Australia has a long history of entrepreneurial business leaders who stamp their personality on their companies. Mark Beyer and David Gibson examine the role of executive chairmen in light of recent controversies at three prominent WA companies.
Some of Australia’s best public companies, and some of its worst, were built by leaders who had a dominating influence on their business.
The best include Frank Lowy’s Westfield and Gerry Harvey’s Harvey Norman, while the worst include Alan Bond’s Bond Corporation and John Elliott’s Elders IXL.
The people who ran these companies were the major shareholder, the chairman and the chief executive, all rolled into one.
Corporate governance reforms adopted in recent years, such as the Australian Stock Exchange’s best practice guidelines, have discouraged this practice, yet there are still plenty of listed companies in Western Australia (and nationally) that persist with an executive chairman model.
Three of these companies – Franklin Tate’s Evans & Tate, John Roberts’ Multiplex and Andrew Forrest’s Fortescue Metals – have run into strife this year, with the latter two subsequently splitting the role of chairman and chief executive.
Does this prove correct the corporate governance purists, who say listed companies should have an independent non-executive chairman?
Or should we look more widely to companies such as Kerry Harmanis’ Jubilee Mines, John Rothwell’s Austal and Brett Fogarty’s GRD, which are happily continuing with their unfashionable corporate governance models?
The ongoing debate over corporate governance follows a spate of reforms around the world in response to high-profile corporate collapses such as Enron and HIH Insurance.
The reforms all pushed concepts like board independence, yet a new international study has found there is no empirical evidence to support the ‘best practice’ models pushed by organisations including the ASX (see next page).
Professional advisers emphasise the ASX’s best practice recommendations are just that – recommendations.
“They are not the be all and end all,” Blakiston & Crabb consultant Dalveen Belyea said.
There is also concern that the corporate regulation pendulum has swung too far.
“If you talk to company directors, a lot of them believe it has swung too far,” Ernst & Young partner Greg Meyerowitz told WA Business News.
Despite these views, recent examples show that companies experiencing difficulties often respond by falling into conformity with the ‘best practice’ governance guidelines.
A case in point is Multiplex, which listed on the Australian Stock Exchange about 18 months ago.
It operated successfully for many years as a private company under the leadership of its founder and executive chairman, John Roberts.
However, Mr Roberts resigned as chairman in May following weeks of damaging publicity over losses on its Wembley stadium project in London and mounting concern about the company’s disclosure practices.
As well as appointing a new chairman, the company is making other board changes so the number of independent directors will match the five executive directors.
Aspiring iron ore producer Fortescue Metals Group was another company to make changes at the top after a damaging run of bad news.
Founding chairman and chief executive Andrew Forrest stepped down as chairman in May, to be replaced by Gordon Toll.
The company said the separation of the roles of chairman and chief executive “reflects the growth and maturity of Fortescue” but it also followed weeks of investor disquiet and ASX queries about its bullish announcements.
Biotech company Chemeq is another prominent WA firm forced to change its governance structure following major operational problems.
Company founder and executive chairman Graham Melrose announced last year he would cease his executive role, but the company has not yet found a new chief executive.
In contrast, embattled Evans & Tate executive chairman Franklin Tate has no intention of changing his company’s governance structure.
“I have a very strong, passionate view that Australia doesn’t need less executive chairman, it needs more,” Mr Tate told WA Business News (see next page).
“If you believe there is a role for entrepreneurial spirit in building and creating great companies, that’s only going to happen when people who are leading companies are doing so with their own money.
“A corollary is that those people wish to express that passion and lead the organisation themselves.
“Sadly, organisations such as the Australian Institute of Company Directors fail to get this at all.”
Mr Tate believes Evans & Tate’s approach to corporate governance is distinguished by the appointment of a lead independent director.
“You get all the benefits of a non-executive chairman without the corporate leadership being compromised,” he said.
Mermaid Marine is another WA company to appoint a lead director, but in practice the role is very different to Evans & Tate.
Mermaid’s lead director, Tony Howarth, said the role was created last year because most of the board members, including non-executive chairman Alan Birchmore, were substantial shareholders or had operational links with the company.
“We felt that things could emerge where there may be some conflicts around the board,” Mr Howarth said.
One example was a bid for the company, but in practice “we have not had to use it”.
WA companies that combine the roles of chairman and chief executive are mostly up-front in explaining why they have departed from the ASX’s best practice guidelines.
Austal executive chairman John Rothwell said the nature of his business required a powerful chairman.
“This is a specialised business,” Mr Rothwell said, adding that “you’ve got to be careful that you have a mix of talented individuals … a board needs to challenge management.”
On the issue of corporate governance regulation, Mr Rothwell said companies should be able to develop their own blend of independence, although there would always be a case for regulation.
“It is unhealthy for a board to be dominated,” he said.
Bob McKinnon recently retired as Austal’s managing director and the company has replaced him with newly appointed chief operating officer Stephen Murdoch.
As a result, the board now has a majority of three non-executive directors in John Poynton, Bob Browning and Chris Norman, who all challenge management frequently, according to Mr Rothwell.
Jubilee Mines’ corporate governance charter states that its current members have the “skills, knowledge and experience necessary to effectively govern the company”.
“In addition, it should be noted that the current executive chairman [Kerry Harmanis] is a substantial and long-standing shareholder of the company and, as such, is able to clearly identify with the interests of shareholders as a whole,” the charter states.
Similarly, Straits Resources notes the substantial shareholding of its executive chairman David Toms as well as his significant commercial experience.
“For these reasons, the board believes Mr Toms’ interests are aligned with that of other shareholders, and the board do not believe that this has any adverse impact on Mr Toms effectively carrying out his duty as board chairman,” Straits Resources’ corporate charter says.
GRD states succinctly that its executive chairman Brett Fogarty “is currently the best qualified board member for the role of chairman given the size and nature of the company and his extensive knowledge of the consolidated entity’s operations”.
Jackson McDonald partner Stephen Doyle said the position of chairman and chief executive was just one aspect of board governance.
“It’s important to look at how the board actually operates,” Mr Doyle said. “There’s a lot to be said for good old fashioned common sense.”
He believes a properly functioning board allows for robust discussion, candour and dissent.
“If you do have someone in the combined role, its very important that you have independent directors with the experience, expertise and personality to discuss matters openly and frankly at board level and be prepared to question and challenge management,” Mr Doyle said.
Ernst & Young’s Greg Meyerowitz agrees that directors need to be prepared to stand up and be counted.
“It’s important to have directors who really understand the industry,” he said.
“You also need people who are prepared to stand up to the chairman and chief executive.”
Blakiston & Crabb’s Ms Belyea, who has helped about 70 listed companies review their corporate governance practices, believes directors need to focus on achieving “honest and transparent disclosure”.
She said board performance evaluation had also been glossed over in the past.
Ms Belyea said many small to mid-sized companies had chosen not to conform with some ‘best practice’ guidelines, partly because of the cost of appointing new independent directors.
However, many companies have formalised and documented their governance practices.
To view the list of dominant business leaders click here.
