Australia’s medium-sized companies are taking corporate governance more seriously than ever, according to an analysis of their ASX filings
AUSTRALIA’S medium-sized companies are taking corporate governance more seriously than ever, according to an analysis of their ASX filings.
Although around one-third of mid-cap companies – which represent ASX listed companies 251-400 by size – are exposing their investors to corporate governance risks, the sector as a whole has standards comparable to the big end of town.
The Horwath 2006 corporate governance report is the first attempt to benchmark governance in mid-cap firms. The report’s findings, based on modelling and research by the University of Newcastle of publicly reported corporate governance structures, found that despite having smaller staff levels and resources, the mid-caps are keeping up.
“The key findings were that the mid-cap companies as a whole are as good as their top 250 counterparts in most aspects of corporate governance,” said Andrew Pearce, managing director at Horwath. “Their limited access to independent directors and independent experts and their ability to pay for them, is where they are mainly challenged. The smaller the company the less directors you’re going to have.”
Pearce said researchers were surprised to find that the mid-tier was relatively advanced. Anecdotal evidence suggests that many governance initiatives among larger companies have been driven by regulatory moves to lessen corporate governance risk. But the mid-cap sector does not have to comply with many of the same initiatives and is developing governance out of business necessity.
“A mid-cap company by its very nature wants to spend money where it’s going to get results,”said Pearce. “They are less likely to spend it in order to tick the box compared to maybe some of the larger corporates where you may be cynical and see that kind of thing. The increasingly regulated environment has caused some of the action, but you don’t need to have an independent director to look after regulatory requirements. What helps you manage that is good access to risk management methodologies and the right kind of people internally. That doesn’t come from giving lip service, it comes from an overall corporate governance framework.”
Additionally, external stakeholders are ramping up their interest in corporate governance. While ratings agencies and the sharemarket have always considered corporate governance in their analysis of organisations, it is growing in importance.
“Most of the research would say external stakeholders are taking more notice,” Pearce said. “Many mid caps are putting in place a good standard of corporate governance not much below their top 250 counterparts. Are they doing that strictly for box ticking? I don’t think so. You’re not going to invest in those systems and personnel unless you’re getting some business benefit. They are doing it for a reason. If you look at the top 250 you can have a look at share price and those with high ranked corporate governance compared with those with low rankings, they are generally outperforming from a share price perspective. There are a number of factors on the side from that, but there is a premium paid. Whether it is institutional or retail investors, they are paying the premium and they do value it.”
The key issue for mid-caps in terms of corporate governance is a lack of independent directors, with 57. 4 per cent not having a majority of independent directors.
The Horwath report assigned a rating of 0-5 stars for governance based on best-practice globally. Factors taken into account included external auditor independence, codes of conduct and separate audit and remuneration committee structures and the presence of independent directors.
