Board Functions and Structures: 3.1 Higher Community Expectation of Directors

3
Board functions and structures
There is now overwhelming evidence that the board system is falling well
short of adequately performing its assigned duties. Without fundamental
improvement by individual boards, the entire board system will continue
to be attacked as impotent and irrelevant and the boards of troubled and
failing companies will, with good reason, increasingly become the targets
of not only aggrieved and angry shareholders but also employees, creditors,
suppliers, governments, and the public.
David SR Leighton and Donald H Thain, Making Boards Work (1997) 3.
Until they served on a board, people may well imagine that directors behave
rationally, that board level discussions are analytical, and that decisions
are reached after careful consideration of alternatives. Not often. Experi-
ence of board meetings, or of the activities of any governing body for that
matter, shows that reality can be quite different. Directors’ behaviour is
influenced by interpersonal relationships, by perceptions of position and
prestige, and by the process of power. Board and committee meetings
involve a political process.
Bob Tricker, Corporate Governance: Principles, Policies and Practices
(2008) 241.
3.1 Higher community expectation of directors
3.1.1 Initially low standards of care, skill and diligence

expected of directors
Directors’ statutory duties and liability are discussed in greater detail in
Chapter 10. It is, however, important first to make a few observations regarding
the higher community expectations of directors.
Based on English precedents, it has been accepted that directors are not
liable for a breach in their duty of care, skill and diligence if they merely acted
negligently. One of the first indications that more than ordinary negligence was
required is found in an English case decided in 1872, where it was held that
directors are liable only for a breach in their duty of care, skill and diligence if
they acted with crassa negligentia (gross negligence).1 This rule was confirmed
1 Overend & Gurney Company v Gibb [1872] LR HL 480 at 487, 488, 489, 493, 496 and 500.
71
72 BASIC CONCEPTS, BOARD STRUCTURES AND COMPANY OFFICERS
in a later case (1899) by Lord Lindley MR, one of the most famous English
commercial Lords:
The inquiry, therefore, is reduced to want of care and bona fides with a view to the
interests of the nitrate company. The amount of care to be taken is difficult to define;
but it is plain that directors are not liable for all the mistakes they may make, although
if they had taken more care they might have avoided them: see Overend, Gurney &
Co. v. Gibb (1872) LR 5 HL 480. Their negligence must be not the omission to take all
possible care; it must be much more blameable than that: it must be in a business sense
culpable or gross. I do not know how better to describe it.2
These sentiments were repeated in several later English cases,3 and the fact
that negligence alone was not enough to hold directors liable for a breach of
their common law duties or equitable duties, was also recognised in the leading
Australian case, Daniels v Anderson.4 In Daniels v Anderson the majority (Clark and
Sheller JJA) referred to the concept of ‘negligence’ as used in context of equitable
remedies, and concluded that ‘[t]he negligence spoken of was something grosser
or more culpable determined by subjective rather than objective tests’.5 The
subjective test referred to by Clark and Sheller JJA alludes to the test that a
director was to exercise only the care which can reasonably be expected of a person
of his knowledge and experience.
The combined effect of a higher requirement than ordinary negligence and
the fact that subjective elements were used to judge whether a particular director
was in breach of her or his duty of care, skill and diligence, ensured that it was
very rare to find cases in which directors were held liable for a breach of their
duty of care, skill and diligence.
In Daniels v Anderson6 the court referred to the low standards of care, skill
and diligence expected of directors in the past and observed that ‘[h]owever
ridiculous and absurd the conduct of the directors, it was the company’s mis-
fortune that such unwise directors were chosen’.7 There were several reasons
given by the courts and commentators as to why in the past the courts were
reluctant to expect high standards of care, skill and diligence of directors. Or, to
2 Lagunas Nitrate Company v Lagunas Syndicate [1899] 2 Ch 392 at 435.

3 Re National Bank of Wales Ltd [1899] 2 Ch 629 at 672; In re Brazilian Rubber Plantation and Estates Ltd
[1911] 1 Ch 425; In re City Equitable Fire Insurance Company Limited [1925] 1 Ch 407 at 427.
4 (1995)16 ACSR 607 (CA (NSW)) at 657.
5 Ibid.
6 (1995) 16 ACSR 607 (CA(NSW)).
7 Ibid 658–9, which is in actual fact a reference to what was said in Turquand v Marshall (1869) LR 4 Ch
App 376 at 386: ‘It was within the powers of the deed to lend to a brother director, and however foolish the
loan might have been, so long as it was within the powers of the directors, the Court could not interfere and
make them liable . . . Whatever may have been the amount lent to anybody, however ridiculous and absurd
their conduct might seem, it was the misfortune of the company that they chose such unwise directors; but as
long as they kept within the powers of their deed, the Court could not interfere with the discretion exercised
by them.’ The Cooney Report Senate Standing Committee on Legal and Constitutional Affairs, Company
Directors’ Duties—Report on the Social and Fiduciary Duties and Obligations of Company Directors (Cooney
Report) (1989) at 20 para. 3.3 fn 2, also cites the following cases for similar sentiments: ‘Re New Mashonaland
Exploration Co [1892] 3 Ch D 577 at 585 per Vaughan Williams J; Re Forest of Dean Coal Mining Co (1878)
10 Ch D 450 at 453 per Jessel MR; Re Faure Electric Accumulator Co (1888) 40 Ch D 141 at 152 per Kay J. See
J Dodds, ‘New Developments in Directors Duties – The Victorian Stance on Financial Competence’ (1991) 17
Monash University Law Review 133 at 133 and 134–6.
BOARD FUNCTIONS AND STRUCTURES 73
put it differently, why the courts were reluctant to scrutinise closely the business
decisions taken by directors. Some of the reasons given were that:
● taking up a position as non-executive director on a part-time basis was
simply ‘an appropriate diversion for gentlemen but should not be coupled
with onerous obligations’8
9
● ‘directors are not specialists, like lawyers and doctors’
● directors are expected to take risks and they are dealing with uncertainties,
which would be compromised if too high standards of care were expected
of directors
● courts are ill-equipped to second-guess directors’ business decisions
● the internal management of the company is one that companies can arrange
as they wish, and courts should be reluctant to interfere with internal
company matters etc.
As will be seen below, the scene has changed considerably, and nowadays there
are much higher expectations of directors to act with due care and diligence, and
these higher expectations are reflected in several court cases decided since the
early 1990s.
3.1.2 Legal recognition of changed community expectation

