This country-specific Q&A provides an overview to Corporate Governance laws and regulations that may occur in Australia.
What is the typical organizational structure of a company and does the structure typically differ if the company is public or private?
The most common type of company in Australia is a company limited by shares, either in the form of a proprietary company or a public company.
All companies must have at least one shareholder or member. Proprietary companies must have no more than fifty shareholders that aren’t employees of the company. There is no limit on the maximum number of shareholders of a public company.
A public company must have at least three directors, two of whom must ordinarily reside in Australia. A public company is also required to have a company secretary ordinarily resident in Australia. A proprietary company must have at least one director who must ordinarily reside in Australia.
Who are the key corporate actors (e.g., the governing body, management, shareholders and other key constituencies) and what are their primary roles? How are responsibilities divided between the governing body and management?
The key corporate actors in an Australian company are the shareholders or members, who own shares in the company, the board of directors, who are responsible for the governance of the company, executive management, who manage the company on a day-to-day basis, and the employees, who work for the company pursuant to the terms of their employment contracts.
Typically, the directors of a company are given wide powers to manage the business of the company, thereby enabling the board to exercise all powers which are not, by law or in accordance with the company’s constitution, required to be exercised by the shareholders. In practice, the directors often delegate the day-to-day management of the company to the chief executive officer and the executive management team.
What are the sources of corporate governance requirements?
The most relevant sources of regulation of companies and their corporate governance requirements are:
legislation, notably the Corporations Act 2001 (Cth) (Corporations Act) and statutory rules and guidance made under it;
a company’s constitution (if it has one), which may impose additional requirements on, or in some cases displace or modify, the general law and statutory requirements; and
in the case of public companies listed on the Australian Securities Exchange (ASX), the ASX listing rules (Listing Rules) and the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Governance Principles), which are a set of guidance principles that apply to all listed companies on a ‘comply or explain’ basis.
In addition to the above sources, various pieces of legislation include liability provisions affecting companies or their directors in specific areas that therefore influence governance systems, particularly where a failure to implement sufficient systems to prevent harm is grounds for culpability. This approach is taken in the regulation of, for example, competition and consumer protection, environmental protection, and occupational health and safety. There are also some specific legislative and regulatory standards that apply to particular industry sectors. For example, financial institutions (most notably, banks and insurers) must comply with the Prudential Standards of the Australian Prudential Regulation Authority (APRA).
What is the purpose of a company?
The purposes of specific companies vary depending on the industry they operate in and, where applicable, the objects identified in their constitutions.
The key advantages of a company over a partnership, unincorporated entity, sole trader or trust arrangement include the limited liability of the shareholders, the operation of the company as a separate legal person and the relatively simpler nature of the corporate structure.
Is the typical governing body a single board or comprised of more than one board?
Australian companies are typically comprised of a single board of directors.
How are members of the governing body appointed and removed from service?
Directors are first appointed on incorporation and, thereafter, pursuant to the terms of the company’s constitution or the applicable provisions of the Corporations Act. The Corporations Act (and usually the constitution) provides for appointment by a majority vote of the shareholders or a decision of the existing directors (which must be subsequently confirmed by majority shareholder vote).
Excluding retirements and resignations, directors may only be removed by a majority vote of the shareholders; they cannot be removed by the board. Constitutions will generally also provide for circumstances in which a directorship automatically terminates (such as the bankruptcy or ill health of the director).
Unless required in the company’s constitution, there is no limit on the period of office for directors of proprietary and unlisted public companies. For companies listed on the ASX, the Listing Rules require that each director (other than the managing director/CEO) must stand for re-election every three years, although there is no limit to the number of terms that they can serve. However the ASX Governance Principles suggests as guidance that the independence of a non-executive director should be considered where such director has been on the board for longer than 10 years.
Who typically serves on the governing body and are there requirements that govern board composition or impose qualifications for directors regarding independence, diversity or succession?
A proprietary company must have at least one director who must ordinarily reside in Australia. The board of a public company must have at least three directors, and at least two directors must ordinarily reside in Australia. In both cases, a company’s constitution may provide for a higher minimum number.
Boards of ASX listed companies typically include both executive directors and non-executive directors. The ASX Governance Principles recommend that a majority of the board should be independent (i.e. the director is not allied with the interests of management, a substantial shareholder or other relevant stakeholder, for example, major customers or suppliers), and that the chair be an independent director.
What is the common approach to the leadership of the governing body?
