of board committees. More specifically it appears that companies with audit, remuneration, compliance, environment and occupational health and safety committees generally performed better than companies without these types of committees. However, the opposite is true for investment and finance committees.

Table 3

Types of Committees and Corporate Performance

Type of committee
Number of companies with committee
Number of companies without committee
Average performance with committee
Average performance without committee
Investment/ Finance
Occupational Health & Safety
Corporate Governance


E. Number of Committees and Corporate Performance

Empirical testing was then conducted to determine whether the number of board committees, as stated in the companies’ annual reports, had any impact on corporate performance. As mentioned in Section 3.A, the average number of board committees for companies in the sample was 3.07 committees and the median number of board committees was 3.0. Table 4 below shows the average adjusted shareholder returns for companies with particular numbers of board committees as stated in the companies’ annual reports, regardless of the type of committee.

Table 4

Number of Committees and Corporate Performance

Number of committees
Average adjusted shareholder returns (%)
Median adjusted shareholder returns (%)
– 4.48
– 4.48
– 2.95

Table 4 suggests that the optimal number of board committees is three, although it is difficult to draw any other important conclusions. Generally, it seems that too few or too many board committees can be detrimental to the company’s performance. Ordinary least squares (OLS) regression analysis was also used to determine if there was any link between the number of board committees and corporate performance. [111] The results of this analysis suggested that there was no statistically significant relationship between the number of board committees and adjusted shareholder returns. [112]

F. Board Committee Composition and Corporate Performance

All of the reports and publications canvassed in Section 4 attest to the desirability of non-executive directors on committees, particularly those that are independent of management. In addition, many of the theoretical perspectives examined support this view, extolling the virtues of objectivity and independence which it is claimed many non-executives possess. Although most of the studies on the importance and effectiveness of non-executive directors have focused on the composition of the board as a whole, these principles can also be applied to the composition of board committees.

One recent US study has directly considered whether board committee composition affects company performance. It hypothesised that committees which perform essentially monitoring functions are best served by a higher proportion of non-executive directors who are independent of management, whereas committees that perform non-monitoring functions, such as evaluating and ratifying long term investment decisions, are best served by a mixture of executive and independent non-executive directors. [113] The study found no significant relation between the mere existence of board committees and corporate performance. [114] Further, no association was found between the percentage of independent non-executive directors on audit and remuneration committees and corporate performance. However, it showed a positive relation between the percentage of executives on investment and finance committees and corporate performance.[115]

To test these theories, the performances of all companies in the sample with particular types of committees were compared after being separated into two categories:

Table 5

Board Committee Composition and Corporate Performance

Type of committee
Number of companies where all non-executives on committee
Number of companies where at least one executive on committee

Average adjusted shareholder returns (%)
Average adjusted shareholder returns (%)
Investment/ Finance
Occupational Health & Safety
Corporate Governance



Table 5 shows that contrary to the theories, reports and publications which champion the inclusion of non-executive directors on committees, particularly those who are independent, corporate performance is generally better in companies that have at least one executive on each board committee. Therefore, calls for wider participation by non-executive directors may be somewhat premature, or as previously suggested, an overreaction to the ‘excesses of the eighties’. [116]

However, companies which had at least one executive on the audit and compliance committees did not perform as well as those where all committee members were non-executives. [117] This may be because, as suggested by April Klein, committees which perform essentially monitoring functions are best served by a higher proportion of non-executive directors who are independent of management, whereas committees that perform non-monitoring functions, such as evaluating and ratifying long term investment decisions, are best served by a mixture of executive and independent non-executive directors. [118]

G. Percentage of Non-executive Directors and Corporate Performance

Despite all the positive benefits non-executive directors are said to bring to a company, the previous research on board composition has overwhelmingly failed to support the widespread belief that a majority of independent non-executive directors will lead to better corporate performance. [119] In fact some studies have shown the contrary, with executive oriented boards showing superior performance. [120] In 1996, Stapledon and Lawrence commented that three of the four latest direct US studies suggest that the proportion of independent nonexecutive directors is unrelated to corporate performance, while the fourth indicated that it is negatively related to corporate performance:

Overall, the US studies indicate that corporate Australia should be wary of exhortations about the efficacy and desirability of adding independent directors to company boards on corporate performance grounds. 121 Table 6 below looks at whether, for the sample of 83 companies, corporate performance is affected by the proportion of non-executives on the board increasing.

