Corporate Governance and Board Structure

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Corporate Governance
and Board Structure
Ismail Bin Ahmed
April, 2007

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and Board Structure
1.1 Introduction
Quoting Sir Adrian Cadbury from The Company Chairman (1990):
"The classical theory of the board is that the shareholders elect the
directors and authorize them to run the company on their behalf. The
board in its turn sets the aims of the enterprise and appoints managers
to carry out those aims. The managers thus carry the authority of the
board and the board that of the shareholders."
The Cadbury Report has done much to restore the supremacy of the
board's ultimate power and accountability, as well as its integrity. It helped
generate a "corporate governance movement," especially in Commonwealth
countries such as Australia, Canada, New Zealand, and South Africa, plus the
Netherlands, with the US tagging along behind. (Garrat, 2003)
The Organisation for Economic Co-operation and Development (OECD)
public governance principles guidelines in 1999 and revised in 2004 amply
illustrate the points which governments and their departments should aim for in
terms of a governance framework: (Cowan, 2004)
Accountability - willingness and openness in relating the decisions made
to clearly defined and agreed objectives.
Transparency - decisions and actions open to scrutiny by appropriate
bodies, institutions and individuals.
Efficient and Effective - outputs from government activity are achieved at
best cost for the agreed level of quality.
Responsiveness - capacity to respond rapidly and with flexibility to
societal changes and to the need for critical re-examination of policies by the
general public.
Forward Vision - ability to anticipate future problems based on current and
takes into account the cost of future demographic, economic and other change.
Rule of Law - transparency of laws, regulations and codes and their
enforcement.

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These are aspirations represents not just good governance but a practical
approach for the public sector in any country. Corporate governance necessary
to monitor whether outcomes are in accordance with plans and to motivate the
organisation to be more fully informed in order to maintain or alter
organisational activity.
Corporate collapses, misinformation, fraud and the failure of many
watchdog institutions, from auditors to investment analysts, have driven the
need for change beyond the self-policing business arena and into the realm of
politics - as had happened to Enron and Worldcom - as well as lesser
corporate debacles, such as Adelphia Communications, AOL, Arthur Andersen,
Global Crossing, Tyco, created an atmosphere of doubt and among the
investing public. Practical applications of corporate governance in the US now
mean compliance with the law - not just compliance with a "softly" enforceable
voluntary code.

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2.1 Australian Corporations Law
Australian corporate law originated since The Crown granted charters of
incorporation such as on some early Acts passed in the United Kingdom in
1834 and 1837, and then in 1844 as "an Act for the Registration, Incorporation
and Regulation of Joint Stock Companies". This United Kingdom Act was
followed by enactments in the several Australian colonies, which legislation
was repealed and replaced over time until each Australian State came to have
its own modern Companies Act. (Yorston, Fortescue & Turner, 2004)
2.2 Model Birth and Growth of a Board
Initially the membership of a board may be limited to a small group of
founders of a business, or the founder and one or more friends or members of
the family. Their meetings may be informal conversations. As business
expands, more individuals may be invited to join the board. The board has
executive directors but the company is dominated by the entrepreneur owner.
Some of executive directors may be employees. Others may be non-
executive directors. As business flourish, it is necessary for the company to call
and hold proper annual general meetings of the members.
Appointment of one or more independent directors follows to ensure the
interests of the minority shareholders. The board has to decide whether a
dividend is appropriate, instead of ploughing all the profits back into financing
further growth of the business.
The appointment of a non-executive director to the board, at best, probably
a widely experienced professional chartered accountant could give the board a
lot of expert advice. He could also be seen by the minority shareholder as a
non-executive director who would bring some balance to the board. Regular,
properly convened and minuted board meetings became a norm.
When the business significantly takes off and the rate of expansion could
not be funded from ploughed-back profits, additional finance became a
necessity.
The board may agree that a merchant bank, which offers to provide
venture capital, be invited to provide funds. The merchant bank provides a
convertible loan, secured on the company's assets and holds a significant
equity stake in the company. The merchant bank is given a seat on the board
as part of the package.
The board now had more executive directors, including the Chairperson
and CEO, and non-executive directors, one of whom represented the interests of
the merchant bank.
The company continues to thrive and it may opt to become an
incorporated company by offering shares to the public, with the entrepreneur
remaining as Chief Executive who acquires majority equity of the company but
continues to serve as a director.