It is common amongst public companies in Australia for the board of directors to have a chair. The role of the chair is not defined in the Corporations Act and therefore varies from company to company. However, the chair is generally responsible for leadership of the board and presiding over board meetings. The ASX Governance Principles recommend that the chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the company. Administrative provisions relating to the chair (including appointment and removal, voting power and approval of board minutes) are typically set out in the company’s constitution.
Typically, each director has one vote on all board decisions. Subject to a company’s constitution, decisions are made by a simple majority of those present and entitled to vote. The chair may have a casting vote (usually in addition to their vote in their capacity as a director) to be used when votes on a resolution are equal.
What is the typical committee structure of the governing body?
Unless a company’s constitution provides otherwise, the directors may delegate any of their powers to committees of the board. For ASX listed companies, it is common, and recommended by the ASX Governance Principles, that boards delegate oversight of certain matters to formal committees, including audit, remuneration and nomination committees. The ASX Governance Principles include comprehensive guidance on the roles and responsibilities of these committees.
How are members of the governing body compensated?
The Corporations Act provides that directors of a company are to be paid the remuneration that the company determines by shareholder vote. However, this general rule (and any other matters relating to director remuneration) can be replaced by the provisions of the company’s constitution. In practice, the board (or, for listed companies, often a remuneration committee) typically recommends the level of remuneration which is then approved by the shareholders.
Typically, non-executive directors are paid directors fees. Executive directors (directors who are also employees of the company) do not typically receive additional remuneration for serving on the board.
The ASX Governance Principles recommend that the structure of remuneration for non-executive and executive directors of ASX listed companies should be clearly distinguished. Non-executives should receive fees. They should not participate in executive incentive plans, nor receive options, bonus payments, or termination benefits other than superannuation. Executive remuneration packages (including for executive directors) should comprise a mixture of fixed and performance-based remuneration. Equity-based remuneration may be appropriate for executives, within guidelines suggested to reduce ‘short-termism’. Termination payments, if any, should be confined to defined circumstances agreed up front, within statutory limits.
Are fiduciary duties owed by members of the governing body and to whom are they owed?
Directors have the following fiduciary duties under common law (which are largely reflected in the Corporations Act):
to act in good faith in the best interests of the company and for a proper purpose;
to exercise a reasonable degree of care, skill and diligence; and
to avoid actual and potential conflicts between their own interests and those of the company, and between their duty to the company and their duties to third parties (for example, duties owed as directors of other companies).
Under the Corporations Act, directors also must not improperly use their position, or information obtained in their role as a director, to gain an advantage for themselves or someone else, or to cause detriment to the company.
The common law duties require directors to take reasonable steps to put themselves in a position to guide and monitor the management of the company. In particular, they must have a general understanding of the company’s business, act in accordance with its constitution and exercise independent judgment. In addition to reasonable skill, care and diligence, they should use any actual knowledge and skills that they have, for example, in financial management.
These fiduciary duties are imposed on both executive and non-executive directors, as well as people who act in the position of a director, including persons who were not formally and properly appointed (de facto directors) and persons whose instructions the directors of a company are accustomed to following (shadow directors).
Directors owe their duties to the company. With respect to the duty to act in the best interests of the company, this is interpreted as a duty to act in the best interests of the shareholders as a whole.
Do members of the governing body have potential personal liability? If so, what are the key means for protecting against such potential liability?
Directors have potential personal liability for a breach of their duties, under the Corporations Act and various other legislation in Australia . Under the Corporations Act, a company may indemnify its directors against liabilities incurred as a director of the company, other in relation to liabilities owed to the company or related bodies corporate, certain civil penalties or compensation orders, or liabilities owed to a third party where the person did not act in good faith.
As an additional protection, it is common for companies to take out directors’ liability insurance on behalf of its directors. However, the Corporations Act prohibits a company from insuring its officers against conduct arising out of a willful breach of their duties or a misuse of position or information.
How are managers typically compensated?
Managers, or executives, are employees of the company and are compensated in accordance with the terms of their employment agreements. The salaries and bonuses of the senior management team is determined by the board of directors, unless delegated to a remuneration committee.
How are members of management typically evaluated?
Management is held accountable by the board of directors. The board may delegate this responsibility to the chief executive or human resources executives.
Do members of management typically serve on the governing body?
A company’s chief executive will typically serve on the board of directors. Chief financial officers and other senior executives may also serve on the board.
What are the required corporate disclosures, and how are they communicated?