Table 6

Percentage of Non-executive Directors and Corporate Performance

Percentage of non-executive directors on the board
Number of companies
Average adjusted shareholder returns (%)
Median adjusted shareholder returns (%)
0 – 49.9
50 – 69.9
70 – 79.9
80 – 89.9
90 – 100

The results suggest that companies with boards that have less than 70 per cent of non-executive directors performed the best, that is, where 30 per cent or more of directors are executive. This was closely followed by boards where over 90 per cent of directors on the board are non-executives. However, regression analysis suggested that there was no statistically significant relationship between the percentage of non-executive directors on the board and adjusted shareholder returns. [122] Despite these findings, the role of independent non-executive directors remains important for reasons other than corporate performance. For instance, there is a role for independent non-executive directors in situations where a potential for conflict exists between shareholders and senior management.[123]

H. Board Committee Size and Composition and Corporate Performance

Empirical testing was conducted to see if larger board committees led to better corporate performance. Arguably larger board committees are better resourced (which also means they are more costly) and may provide ‘better’ advice to the board than smaller committees. Again, the performance of all companies with particular types of committees are compared after being separated into two categories:

Table 7

Board Committee Size and Composition and Corporate Performance Board

Type of committee
Companies where three or fewer committee members
Number of companies where at least one executive on committee

Average adjusted shareholder returns (%)
Average adjusted shareholder returns (%)
Investment/ Finance
Occupational Health & Safety
Corporate Governance

The small sample sizes make it difficult to reach any meaningful conclusions, except for audit, remuneration and nomination committees. In relation to audit and remuneration committees, those companies which had fewer members on the committees generally performed better. However, nomination committees performed better when comprised of four or more members. This could be due to the fact that the nomination committee relies on its members to have access to a large pool of potential board candidates. Theoretically, the larger the committee, the more potential candidates it will have access to, giving the company a better chance of locating the best candidates who will be capable of ensuring that the company performs well.

I. Board Size and Corporate Performance

If the board is small, there may be less need for committees because the board itself may be more active in areas which would otherwise usually be left to committees. For example, Crown Limited has only an audit committee which typically comprises all board members. The board as a whole is responsible for determining nominations, and remuneration is dealt with by a senior management committee. The Crown Limited Annual Report states that ‘[w]ith a small and active Board, the creation of numerous Committees is considered unnecessary.’ [124] Table 8 below shows that companies which have more board members are more likely to have a greater number of board committees than companies with relatively few board members.

Table 8

Board Size and Corporate Performance

Board Size
Number of Companies
Average number of committees
Average adjusted shareholder returns (%)
Median adjusted shareholder returns (%)

Of course, board committees are not the only corporate governance mechanisms which may affect corporate performance. For example, the size and composition of the board itself may also affect performance. In 1993, Hilmer reported that a typical board of a large public company in Australia has ten directors, of whom eight were non-executive and two were executive. [125] For the 86 companies in the sample, the average number of directors was 9.15, with 2.28 executives and 6.87 non-executives. Table 8 above also illustrates the effect of the size of the board as a whole upon corporate performance. (Of course, board size may primarily reflect the size of the company, as larger companies are more likely to have more board members). The results are consistent with previous studies and suggest that there is no link between the size of the board and corporate performance for Australia’s Top 100 companies. This was confirmed by OLS regression analysis, which showed that there was no statistically significant relationship between the number of board members and adjusted shareholder returns. [126]