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3.1 Directors and the Board: Legal Duties
Owner-directors as had been described above need to be kept aware of
the fact that an incorporated business is a legal entity in its own right. In
return for the privilege of limited liability certain legal obligations must be
assumed. The company's assets are not their private property.
The board of directors of a company, regardless whether they are
owner-directors or not, have a duty of care and skill to supervise the policy
and management of the company's activities.
As agents for the company, the directors have the powers and duties of
carrying on the whole of its business, subject to the restrictions imposed by
the memorandum or articles and any statutory provisions contained in the
Corporations Law.
Whilst little may be expected historically from company directors in
relation to care and skill, this duty has been interpreted in a way that places
a very modest burden upon the shoulders of directors based on a leading
case, Re City Equitable Fire and Insurance Co Ltd (1925). (Routledge-
Cavendish Lawcards, 2006)
The directors are also under a fiduciary duty towards the company and
improper actions may entail liability either through a breach of the
Corporations Law, the company's memorandum and articles, or the general
law. Much is expected in terms of honesty and integrity from the directors,
since a director is considered to be a type of trustee of the company's
property [Keech v Sandford (1726)]. (Routledge-Cavendish Lawcards:
Company Lawcards, 2006)
Much of this law has been developed by the cases, but there is some
modification of the judge-made law by statutory provisions.
Directors must act bona fide in the interests of the company; exercise
their powers for the purposes for which they have been conferred; not place
themselves in a position in which there is a conflict between their duties to
the company and their personal interests; and must not make a secret profit.
3.2 Directors and the Board: Types of Directors
(Adapted and improvised from Tricker, 1994)
An executive director is both a member of the board of directors and an
executive in the company. He or she is appointed by the shareholders and is
responsible like all directors under company law besides being an employee of the
company under a contract of employment.
A non-executive director is one who does not also hold a management
position in the company on whose board he or she serves.
A nominee director is a director who has an agency agreement to promote
the interests of a principal; for example, the interests of a major shareholder or a
merchant bank with a significant stake in the company. Their nominee

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commitment does not prevent them from acting like every other director, in the
best interests of the company as a whole.
Representative directors quite similar to nominee directors. But they are
appointed to the board to represent the interests of a stakeholder group,
such as the city council, employees, consumers, or other vested interests. They
must also for the good of the company as a whole.
An alternate director can be appointed, in line with the company's charter, to
attend board meetings whenever the person for whom he or she is the named
alternate cannot be present. When acting in this situation, the alternate director
acquires all the rights and duties of other directors.
A shadow director is someone who, though not formally a member of the
board, plays in the background and exercises power over board decisions. In some
jurisdictions, where it can be shown that a board is acting under such influence,
the shadow director can be held responsible like other board members.
Many people who have the title of director do not, in fact, serve on a board.
The reasons might be to reward performance with recognition and status, or to
give prestige to an executive who is required to represent the company with major
clients, customers, government and so on. Others differentiate their director's
titles with qualifications, such as non-executive director or executive director, in
ways not recognized by company law. Whilst a few, who do not bear the title of
director at all, could find themselves held responsible as if they were.
3.3 Directors and the Board: Institutionalisation of the
All directors, who have been properly appointed by the shareholders,
are equally responsible to safeguard and enhance stakeholder investment
by effective oversight of management activities.
Their activities include reviewing the development and execution of
strategies; selecting and reviewing the performance and compensation of
the chief executive and senior management; and ensuring transparency of
communication and disclosure of financial and non-financial information,
including establishing an effective audit process. (Ernst & Young -
Effective Governance Model)
In addition to undertaking all of these activities an over-arching
challenge for the board is to create a sound culture that allows the
principles of good governance to thrive. No matter what processes and
activities are in place, at the core of good governance is culture. (Ernst &
Young - Effective Governance Model)
According to ASX Corporate Governance Guidelines Principle 2, "Ultimately
the directors are elected by the shareholders. However the board and its
delegates play an important role in the selection of candidates for
shareholder vote."

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4.1 Board Structure and Corporate Governance
According to the ASX Corporate Governance Council Principle 2 of Good
Corporate Governance and Best Practice Recommendations, a company should
"Structure the Board to Add Value" – This principle "seeks to ensure the
board has an effective composition, size and commitment to adequately
discharge its responsibilities and duties. The recommendations include
that the chairperson should be an independent director, the role of the
chairperson and CEO should be performed by separate individuals, a
majority of the board should be independent and the board should
establish a nominations committee". (Ernst & Young: Effective
Governance Model - An Operating Framework)
Certainly, board structure is a foundation for an effective board. It focuses
on the background interests, affiliations and position of its members. It is deals
with the balances of power and is at the centre of board performance and
accountability.
4.1.1 Board Size
ASX Corporate Governance Guidelines Principle 2 on Composition and
Commitment states that "It is important that the board be of a size and
composition that is conducive to making decisions expediently, with the
benefit of a variety of perspectives and skills, and in the best interests of
the company as a whole rather than of individual shareholders or interest
groups. The size of the board should be limited so as to encourage efficient
decision-making".
It is obvious that there is no prescribed size for a company's Board or for its
composition. A company is at liberty to decide for itself the best fit for the purpose
it has been established. Companies should, therefore, consider first and foremost
why the Board is being set up and what it is hoping to achieve. (Cowan, 2004)
The minimum and maximum numbers of members of a company's board are
usually laid down in the company's Articles of Association or charter which can
only be changed by a special resolution of the members.
According to a UK survey by Coulson-Thomas and Alan Wakelam, there is
little evidence that there is an ideal or `standard best' size for a board. (Coulsin-
Thomas, 1993)
The impact of company size upon the nature and operation of a board, and
the subject-matter with which it is concerned, will vary. Market sector, the
complexity of a process or technology, whether there are international operations,
company structure and many other considerations will influence these factors.
(Coulsin-Thomas, 1993)
The optimum size of the board depends, as has been suggested, upon the
circumstances of the company, the qualities of the directors and how the
business of the board is conducted. A board which is `too small' may be deficient
in certain areas of expertise, and might lack breadth and balance. One that is `too