The principle disclosure and reporting requirements on Australian companies are set out in the Corporations Act and the Listing Rules. As a basic rule and subject to certain exemptions, the Corporations Act requires all public companies, all large proprietary companies and certain small proprietary companies (notably those small proprietary companies that are foreign-controlled or have been requested to do so by ASIC or shareholders) to prepare and disclose annual financial reports. The Corporations Act also sets out the instances in which the annual financial reports must be audited.
The Listing Rules contain a number of additional disclosure rules that apply to listed companies, including additional periodic disclosure requirements and continuous disclosure requirements, including the disclosure of market sensitive information. The type of information that this covers will depend on the nature of the business of the listed company, but typically includes material transactions, involvement in a material law suit or the fact that the company’s earnings will be materially different from guidance or market expectations.
How do the governing body and the equity holders of the company communicate or otherwise engage with one another?
A board of directors communicates with its shareholders in two principle ways:
through corporate disclosures (see Question 16); and
at general meetings of the shareholders (see Questions 22 and 25).
Are dual or multi-class capital structures permitted and how common are they?
Multiple classes of shares are permitted for Australian companies, with the rights set out in the company’s constitution.
Ordinary shares are the most common form of shares for both public and proprietary companies. Ordinary shares carry no special or preferred rights. Holders of ordinary shares will usually have the right to vote at general meetings, to participate in any dividends and to participate in any distribution of assets on winding up of the company, in each case on the same basis (i.e. pro-rata) as other ordinary shareholders.
What percentage of public equity is held by institutional investors versus retail investors?
There is no typical spread of equity between institutional and retail investors, rather the split would vary widely between different listed entities.
What matters are subject to approval by the shareholders and what are the typical quorum requirements and approval standards? How do shareholders approve matters (e.g., voted at a meeting, written consent)?
As a general principle, the operation and management of a company’s business is delegated to the board and its delegates (i.e. board committees and the management team). However, certain matters, either under the Corporations Act or the company’s constitution, require shareholder approval. Some approvals require a simple majority, while others require a special resolution (approval by 75% of shareholders entitled to vote on the matter). Key approvals required from shareholders under the Corporations Act, Listing Rules or a typical constitution include:
name and constitution: any change to the company’s name or constitution must be approved by a special resolution;
capital management: certain reductions of capital and share buy-backs require shareholder approval, either by simple majority or special resolution, depending on the circumstances. Simple majority approval is required for listed companies to issue shares in excess of 15% of existing equity capital in any 12-month period. A company financially assisting another to acquire shares in itself also requires a special resolution, unless the assistance does not prejudice the interests of the company, its shareholders, or its ability to pay its creditors;
related party transactions: simple majority approval is required for companies to give any financial benefit to related parties (including directors), with limited exceptions including benefits given on arm’s-length terms and reasonable remuneration. Any issue of securities to related parties must be approved by a simple majority of shareholders (either specifically or by an approved share plan);
significant transactions: simple majority approval is required if a listed company proposes to make a significant change to the nature or scale of its activities, or to dispose of its main undertaking.
alteration of rights: alterations to the rights attaching to classes of shares must generally be approved by special resolution, normally by all shareholders and by each relevant class, unless otherwise specified in a company’s constitution; and
election/re-election of directors: the appointment of directors requires a majority vote of the shareholders. For companies listed on the ASX, shareholders vote on the re-election of directors at least every three years.
Are shareholder proposals permitted and what requirements must be met for shareholders to make a proposal?
Shareholder proposals are permitted where the proposal is requested by shareholders with at least 5% of votes.
May shareholders call special meetings or act by written consent?
The Corporations Act requires directors of a company to call and arrange to hold a general meeting which is validly requested by shareholders with at least 5% of the votes which may be cast at a meeting, or by at least 100 shareholders. In order to request a general meeting, shareholders must submit a written request to the company, setting out any proposed resolution(s) and signed by the requesting shareholders. There are limits to what is permitted with respect to resolutions proposed at shareholder requisitioned meetings. Courts have held that where a proposed resolution relates to powers vested in the board under the company’s constitution, or is for some other improper purpose, the request should not be considered valid. Where a valid request is made, the shareholder requisitioned meeting must be called and concluded within two months from the date the request was provided.
A company may pass a resolution without a general meeting being held if all the shareholders entitled to vote on the resolution sign a document (i.e. a written resolution) containing a statement that they approve the resolution set out in the document. Written shareholder resolutions are common for proprietary companies, particularly those with a single shareholders and, primarily for practical reasons, less common for public shareholders given their larger shareholder base.