6. Conclusion

A. Are Committees Necessary?

Board committees, especially the key trio of audit, remuneration and nomination committees, are important outward and visible signs of good corporate governance. However, the mere establishment of a committee is no guarantee that it will make a contribution to improving corporate performance, especially as the board may or may not decide to implement the committee’s recommendations. Membership, terms of reference, mode of operation and reporting systems will determine the ultimate effectiveness of a committee. [127]

So which committees, if any, should a company adopt? It has been asserted that ‘[t]here are no “right” committees to have, no list of correct subdivisions for getting a job done. None of the common committees are indispensable.’ [128] However, the results of this study provide some support for those who suggest that audit, remuneration and nomination committees should be mandatory, at least to the extent that companies with these types of committees performed better than companies which did not have these committees. The study indicates that many boards appear to be delegating additional matters to committees. More than 66 per cent of the companies in the sample had between three and six committees. This is possibly as a result of the increasing demands made of directors and the success of some committees that have been established.

This trend in committee formation seems to be influenced by the size and composition of the board as well as the circumstances of the organisation as a whole. For example, it can be seen from the sample that larger companies tend to have more committees and some committees are industry-specific, and even ‘company-specific’ if a particular company has been under media scrutiny in relation to certain issues. The results of this study also suggest that the optimal number of committees is three; however, too few or too many committees can be detrimental to corporate performance. Further, companies with small committees, that is three or fewer members, often perform as well, and in many cases better than, companies with large committees, that is, four or more members. With respect to committee composition, it seems that it is often beneficial to have executive directors on committees, except in the case of audit and compliance committees.