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big' may inhibit close interpersonal relationships, causing board processes to be
more formal. Schisms can more easily arise while a strong may CEO feel
inclined to view the big board as his or her 'audience'.
In the UK, John Harvey-Jones of ICI PLC streamlined the governance of the
divisional companies that reported to the main board by reducing the board
sizes significantly. Proposals for increasing board numbers are frequently put
to boards; suggestions for reducing the board size are far more unusual (Tricker,
1994).
4.1.2 Board Composition
ASX Corporate Governance Guidelines Principle 2 on Director Competencies
states that "Corporate performance is enhanced when there is a board with
the appropriate competencies to enable it to discharge its mandate
effectively. An evaluation of the range of skills, experience and expertise on
the board is therefore beneficial before a candidate is recommended for
appointment. Such an evaluation enables identification of the particular
skills, experience and expertise that will best complement board
effectiveness".
Good governance means good people. A board's power is a function of its
directors and how they are chosen. Former Coca-Cola director Charles Duncan
says, "Be very careful in recruitment. All other things are dependent on the right
individuals. Do your due diligence. You can have any kind of processes and
controls," but without the right people, it doesn't matter.(Shultz, 2001)
Someone who has been successful in leading a company does not mean her
or she is effective in the boardroom. A decisive, action-oriented CEO or
entrepreneur may not easily become a collaborative team member who sits
quietly, be a good listener, a good advisor, and a consensus builder. Perspective
of a CEO is narrow because he or she worked in the business of a single
company. A balance of consultants and professionals who have broad perspec-
tives and insight is the key.
Include some directors with prior board experience. Their ability to
mentor new board members and the governance knowledge they bring. Proven
directors may be deemed capable -but they may or may not be the best for
another company. Someone who serves on a board does not mean that he or
she is a good board member. It is necessary to visualize who will be at the board
table and how they will interact with each other and how they will complement the
strengths and weaknesses of each other and management.
Avoid a majority of investors. Companies will only limit their ability to
recruit proactively to their strategic needs by overloading their boards with
investors. Fast growth companies are especially vulnerable, because board seats
are swapped for investments. Ideally, a core board must be recruited before a
company seeks significant funding.
Ensure diversity. The most successful and competitive companies have

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active and diversified boards which is characterised by its breadth of perspective,
background, knowledge and experience from outside the organization brought to
its leadership.
There should be relevant level of financial competencies and understanding
of relevant law at the board table, though that does not necessarily mean
practicing accountants and lawyers should be directors. The board
responsibilities of these profesionals are the same as for all other directors.
4.2 Director Independence
4.2.1 Director Independence: Non-executive Directors
The aim of Principle 2 of the ASX Corporate Governance Guidelines is to
achieve an appropriate balance between achieving a desirable level of board
independence and maintaining sufficient relevant experience and competence for
the board to fulfil its objectives (Independent Review Group Report March 31,
2004: http://www.asx.com.au/about/pdf/IRG_report_web_tool.pdf)
The principal argument for the inclusion of non-executive directors on a board
is for the independent and objective perspective they can bring to board
deliberations. Non-executive director can make a vital contribution as part of
the checks and balance mechanisms to ensure that executive directors do not
treat the company as their private possession. (Tricker, 1994)
Lack of independence is a major reason for ineffective governance in every
type of organization. For the board to perform at the highest level it must have a
wider perspective for strategy development and decision making than is available
within the organization.
The independent governance role and function should focus on bringing a
number of key benefits to the leadership, management and governance of the
organization. Directors with an independent perspective are more likely to
constructively challenge proposals and decisions before the board, other
directors and management.
The board should consider providing more fulsome disclosure in relation to
the skills, experience and abilities of its directors and how the company benefits
from this. (Appendix 2: Ernst & Young: Effective Governance Model - An
Operating Framewok) Disclosure may include the risk profile of the company
and the impact this has on desirable board membership. For example, the board
may wish to discuss the entrepreneurial nature of the business, to demonstrate
the relevance of a board-member selection.
The CLERP 9 Act contains a number of important reforms to the existing
corporate governance provisions in the Corporations Act, including continuous
disclosure. Changes to continuous disclosure offence provisions includes the
controversial power given to ASIC to issue infringement notices for breaches.
(AAR: Corporate governance site: CLERP 9: Overview:
www.aar.com.au/corpgov/clerp)

