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Corporate Governance – 2009 Reports

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Reports find corporate governance standards slipping
across large and mid-caps sectors

A high percentage of listed Australian companies still have significant deficiencies in their corporate governance policies, with less than 16% (39) of the 250 largest companies by market capitalisation achieving best practice standards.

At the same time, of those companies ranked 251-400 by market capitalisation, which are classified as mid-caps, less than 5% (7) demonstrated best practice governance standards in the 2008 financial year.

The 2009 WHK Horwath Large Cap and Mid-Cap Corporate Governance reports, which have been released today, also show a marked increase in the number of listed companies that were totally lacking in corporate governance structures and policies based on their 2008 annual report disclosures.

The separate reports rank the performance of listed companies on key governance factors such as board composition and independence, auditor independence, having separate audit, remuneration and nomination committees in place and carbon emissions disclosures. As well as failing in these areas, the worst performers also have inadequate documentation in areas such as disclosure of related-party transactions or rigorous policies on risk management and share trading.

In the large caps sector, 14 listed companies, or 5.6%, achieved the lowest possible score of 1 star for corporate governance, on a scale of 1 to 5 stars. This compared with 10 companies, or 4%, in 2008.

In the mid-caps sector, which includes 150 companies, the number with only 1 star ratings more than doubled from the previous year. A total of 23 companies, or 15.6%, ranked as the worst governance performers, up from 10 companies, or 6.7%, in 2008.

Research for both reports was undertaken by the University of Newcastle.

“The results are very disappointing and show there has actually been a deterioration in the corporate governance across both the large caps and mid-caps sectors,” said WHK Horwath principal, Audit & Assurance, John Gavens.

“We have the corporate governance framework and guidelines in place and should expect, from an accountability and performance perspective, that companies should be complying, particularly at the larger end of the market.”
In both the large caps and mid-caps sectors, the corporate governance structures of the 5-star companies were outstanding, and without question, met best practice standards.

Of the large cap companies, there were four companies that jointly topped the list. These were Melbourne-based health products group Ansell, retailer David Jones, paper group PaperlinX, and financial services firm Perpetual (in alphabetical order), which met all criteria considered in the WHK Horwath model unequivocally.

Of the mid-caps, there were seven companies that achieved a 5-star rating. The top ranked company was Sydney-based health products group Aevum, with other 5-star companies Austbrokers Holdings, WDS, SMS Management, Nomad Building Solutions, Biota Holdings and Sirtex Medical.

“The companies that are getting five stars tick every box in relation to governance, but those with the highest ranking have extra rigour and depth in terms of their policies covering areas such as share trading and risk management,” said Associate Professor Jim Psaros of the University of Newcastle. “They are beyond reproach and their communication of governance policies and practices is totally transparent.”

The three lowest-ranked companies among the large caps, each achieving only a 1-star governance rating, were high-profile Victorian-based retail group Premier Investments, and Perth-based resources company Giralia Resources and coal technology group White Energy Company.

Among the mid-caps, the lowest-ranked were Melbourne-based investment company Contango Microcap, and Perth-based Pan Pacific Petroleum and property company United Overseas Australia.

“The deterioration in corporate governance is not apparent at the top end of the spectrum as excellent companies have not gone backwards with their corporate governance,” Associate Professor Psaros said. However, there has been a substantial increase in the number of companies with poor corporate governance.

“At the top end our companies would have governance standards that they can be proud of on an international level and would match standards anywhere in the world, but at the bottom end some of our companies are being run like the local tuck shop.”

Other key highlights of the large caps report include:

  • The industries that have the highest proportion of companies with excellence in corporate governance were the banks, insurance, food, beverage & tobacco and hotels, restaurants & leisure. In contrast the energy, media, and in particular the metals & mining industries appeared to have, on average, poorer across the board corporate governance. As has been the case for several years, the metals & mining industry is the worst offender. Disappointingly, it has a disproportionately large proportion of 1-star companies, and a correspondingly disproportionately small proportion of 5-star companies.
  • With respect to carbon reporting, the aggregate results are pleasing. Fifty companies, (20%) provided what can be described as excellent carbon disclosures. This is in the absence of a current legal imperative to do so, or without established guidelines. The majority of Australia’s top 250 listed companies are making quite reasonable attempts to inform their stakeholders of their carbon emission actions and future intentions.

Other key highlights of the mid-caps report include:

  • Few of the individual companies that had been assessed in both 2008 and 2009 had significantly worse corporate governance. However, the key explanation for the aggregate deterioration of corporate governance relates to the significant increase in the number of companies who had not been previously ranked. In the 2009 Mid-Cap Report, 76 of the 150 companies had not previously been ranked as mid-caps. When considered as a group, their corporate governance was very poor.
  • Software & Services was the industry group that appeared to have companies with the best corporate governance structures. In contrast, the industry groups that stood out with a disproportionately large number of poor corporate governance companies were the Energy industry (2.59 stars) and the Materials industry (2.12). The results are clearly disappointing for both industries.

“This may have been possibly understandable, but not necessarily justified, when they were small market capitalisation companies,” Mr Gavens said. “However, now that they have greater market prominence, there is an obligation to have greater transparency and accountability that is commensurate with improved corporate governance structures.

“Over the last 12 months, we have seen companies with poor corporate governance practices disappear from the survey and be replaced with companies with even poorer corporate governance practices. The uncertain economic times has resulted in the survey reviewing the practices of companies that would otherwise fly under the radar. What is unclear is whether this is a short term aberration as these companies may disappear from the mid-cap list as quickly as they have appeared. Time will tell.”

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