[*] BA, LLB (Hons), University of Melbourne; Solicitor, Arthur Robinson & Hedderwicks, Melbourne. An earlier draft of this article was submitted as part of the coursework for a Master of Laws degree in the Faculty of Law at the University of Melbourne. I am grateful to Professor John Farrar for his helpful comments on earlier drafts of this article.
[1] Section 226A is a replaceable rule which is similar to the recently repealed Article 66(1) of Table A in Schedule 1 of the Corporations Law.
[2] Corporations Law 1991 (Cth) s226A
[3] Axworthy CS, ‘Corporate Directors – Who Needs Them?’ (1988) 51(3) Mod LR 273 at 273.
[4] Branson DM, Corporate Governance (1993) at 229.
[5] AWA Ltd v Daniels trading as Deloitte Haskins & Sells (1992) 7 ACSR 759 at 832.
[6] Branson, above n4 at 229–230.
[7] Francis I, Future Direction – The Power of the Competitive Board (1997) at 175.
[8] Korn/Ferry International, Boards of Directors in Australasia 1997 (1997) at 16.
[9] For a summary of these studies see Stapledon GP and Lawrence J, ‘Board Composition Structure and Independence in Australia’s Largest Listed Companies’ (1997) 21 MULR at 150.
[10] Refer to Table 2 on page 12.
[11] Australian Stock Exchange, Guidance Note – Disclosure of Corporate Governance Practices 1998. (Emphasis added).
[12] Ibid.
[13] Corporate Law Economic Reform Program, Directors’ Duties and Corporate Governance: Facilitating Innovation and Protecting Investors: Proposals for Reform, Paper No 3 (Canberra: AGPS, 1997) at 63. See also ASX, Good Response to ASX Corporate Governance Disclosure Rule, Media Release, (5 March 1997) at 1, where it was reported that in the 1996– 97 financial year, almost 96 per cent of the Top 150 ASX listed companies had an audit committee.
[14] Bosch H, The Director at Risk: Accountability in the Boardroom (1995) at 169.
[15] See Main A, ‘Tougher Bill is a Triumph’, The Australian Financial Review (Melbourne) (26 June 1998) at 22; Van Leeuwen H, ‘Corporate Crackdown: Executives Forced to Reveal their Salaries’ AFR (Melbourne) (26 June 1998) at 1 and 22; Maiden M, ‘Show and Tell Time for Top Pay Deals’ The Age (Melbourne) (26 June 1998) at B2; Hudson P, ‘Company Law Shake-up’ The Age (Melbourne) (26 June 1998) at B1; and Chenoweth N, ‘Show and Tell Executive Salaries Exposed’, AFR (Melbourne) (4–5 July 1998) at 1.
[16] Senator Ian Campbell, Corporations Law Amendments Unacceptable, No 6 (15 July 1998) at 1. However, it is unlikely that the PJCSS will report back before October due to a reorganisation of Senate sitting dates: Main A, ‘Battle for the Boardroom’ The Australian Financial Review (Sydney) 31 July 1998 at 33.
[17] Davis I, ‘Bid to Get the Law Back in Step with Business’ The Australian Financial Review (Melbourne) 15 July 1998 at 4; Henderson I, ‘Howard Backtracks on Corporate Law’ The Australian (Melbourne) 16 July 1998 at 21; Hudson P, and Shield H, ‘Rethink on Pay-packet Law’ The Age (Melbourne) 16 July 1998 at B1 and Main, above n16 at 33.
[18] Thomson MP K, Government Wrong on Disclosure of Directors’ Remuneration – Referral to Committee is a Waste of Taxpayers Funds, Media Release, (15 July 1998) at 1.
[19] Commonwealth of Australia, Senator Ian Campbell, Senate, Parliamentary Debates (Hansard), 25 June 1998 at 4064.
[20] Commonwealth of Australia, Senate, Parliamentary Debates (Hansard), 25 June 1998 at 4064 (Senator Margetts – Greens).
[21] See Barnard JW, ‘The Hampel Committee Report: A Transatlantic Critique’ (1998) 19(4) The Company Lawyer 110 at 111, which states that the motivation for US companies to improve their governance practices stems from fear and shame rather than any aspiration to simply try to do things better. It would seem that in Australia fear of embarrassment may play a similar role with respect to corporate governance practices.
[22] Grice B, ‘Institute Position on Audit Committees’ (1993) 64(11) Charter at 55. For example, the New York Stock Exchange requires that all domestic companies listing on the exchange establish and maintain an audit committee. This requirement has been in place since 1978: para 3.303.00 of the New York Stock Exchange Listed Company Manual.