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4.2.2 Director Independence: Relationships
ASX Corporate Governance Guidelines Principle 2 states that "Family ties
and cross-directorships may be relevant in considering interests and
relationships which may compromise independence, and should be
disclosed by directors to the board:.
Independence of mind means the integrity of the individual and his freedom
from any conflict of interest that could affect the exercise of independent
judgment.
The bottom line question is; does the director have any relationship that
could be construed to influence his/her ability to exercise independent
judgment as a director of the organization? (Matheson, 2004)
Independence, in practice, also means the directors do not benefit personally
from the decisions of the board. A director must be free from the influence of
employees (including management) protecting their personal position, status,
career or financial position. In the extreme, this would exclude employees, and
their immediate families, the organization's legal advisors, bankers, consultants,
suppliers and customers from being directors.
A non-executive director is deemed as independent if, he or she satisfies the
description in Box 2.1 of the Principle 2 of the ASX Corporate Governance
Guidelines (Appendix 1).
Prospective Board-Members should be assessed and made to answer the list
of Questionnaire in Appendix 2. Even seasoned directors should be interviewed
in the context of the board. They need to understand the company charter and
what is expected of them.
4.3 Chairperson
4.3.1 Role of the Chairperson
ASX Corporate Governance Guidelines Principle 2 - Recommendation 2.2
on Commentary and Guidance states: The chairperson should be an
independent director that:
 The chairperson is responsible for leadership of the board, for the
efficient organisation and conduct of the board’s function, and for the
briefing of all directors in relation to issues arising at board meetings.
 It is important that the chairperson facilitate the effective
contribution of all directors and promote constructive and respectful
relations between board members and between board and
management.
 Where the chairperson is not an independent director, it may be
beneficial to consider the appointment of a lead independent director.

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 It is vital that the chairperson commit the time necessary to
discharge that role effectively. In that context the number of other
positions, and time commitment associated with them, should be taken
into account.
A strong Chairperson is an important factor to success. An overbearing
Chairperson may how ever lead to disaster for all concerned. Some or all of the
following reasons may indicate a Chairperson who is bent on keeping personal
control: (Cowan, 2004)
Setting highly controlled Board meeting agendas to which other directors are
denied input
 Creating a Board environment which makes it difficult for other directors to
participate in general debate
 Curtailing discussion of important and/or strategic matters
 Creating an "inner group" of intimate directors which sets Board direction
 Minimising the input and impact of reports from important Board
Committees
 Limiting the availability of important data to independent directors.
4.3.2 Separation between Chairperson and Chief
Executive
ASX Corporate Governance Guidelines Principle 2 Recommendation 2.3
states: The roles of chairperson and chief executive officer should not be
exercised by the same individual.
An all-powerful Chairperson influence may be exacerbated when there is no
division between the role of Chairperson and CEO. This concentration of power
can often simply be seen by the other directors as too much to overcome and is
often cited as the main contributor to pursuance of poor company strategies long
after they have seen to be failing. (Tricker, 1994)
The roles of chief executive and Chairperson of the board must be separated
to enhance checks and balances at board level and reduce the risk of
domination by a powerful chief executive. Howe ever, while separation of
roles can enhance conformity, having one person as the Chairperson/chief
executive may encourage performance because often, a company needs single-
minded leadership in competitive conditions.
The CEO and the directors must treat each other as equals in the
operation and governance of the company. They must trust and respect each
other. Collegiality and cooperation must be preserved to ensure that the
important responsibilities of the board are properly discharged even while current

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trends are leading to a reduction of the CEO's dominance in the boardroom,
especially as the new rules of corporate governance are implemented.
Therefore:
(Brountas, 2004)
 The CEO and the directors must cooperate and work together to create
an open board environment where disagreement doesn't create disruptive
tension or animosity.
 Directors must be aware of the CEO's need for attentive and committed
directors who are willing to devote the time necessary to acquire and
maintain solid knowledge about the company's business, finances,
competitors, and risks.
 Directors need to concentrate during board meetings and remember
what the CEO and management tells them about achievements, problems,
plans, and future strategies. There is nothing more frustrating to a CEO
than a director who asks for a discussion or explanation of a matter, a
future strategy, or a compensation program that was exhaustively
presented and discussed at a recent prior meeting.
 Directors need to assist the CEO in planning the agendas for the board
meetings, thereby allowing the CEO to conduct meetings that are relevant,
informative, productive, and beneficial to both management and the direc-
tors.
 The CEO wants and needs honest feedback from the directors, including
advice designed to improve board meetings and enhance director
knowledge, as well as frank and helpful criticism when required and
encouragement and praise when earned.