Is shareholder activism common and what are the recent trends?
Whilst shareholder activism was not traditionally common in Australia, the rise in shareholder activism trending worldwide is being felt in Australia.
Shareholder activists typically use their voting rights to push for change in areas such as executive remuneration, corporate strategy, board changes and capital redistributions. Activism is also more common in certain industries, and on certain issues – in particular with regard to environmental concerns.
Together with an increase in shareholder activist funds, Australia’s proxy advisor sector continues to grow.
What is the role of shareholders in electing the governing body?
The Corporations Act (and usually the constitution of a company) provides for appointment of directors by a majority vote of the shareholders or a decision of the existing directors (which must be subsequently confirmed by majority shareholder vote).
Are shareholder meetings required to be held annually or otherwise, and what information needs to be presented?
Proprietary companies are not required to hold annual general meetings (AGMs).
Public companies must hold an AGM at least once each year, and within five months of the end of its financial year. The statutory annual financial report, auditor’s report and directors’ report must be presented to the AGM. The AGM must consider the advisory resolution on the remuneration report, and will commonly consider the re-election of directors. The company auditor must attend the AGM. Shareholders have a right to submit questions to the auditor in advance, and must be given an opportunity to ask questions of the auditor at the meeting. An opportunity must also be allowed for shareholders to ask questions about, or make comments on, the management of the company and the remuneration report.
Do any organizations advise or counsel shareholders on whether to approve matters?
What role do other stakeholders, including debt holders, employees, suppliers and customers and the government, typically play in the corporate governance of a company?
What consideration is given to environmental and social issues, including climate change, sustainability and product safety issues, and are there any legal disclosure obligations regarding the same?
The ASX Governance Principles require listed entities to act ethically and responsibly. The ASX Governance Principles also require listed entities to recognize and manage risk, including economic, environmental and social sustainability risks (i.e. not just financial risk). Entities are required to disclose any material exposure to such risks.
A September 2018 study by ASIC revealed:
17% of listed companies in the sample search identified climate risk as a material risk;
the majority of the ASX 100 companies in the search sample had, to some extent, considered climate risk to the company’s business; and
there is limited climate-risk-related disclosure outside of the ASX 200.
How are the interests of shareholders and other stakeholders factored into decisions of the governing body?
Do public companies typically provide earnings guidance on either a quarterly or annual basis?
May public companies engage in share buybacks and under what circumstances?
It is common for public companies in Australia to engage in share buybacks as a means of returning capital to shareholders. The rules and procedures for share buybacks are set out in the Corporations Act. There are a number of different ways in which a share buyback can be effected, including equal access buybacks and selective buybacks. Underlying these different procedures is the same basic principles which are intended to protect the interests of creditors and shareholders, focusing on continuing company solvency, fairness to shareholders and disclosure of all relevant information.
What do you believe will be the three most significant issues influencing corporate governance trends over the next two years?
At the time of writing, a number of corporate governance initiatives are receiving increased focus following the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. While the scope of the Royal Commission was limited to the financial services sector, many of the issues highlighted are relevant to other sectors and it is expected that the Royal Commission’s impact on corporate governance practices will be far more wide reaching.
Focus on corporate culture: beginning with a focus on remuneration (see below) and governance structures, we expect to see more corporates making a concerted effort to identify core values use those core values to establish a culture that will determine its approach to corporate governance. The challenge inherent in this focus on culture is how to measure or assess a company’s culture, both internally (i.e. by the company themselves) and externally (by regulators). Regardless, we expect to see more guidance and, to a lesser extent, rules requiring companies to underpin their corporate governance with a values-based culture.
Increased scrutiny of executive remuneration: the Royal Commission was particularly critical of the failure of companies in the financial sector to properly implement executive remuneration arrangements which involve a variable component measured against the company’s management of risk. One of the key issues highlighted is the nature of the risk that management should be expected to consider and therefore be compensated in relation to, with a growing focus on non-financial risk (for example, risks to reputation).
Increased consideration of non-financial risks: More generally, the Royal Commission highlighted the need for directors to give due consideration to both financial matters (such as liquidity, capital and credit risk) and non-financial matters (such as regulatory, conduct, compliance and reputational risks) when discharging their duties Assessing and considering only financial risks and impacts is not sufficient. As a result, we expect to see a greater focus on non-financial risk in risk and corporate governance frameworks in Australia.