[23] Committee on the Financial Aspects of Corporate Governance, Cadbury, Sir Adrian (Chairman), Report of the Committee on the Financial Aspects of Corporate Governance – The Code of Best Practice (Published by: Committee on the Financial Aspects of Corporate Governance) (hereinafter Cadbury Code) (1992) at 7.
[24] Listing Rule 12.43(j) of the Listing Rules of the London Stock Exchange.
[25] Keegan M & Degeorge F, ‘Audit Committees – A Study in European Corporate Governance’ (1998) 6(2) Corporate Governance at 117. The companies surveyed were based in Belgium, France, Germany, Italy, Spain, Sweden, Switzerland and the UK.
[26] The methodology outlined in this Section and in Section 5.3 is similar to that used in Farrer J & Ramsay IM, ‘Director Share Ownership and Corporate Performance’ (1998) 6 Corporate Governance: An International Review 233.
[27] Schroders Property Fund Annual Report 1997 at 56.
[28] Lynn B, ‘More Effective Audit Committees Can Improve Corporate Governance’ (1993) 9(4) Company Director at 44.
[29] Guthrie J & Turnbull S, ‘Audit Committees: Is There a Role for Corporate Senates and/or Stakeholders Councils?’ (1995) 3(2) Corporate Governance at 80–81.
[30] Australian Accounting Research Foundation, Institute of Internal Auditors – Australia and Australian Institute of Company Directors, Best Practice Guide (1997) at 8.
[31] This represents a significant increase. In 1982 a survey of the top 300 Australian companies found that 27 per cent had established audit committees. Another survey in 1993 found that 48 per cent of the 1200 publicly listed Australian companies in the survey had established an audit committee: Guthrie J, ‘Mandatory Audit Committees’ (1993) 64(11) Charter at 54–55.
[32] Above above n22 at 55.
[33] Guthrie & Turnbull, above n29 at 78 and Turnbull S, ‘Competitiveness and Corporate Governance’ (1994) 2(2) Corporate Governance at 84.
[34] Brown PM, ‘Responsibilities of the Remuneration Committee’ (1995) 3(2) Corporate Governance at 61. 42
[35] Houston W & Lewis N, The Independent Director (1992) at 12.
[36] Webb C, ‘Strictly Private’ The Age (Melbourne) 31 March 1998 at 4; Bartholomeusz S, ‘Measure of Value on the Board’ The Age (Melbourne) 13 December 1997 at 1; Rance C, ‘Top Executive Salaries Poorly Justified’ The Age (Melbourne) 10 May 1997 at 1; Reingold J, ‘Where Parting is Such a Sweet Deal’ Bus Week (31 March 1997) at 36–37; and Jeanes M, ‘Directors in for a Rough Ride From Shareholders’ AFR (Sydney) 24 January 1997. For a discussion of what constitutes reasonable remuneration see Defina A, Harris TC & Ramsay IM, ‘What is Reasonable Remuneration for Corporate Officers? An Imprical Investigation into the Relationship Between Pay and Performance in the Largest Australian Companies’ (1994) 12 Comp’s and Securities LJ at 341.
[37] Hill J, ‘Remuneration Disclosure in Australia’ Research Paper No.1/1996 for the Australian Investment Managers’ Association (February 1996) at 6.
[38] Id.
[39] Bacon J, Corporate Boards & Corporate Governance (1993) at 15.
[40] Id at 15.
[41] Bosch, above n14 at 172–73.
[42] Conyon MJ, ‘Corporate Governance Changes in UK Companies Between 1988 and 1993’ (1994) 2(2) Corporate Governance at 98.
[43] Bosch, above n14 at 173.
[44] Chester S and Rowley JWF, ‘Environment Committees and Corporate Governance’ (1992) 20(7) International Business Lawyer 342 at 342.
[45] See Lagan A, ‘Challenging the Bottom Line’ The Australian Financial Review (Melbourne) 27 July 1998 at 14, which describes Shell’s new corporate report entitled, ‘Profits and Principles: Does there have to be a choice?’.
[46] Australia and New Zealand Banking Group Limited is one example of a company that has established such a committee.
[47] It is interesting to note that it is not only the directors of a company that may be held liable for a contravention of some of the acts comprising the complicated legal regime that applies to companies. For example, under section 66B of the Environment Protection Act 1970, it is the directors, as well as any person ‘concerned in the management of the corporation’, that are liable for a contravention of provisions of the Act.
[48] Charkham JP, Keeping Good Company: A Study of Corporate Governance in Five Countries (1995) at 191.