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5.1 Disclosure of Corporate Governance Practices
In reality, the ASX Corporate Governance Recommendations are not
prescriptive. They are guidelines, designed to produce an efficiency, quality
or integrity outcome.
The two main platforms for companies to disclose their corporate
governance practices are the annual report and their website. The annual
report is to summarise a company's corporate governance practices and
where they do not conform with the best practice principles, to explain why
a particular approach has been taken.
(CLERP 9 Discussion Paper: Annual Reporting Meeting:
http://www.aar.com.au/corpgov/iss/ann/index.htm)
1) The Recommendations provide a framework to help companies
provide meaningful and comparable disclosure about their governance
practices. The Recommendations are inspirational statements, but will not
represent best practice for all companies in all situations.
3) Companies should not adopt the Recommendations without first
considering what constitutes best practice in its own particular
circumstances.
4) Best practice evolves over time. Companies must seek to improve
their governance practices, having regard to changing market needs and
changing circumstances.
5) A company's only obligation is to disclose to what extent it has not
followed the Recommendations and why.
6) If it chooses to implement alternative governance practices, it is
encouraged to disclose how these practices embody the spirit and intent of
the overarching Principle.
Mr. Justice Owen, in his first recommendation in the HIH Royal
Commission report, recommended to the Government that:
'...the disclosure and other requirements of the Corporations Act
2001 (Cth), the relevant accounting standards and the Australian
Stock Exchange Listing Rules that relate to directors' remuneration
be reviewed as a matter of priority, to ensure that together they
achieve clear and comprehensive disclosure of all remuneration or
other benefits paid to directors in whatever form.'
(CLERP 9 Remuneration-
http://www.aar.com.au/corpgov/iss/rem.htm)
The Australian Government has addressed this recommendation in the
CLERP 9 Discussion Paper process. The discussion paper proposed the

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Corporate Governance, in consultation with ASIC, prepared guidelines for the
use of webcasting.
The Corporate Governance recommendations provide that companies should:
 establish a communications strategy to promote effective
communication with its shareholders, including a policy on electronic
communication;
 consider webcasting or teleconferencing general meetings; and
 consider allowing shareholders to lodge proxies electronically,
subject to the adoption of satisfactory authentication procedures.
However, the CLERP 9 Act does not contain any provisions that are directly
aimed at addressing the impediments to introducing webcasting as a
substitute for physical attendance at the general meeting.
(CLERP 9 Discussion Paper: Shareholder Participation – Access to
Meeting: http://www.aar.com.au/corpgov/iss/share.htm#acc#acc)

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6.1 The Significance of Structure - Governance and
Management Distinguished
Board structure distinguishes between those directors who hold
management positions in the company and those who do not. In Australia and
countries influenced by the development of British practice, those with
management positions are referred to as executive directors and those without
are called non-executive directors. In Australia, the boards of public
companies tend to have a majority of non-executive directors.
Another distinction can be drawn between non-executive directors who
are genuinely independent of the company's affairs, other than holding their
board appointment, and those who, although they are not executives of the
business, nevertheless hold positions which might bring their objectivity and
independence into question. Howe ever in practice, some members may
have charismatic power to influence their fellow directors, whilst others
may be allowed to dominate, but there is no official hierarchy.
Corporate governance is increasingly used to refer to the specific work of
directors and boards, as they interact with top management, shareholders,
auditors and other external parties, contrasting with management's work in
running the business.
A useful way of depicting the interaction between management and board is to
present the board as a circle which is superimposed on the hierarchical `triangle
of management' (Figure 1). Board structures can be distinguished and their
strengths and weaknesses can be assessed using this model.

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7.1 Conclusion
A survey in respect of corporate governance practices in the Asia-
Pacific region published by the Association of Chartered Certified Accountants
in Australia (November 2002) revealed that:
"...Australia does have a high standard of corporate governance and clearly
must do much more to promote this internationally rather than just in Australia.
Positioning Australia in this way will help encourage capital inflows into the
country. If we fail to do this, we risk losing investment capital to other
countries in the Asia Pacific region." (Cowan, 2004)
Paul Gompers of Harvard and Andrew Metrick of the University of
Pennsylvania’s Wharton School found that "firms with stronger shareholder rights
had higher firm value, higher profits, higher sales growth, lower capital
expenditures, and fewer corporate acquisitions."
http://www.larsonallen.com/effect/spring05/psg.pdf
Most directors desperately need educating to be able to cope with the
complex and dynamic external demands on their business. Lack of
knowledge is a major cause of boards' strategic incompetence. It takes time to
change both the mindset and behavior of a board so that its members become
comfortable with their strategic roles and tasks and with regular and open
review of their performance.
Notwithstanding their exemplary experience and qualifications, directors
who do not come to board meetings fully prepared to discuss and act on the
meeting agenda should either resign voluntarily or be removed by their fellow
members. In an era when bad corporate governance is under attack and
directors are being sued for failing to perform their fiduciary duties, a director
who comes to board meetings unprepared should be told that his or her
presence is no longer required and be invited to leave.

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8.1 References & Bibliography
AAR: Corporate Governance Site: CLERP 9: Overview:
www.aar.com.au/corpgov/clerp
Brountas P.P. Boardroom Excellence: A commonsense Perspective on
Corporate Governanace. San Fransisco: Jossey Bass, 2004.
Cadbury, Sir Adrian. The Company Chairman, 1990.
Colley J.L.Jr, Doyle J.L, Logan G.L, Stettinius W. What Is Corporate
Governanace?. New York: McGraw Hill, 2005.
Cowan, Neil. Corporate Governance that Works. Singapore: Pearson
Prentice Hall, 2004.
Ernst & Young. Effective Governance Model
Garrat B. Thin on Top: Why Corporate Governance Matters and How to
Measure and Improve Board Performance. London: Nicholas Brealey
Publishing, 2003.
Independent Review Group Report March 31, 2004:
http://www.asx.com.au/about/pdf/IRG_report_web_tool.pdf
Routledge-Cavendish Lawcards. Company Law, 5th
Edition, 2006.
Tricker, Robert. I. International Corporate Governance: Text, Readings
and Cases, Singapore: Prentice Hall, 1994.
Yorston, Fortescue and Turner. Australian Commercial Law. The Law
Book Company Limited, 1994.
Appendices
http://www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommend
ations.pdf
Shultz S. F. The Board Book: Making Your Corporate Board a Strategic
Force in Your Company's Success. New York: AMACOM, 2001, pg.53.
(Ernst & Young: Effective Governance Model - An Operating
Framewok)
http://www.ey.com/global/content.nsf/Australia/AABS_-
_Effective_Governance_Model

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Appendices
Appendix 1
ASX Corporate Governance Council - Good CG and Best
Practice Recommendations
http://www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf
Principle 2:
Structure the board to add value
Have a board of an effective composition, size and commitment to
adequately discharge its responsibilities and duties.
An effective board is one that facilitates the efficient discharge of the duties imposed by
law on the directors and adds value in the context of the particular company’s circumstances. This requires
that the board be structured in such a way that it:
• has a proper understanding of, and competence to deal with, the current and emerging issues of the
business
• can effectively review and challenge the performance of management and exercise independent
judgement.
Ultimately the directors are elected by the shareholders. However the board and its delegates play an
important role in the selection of candidates for shareholder vote.
How to achieve best practice
Recommendation 2.1:
A majority of the board should be independent directors.
Commentary and Guidance
Assessment of Independence
An independent director is independent of management and free of any business or other relationship that
could materially interfere with – or could reasonably be perceived to materially interfere with – the exercise
of their unfettered and independent judgement.
Disclosure of Independence
The board should regularly assess the independence of each director in light of interests disclosed by them.
So that it can do this, each independent director should provide to the board all relevant information.

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Directors considered by the board to be independent should be identified as such in the corporate
governance section of the annual report. The board should state its reasons if it considers a director to be
independent notwithstanding the existence of relationships listed in Box 2.1. In this context, it is important
for the board to consider materiality thresholds from the perspective of both the company and its directors,
and to disclose these.
The tenure of each director is important to an assessment of independence. The board should disclose the
period of office of each director in the corporate governance section of the annual report.
Where the independent status of a director is lost, this should be immediately disclosed to the market.
Independent Decision-Making
All directors should bring an independent judgement to bear in decision making.
To facilitate this, there should be a procedure agreed by the board for directors to take independent
professional advice if necessary, at the company’s expense.
Non-executive directors should consider the benefits of conferring regularly at scheduled sessions without
management present. Their discussions can be facilitated by the chairperson or lead independent director.
Family ties and cross-directorships may be relevant in considering interests and relationships which may
compromise independence, and should be disclosed by directors to the board.
Box 2.1: Assessing the independence of directors
An independent director is a non-executive director (ie is not a member of
management) and:
1. is not a substantial shareholder of the company or an officer of, or
otherwise associated directly with, a substantial shareholder of the company
2. within the last three years has not been employed in an executive capacity
by the company or another group member, or been a director after ceasing to
hold any such employment
3. within the last three years has not been a principal of a material
professional adviser or a material consultant to the company or another group
member, or an employee materially associated with the service provided
4. is not a material supplier or customer of the company or other group
member, or an officer of or otherwise associated directly or indirectly with a
material supplier or customer
5. has no material contractual relationship with the company or another group
member other than as a director of the company
6. has not served on the board for a period which could, or could reasonably
be perceived to, materially interfere with the director’s ability to act in the best
interests of the company
7. is free from any interest and any business or other relationship which could,
or could reasonably be perceived to, materially interfere with the director’s
ability to act in the best interests of the company.
The UK Higgs report nominates 10 years in relation to director tenure considerations, but has not yet been
adopted in the UK. The Council will continue to monitor developments in other jurisdictions in this area.