[49] For example, CSL Limited states on page 27 of its Annual Report: ‘The Company abides by the Code of Conduct of the Australian Pharmaceutical Manufacturers Association, the Code of Good Manufacturing Practice, the Code of Good Laboratory Practice and similar standards suitable to the pharmaceutical and veterinary industries.’
[50] Bosch, above n14 at 168.
[51] Ibid.
[52] Westpac Banking Corporation has a political donations committee and the Australian and New Zealand Banking Group Limited has a donations committee. WMC Limited has both a community and a political donations committee.
[53] In 1996, 64 of the Standard & Poor 500 companies reported having a committee dealing with corporate governance issues. See Tobey S, ‘Board Study Points to Increased Independence’ (1996) 13(3) IRCC Corporate Governance Bulletin at 11.
[54] Fridman S, ‘The News Corporation Super Shares Proposal: Crime of the Century or Tempest in a Teapot’ (1994) 4 Australian Journal of Corporate Law at 184.
[55] Clutterbuck D and Waine P, The Independent Board Director (1994) at 3; and Australian Investment Managers’ Association, Corporate Governance: A Guide for Investment Managers and Corporations (2nd ed, 1997) at 20–21.
[56] Committee on the Financial Aspects of Corporate Governance, Cadbury, sir Adrian (Chairman) The Financial Aspects of Corporate Governance (Published by: Committee on the Financial Aspects of Corporate Governance) (the Cadbury Report) (1992) at 21 and 38.
[57] Ibid.
[58] Id at 27.
[59] Dignam Dr A, ‘A Principled Approach to Self-regulation? The Report of the Hampel Committee on Corporate Governance’ (1998) 19(5) The Company Lawyer 140 at 140.
[60] Study Group on Director’s Remuneration, Greenbury, Sir Richard (Chairman) (the Greenbury Committee), Directors’ Remuneration: Report of a Study Group by Sir Richard Greenbury (Gee Publishing) (hereinafter the Greenbury Report) (1995) at 22.
[61] Id at 21–22.
[62] Id at 23.
[63] Committee on Corporate Governance, Hampel, Ronald (Chairman) Report of the Committee on Corporate Governance – Final Report (Gee Publishing) (hereinafter the Hampel Report) (January 1998) at 5.
[64] Note 59 at 140.
[65] Id at 152.
[66] Hampel Report, above n63 at 29, 36 and 49.
[67] Id at 36.
[68] The Working Group on Corporate Practices and Conduct, Corporate Practices and Conduct (3rd ed, 1996) at 17-18.
[69] Bosch AO H, ‘Corporate Practices and Conduct: Setting Standards for Corporate Governance in Australia’ (1993) 1(4) Corporate Governance at 198.
[70] Bosch AO H, Bosch on Business: Essential Readings for Directors, Executives and Investors (1992) at 173.
[71] Note 68 at 18.
[72] Bird H, ‘The Rise and Fall of the Independent Director’ (1995) 5(2) Australian Journal of Corporate Law 235 at 246.
[73] Hilmer FG (ed), Strictly Boardroom: Improving Corporate Governance to Enhance Corporate Performance (1993) at 61.
[74] AIMA, ‘Corporate Governance: a Guide for Investment Managers and Corporations’ (2nd ed, 1997). Although AIMA has recently been renamed the Investment and Financial Services Association (IFSA), it shall be referred to as AIMA since the discussion will focus on what are referred to as the AIMA Guidelines which were published in July 1997.
[75] Australian Investment Managers’ Association, above n53 at 21.
[76] Ibid.
[77] Ibid.
[78] Ibid.
[79] Linaker P, ‘The Institutional Investor – Investment from M & G’s Viewpoint’ in Prentice DD & Holland PJR (eds) Contemporary Issues in Corporate Governance (1993) at 110. See also Griffin P, ‘Institutional Investors in Australia: A Shareholders’ Perspective’ (Speech presented at Corporate Governance & Australian Competitiveness: The Role of the Institutional Investors Conference, organised by the Australian Investment Managers’ Group and the Business Council of Australia, 11 November 1993 at 12.
[80] Refer to Table 6 in Section 5.G.
[81] Kohler A, ‘Back to the Boardroom’ The Australian Financial Review, 9 December 1997 at 19.
[82] AWA Ltd v Daniels t/a Deloitte Haskins & Sells and Others (1992) 7 ACSR 759 at 867.
[83] Pease G & McMillan K, The Independent Non-Executive Director (1993) at 45.
[84] Tricker RI, Corporate Governance: Practices, Procedures and Powers in British Companies and their Boards of Directors (1984) at 189.