20
Recommendation 2.2:
The chairperson should be an independent director.
Role of Chairperson
The chairperson is responsible for leadership of the board, for the efficient organisation and conduct of the
board’s function, and for the briefing of all directors in relation to issues arising at board meetings.
It is important that the chairperson facilitate the effective contribution of all directors and promote
constructive and respectful relations between board members and between board and management.
Where the chairperson is not an independent director, it may be beneficial to consider the appointment of a
lead independent director.
It is vital that the chairperson commit the time necessary to discharge that role effectively. In that context
the number of other positions, and time commitment associated with them, should be taken into account.
Recommendation 2.3:
The roles of chairperson and chief executive officer should not be
exercised by the same individual.
There needs to be a clear division of responsibility at the head of the company.
The division of responsibilities between the chairperson and the chief executive officer should be agreed by
the board and set out in a statement of position authority.
The chief executive officer should not go on to become chairperson of the same company.
Recommendation 2.4:
The board should establish a nomination committee.
Purpose of the Nomination Committee
Particularly in larger companies, a nomination committee can be a more efficient mechanism for the
detailed examination of selection and appointment practices meeting the needs of the company.
The existence of a nomination committee should not be seen as implying a fragmentation or diminution of
the responsibilities of the board as a whole.
It is recognised that for smaller boards, the same efficiencies may not be apparent from a formal committee
structure.
Composition of Nomination Committee
The nomination committee should:
• consist of a minimum of three members, the majority being independent directors
• be chaired by the chairperson of the board or an independent director.

21
Charter
The nomination committee should have a charter that clearly sets out its role and responsibilities,
composition, structure and membership requirements.
Responsibilities
Responsibilities of the committee should include:
• assessment of the necessary and desirable competencies of board members
• review of board succession plans
• evaluation of the board’s performance
• recommendations for the appointment and removal of directors.
Selection Process
A formal and transparent procedure for the selection and appointment of new directors to the board helps
promote investor understanding and confidence in that process.
Director Competencies
Corporate performance is enhanced when there is a board with the appropriate competencies to enable it to
discharge its mandate effectively. An evaluation of the range of skills, experience and expertise on the
board is therefore beneficial before a candidate is recommended for appointment. Such an evaluation
enables identification of the particular skills, experience and expertise that will best complement board
effectiveness.
The nomination committee should consider developing and implementing a plan for identifying, assessing
and enhancing director competencies.
The nomination committee should also consider whether succession plans are in place to maintain an
appropriate balance of skills, experience and expertise on the board.
Composition and Commitment
It is important that the board be of a size and composition that is conducive to making decisions
expediently, with the benefit of a variety of perspectives and skills, and in the best interests of the company
as a whole rather than of individual shareholders or interest groups. The size of the board should be limited
so as to encourage efficient decision-making.
It is also important that individual board members devote the necessary time to the important tasks
entrusted to them. In this context, all directors should consider the number and nature of their directorships
and calls on their time from other commitments.
In support of their candidature for directorship, non-executive directors should provide the nomination
committee with details of other commitments and an indication of time involved. Non-executive directors
should specifically acknowledge to the company prior to appointment or being submitted for election that
they will have sufficient time to meet what is expected of them.
The nomination committee should regularly review the time required from a non-executive director, and
whether directors are meeting this. A non-executive director should inform the chairperson and the
nomination committee before accepting any new appointments.
Election of Directors
The guidelines in Attachment A concerning notices of meeting are designed to facilitate better
communication with shareholders. They contain guidance about how to frame resolutions for the election of
directors.
The names of candidates submitted for election as director should be accompanied by the following
information to enable shareholders to make an informed decision on their election:

22
• biographical details, including competencies and qualifications and information sufficient to enable an
assessment of the independence of the candidate
• details of relationships between:
- the candidate and the company
- the candidate and directors of the company
• directorships held8
• particulars of other positions which involve significant time commitments
• the term of office currently served by any directors subject to re-election
• any other particulars required by law.
Term of Directorship
Non-executive directors should be appointed for specific terms subject to re-election and to the ASX Listing
Rules and Corporations Act provisions concerning removal of a director.
Re-appointment of directors should not be automatic.
Recommendation 2.5:
Provide the information indicated in Guide to reporting on Principle 2.
Guide to reporting on Principle 2
The following material should be included in the corporate governance section of the annual report:
• the skills, experience and expertise relevant to the position of director held by each director in office at the
date of the annual report
• the names of the directors considered by the board to constitute independent directors and the company’s
materiality thresholds
• a statement as to whether there is a procedure agreed by the board for directors to take independent
professional advice at the expense of the company
• the term of office held by each director in office at the date of the annual report
• the names of members of the nomination committee and their attendance at meetings of the committee
• an explanation of any departures from best practice recommendations 2.1, 2.2, 2.3, 2.4 or 2.5.
The following material should be made publicly available, ideally by posting it to the company’s website in
a clearly marked corporate governance section:
• a description of the procedure for the selection and appointment of new directors to the board
• the charter of the nomination committee or a summary of the role, rights, responsibilities and membership
requirements for that committee
• the nomination committee’s policy for the appointment of directors.
Application of Principle 2 in relation to trusts
References to “board” and “directors” should be applied as references to the board and directors of the
responsible entity of the trust.
There may be technical conflict in implementing the recommendations that the chairperson be an
independent director or a lead independent director, where the responsible entity is a wholly-owned
subsidiary of a fund manager and all the directors are employees of the parent. This should be discussed and
clarified in any explanation of departure from the best practice recommendations included in the corporate
governance section of the annual report.
Refer also to section 601JA(2) of the Corporations Act, which sets out the criteria for independence of a
director of a responsible entity.
Note also that Part 5C.5 of the Corporations Act in relation to compliance committees for trusts provides
under section 601JA(1) that a responsible entity must establish a compliance committee if less than half the
directors of the responsible entity are external directors.

23
Appendix 2
Adapted from Shultz S. F. The Board Book: Making Your Corporate Board a Strategic
Force in Your Company's Success. New York: AMACOM, 2001, pg.53.
Questions to Ask Prospective Board Members
Why do you want to serve?
What is your opinion of our company? (Does she have some knowledge of how
you compete, how you market, who the competition is, who your customers are,
what your employee profile is, how you use your board and what your critical
issues are?)
How will you contribute? Examples.
What are your specific areas of expertise? How will those add value to the
board?
What is your financial acumen? Each director does not need to be an
accountant. She must, however, have the ability to monitor and steward
resources.
How many other boards do you sit on? For profit and not for profit. What role do
you play on those boards?
What is your view of the role of a board and corporate governance?
Do boards add value? How?
What are the downsides?
How do you use your board? (If applicable.)
What is your most rewarding experience on a board?
How specifically have you added value? Examples.
What is your most difficult experience as a director?
Are you willing to commit to the level of participation and support that we need?
What committees would you like to sit on? Why?
Do you prefer to be compensated in stock or cash? (Nell Minow says if directors
don't think that your company is the best investment they could possibly make,
they should not be on the board. This includes being willing to buy stock in a
turnaround situation. If they don't have enough confidence in the company to buy
stock, how can they add value as a board member?)
Are your goals and values compatible with those of our organization? Describe.
What are your concerns?

24
Appendix 3
(Ernst & Young: Effective Governance Model - An Operating Framewok)
http://www.ey.com/global/content.nsf/Australia/AABS_-_Effective_Governance_Model
The following information must be disclosed in the corporate governance
section of the annual report. This information is in addition to any
disclosures, which may be made in order to explain departures from best
practice Recommendations.
1. The skills, experience and expertise relevant to the position of director
held by each director in office at the date of the annual report.
2. The names of the directors considered by the board to constitute
independent directors and the company’s materiality thresholds.
3. A statement as to whether there is a procedure agreed by the board for
directors to take independent professional advice at the expense of the
company.
4. The term of office held by each director in office at the date of the
annual report.
5. The names of members of the nomination committee and their
attendance at meetings of the committee.
6. Details of the names and qualifications of those appointed to the audit
committee, or, where an audit committee has not been formed, those
who fulfill the functions of an audit committee.
7. The number of meetings of the audit committee and the names of the
attendees.
8. Whether a performance evaluation for the board and its members has
taken place in the reporting period and how it was conducted.
9. Disclosure of the company’s remuneration policies including the costs
and benefits of the policy and the link between performance and
remuneration.
10. The names of the members of the remuneration committee and their
attendance at meetings of the committee.
11. The existence and terms of any schemes for retirement benefits, other
than statutory superannuation, for non-executive directors.
In addition to the mandatory disclosure, the CGC provides guidance on
how to report on each Principle. In all cases a departure from a
recommendation must be adequately explained.
Finally, the CGC also requires that various information be made publicly

25
available, ideally on the company’s website in a clearly marked
“corporate governance section”.
The following information must be made publicly available. Where a
company does not have a website, this information must be made
available by other means. For example, a company may provide the
information on request by email, facsimile or post.
 The statement of matters reserved for the board or a summary of
the board charter or the statement of delegated authority to
management.
 A description of the procedure for the selection and appointment of
new directors to the board
 A copy of the charter of the nomination committee or a summary of
the role, rights, responsibilities and membership requirements for that
committee
 A copy of the nomination committee’s policy for the appointment of
directors.
 The company’s code of conduct or a summary of its main provisions.
 The company’s policy regarding trading in the company’s securities
by directors, officers and employees.
 Information about the procedures the company has for selecting and
appointing the external auditor, and for the rotation of the audit
engagement partners.
 A summary of the policies and procedures the company has in place
to ensure compliance with listing rule disclosure requirements.
 A description of the arrangements the company has to promote
communication with shareholders.
 A description of the company’s risk management policy and internal
compliance and control system.
 A description of the process for performance evaluation of the
board, its committees and individual directors and key executives.
 A copy of the charter of the remuneration committee or a summary
of the role, rights, responsibilities and membership requirements for that
committee.

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