[85] Pease & McMillan, above n83 at 153. See also Veasey N, ‘The Defining Tension in Corporate Governance in America’ (1997) 7(2) Australian Journal of Corporate Law at 143.
[86] Tricker, above n84 at 188.
[87] Pease & McMillan, above n83 at 55.
[88] Note 81.
[89] Ibid. Note, in particular, Kohler’s discussion of Coles Myer.
[90] Ibid.
[91] Pease & McMillan, above n83 at 154.
[92] Carver J, Boards That Make a Difference: A New Design for Leadership in Non-profit and Public Organizations (2nd ed, 1997) at 149.
[93] Paris Colloquium on Corporate Governance, ‘Session Three: Board Committees’ (1984) 6 Journal of Comparative Business and Capital Market Law 231 at 231.
[94] Bosch, above n14 at 157.
[95] Francis, above n7 at 175.
[96] Pease & McMillan, above n83 at 155.
[97] Ibid.
[98] Bosch, above n14 at 157.
[99] Pease & McMillan, above n83 at 155.
[100] Carver, above n92 at 146.
[101] Pease & McMillan, above n83 at 156.
[102] Carver, above n88 at 154.
[103] Pease & McMillan, above n83 at 156.
[104] Carver, above n92 at 147.
[105] Francis, above n7 at 171.
[106] Bosch, above n14 at 158.
[107] Section 226D(1) Corporations Law.
[108] Section 226D(2) Corporations Law.
[109] Pease & McMillan, above n83 at 156.
[110] Australian Institute of Company Directors and Australian Investment Managers’ Association, Employee Share Scheme Guidelines and Executive Share Option Scheme Guidelines (1994) at 1.
[111] For an outline of the regression techniques used see Hamburg M, Statistical Analysis for Decision Making (5th ed, 1991) at 453–484.
[112] The t-statistic for this regression analysis was 0.560. As OLS involves linear regression, it is not surprising that this relationship was not statistically significant because it does not appear to be a linear relationship, that is, Table 4 suggests that shareholder returns rise and then fall as the number of board committees increase.
[113] Klein A, ‘Firm Performance and Board Committee Structure’ (1998) 41 J of Law and Economics 1 at 275–303.
[114] Id at 293. This is in contrast to the findings of this study, since it can be said that generally companies with an average of three board committees perform the best. Also, companies in the sample with audit, remuneration, compliance, environment and occupational health and safety committees generally performed better than companies without these types of committees. See Tables 3 and 4.
[115] Id at 277. This appears to be supported by the findings of this study. See Table 5.
[116] Sheikh Dr S & Rees Professor W, ‘Corporate Governance and Corporate Control – Self- Regulation or Statutory Codification’ in Sheikh Dr S & Rees, Professor W (eds), Corporate Governance and Corporate Control (1995) 361 at 389. See also Kohler, above n81.
[117] This finding is supported by a recent study by Wright D, ‘Evidence on the Relation Between Corporate Governance Characteristics and the Quality of Financial Reporting’ (Working Paper, School of Business Administration, University of Michigan, 1996) which found negative correlations between the presence of executive and non-independent non-executive directors on the audit committee and the quality of financial statement information.
[118] Klein, above n113 at 3.
[119] See generally, Stapledon & Lawrence, above n9 at 150; Hilmer, above n73 at 93; Klein, above n113; and Donaldson L & Davis JH, ‘Boards and Company Performance – Research Challenges the Conventional Wisdom’ (1994) 2(3) Corporate Governance at 151.
[120] Hilmer, above n73 at 93.
[121] Stapledon Dr G & Lawrence J, ‘Board Composition and Structure in the Top 100’ (1996) 12(9) Company Director 8 at 9.
[122] The t-statistic for this regression analysis was 0.369. Again, this may have been due to the non-linear relationship between the percentage of non-executive directors on the board and adjusted shareholder returns, that is, shareholder returns seem to fall and then rise as the percentage of non-executives on the board increases.
[123] Stapledon & Lawrence, above n9 at 161.
[124] Crown Limited, Crown Limited Annual Report (1997) at 62.
[125] Hilmer, above n73 at 54.
[126] The t-statistic for this regression analysis was 0.212.
[127] Bosch, above n14 at 175.
[128] Carver, above n92 at 147.

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