of directors
That the scene has changed considerably for directors in recent years was strik-
ingly illustrated by the case of Daniels v Anderson.10 Although the court specifi-
cally recognised the potential tension between expecting objective professional
standards of all directors in all types of companies, the court did not hesitate
to conclude that community expectations of the standards of performance of
directors have increased since the case of City Equitable Fire Insurance Co Ltd
(decided in 1925). Thus, the court held that it is the modern law of negligence
that should be used to determine whether a director was in breach of his or her
duty of care, skill and diligence.11 In actual fact, the court held that the modern
law of negligence (also called the tort of negligence) can cope with the potential
tension between expecting objective professional standards of all directors in all
types of companies.
The court adopted the general principles of the tort of negligence and the duty
of care after drawing attention to three very important things. First, there were
historic reasons why directors’ duty of care, skill and diligence were viewed in a
particular manner by the English courts of the late 1800s and early 1900s. Refer-
ring to the article by Jennifer Hill,12 the court made the following observation:
8 RBS Macfarlan, ‘Directors’ Duties after the National Safety Council Case: Directors’ Duty of Care’, (1992)
3 Australian Bar Review 269 at 270. See also Dodds, above n 7, at 134.
9 P Redmond, ‘The Reform of Directors’ Duties’ (1992) 15 UNSWLJ 86 at 98, quoting from Barnes v Andrews
298 Fed 614 (1924) at 618.
10 (1995)16 ACSR 607 (CA (NSW)).
11 at 664–5.
12 J Hill, ‘The Liability of Passive Directors: Morley v Statewide Tobacco Services Ltd’, (1992) 14 Syd LR 504.
The nature and extent of directors’ liability for their acts and omissions developed as
the body corporate evolved from the unincorporated joint stock company regulated
by a deed of settlement and was influenced by the partnership theory of corpora-
tion whereunder shareholders were ultimately responsible for unwise appointment of
directors.13
Second, in embracing the tort of negligence as the basis of liability for a breach of
a director’s duty of care, skill and diligence, the court took into consideration that
‘the law about the duty of directors’ had developed considerably since the decision
in Re City Equitable Fire Insurance Co (1925).14 The court then, in roughly seven
pages,15 painstakingly quoted from contemporary cases before reaching the con-
clusion that the tort of negligence and the modern concept of a duty of care now
forms an acceptable basis for liability of directors’ breach of their duty of care.16
Third, the court mentions the law of negligence has developed considerably in the
70 years (Daniel’s case was decided in 1995) since the decision in Re City Equitable
Fire Insurance Co.17
Daniels v Anderson represents the pinnacle in Australia (and probably also in
other jurisdictions influenced by English law!) of the development of directors’
duty of care, skill and diligence, which only began to emerge in greater detail in
about 1869, with the case of Turquand v Marshall. Daniels v Anderson was decided
in 1995, and since then it can safely be stated that the standards of care expected
of Australian directors under the common law has reached new heights – Daniels
v Anderson brought an abrupt end to the notions that directors’ duty of care, skill
and diligence should be judged subjectively and that their negligence ‘must be
in a business sense culpable or gross’. Although Daniels v Anderson represents
the pinnacle of developments in this regard, there were at least two earlier cases
that sent a wake-up call to sleeping or dormant directors in Australia – they were
the cases of Statewide Tobacco Services Ltd v Morley18 and Commonwealth Bank
of Australia v Friedrich,19 which served as the catalysts for the development of
contemporary standards in this area of the law.
Similar developments, and the fact that there are nowadays higher expecta-
tions of directors, are neatly summarised by Tricker, with reference to interna-
tional developments:
Once upon a time a directorship was a sinecure – an occasional meeting between

friends, maybe a few supportive questions, then a fee and probably lunch. Not now.
Today more is expected of company directors, indeed the members of all governing
bodies, than ever. The work of governing corporate entities has become demanding,
13 Daniels v Anderson (1995) 16 ACSR 607 (CA (NSW)) at 657.

14 Ibid at 661. See also The Honourable Sir Douglas Menzies ‘Company Directors’ (1959) 33 The Australian
Law Journal 156 at 156–8 and 163–4; Macfarlan, above n 8, 272–3.
15 Daniels v Anderson (1995) 16 ACSR 607 (CA (NSW)) at 661–7.
16 Ibid at 668.
17 Ibid at 661.
18 (1990) 8 ACLC 827.
19 (1991) 9 ACLC 946. See generally A S Sievers ‘Farewell to the Sleeping Director—The Modern Judicial
and Legislative Approach to Directors Duties of Care, Skill and Diligence’ (1993) 21 Australian Business Law
Review 111.
often difficult, and open to challenge. Nevertheless, the work and responsibility is often
crucial and can be rewarding, both financially and personally.20
As will be seen in Chapter 10, director liability in Australia is dominated by

liability for a breach of their statutory duties. Also, it will be seen that it is the
primary corporate regulator (the Australian Securities and Investments Com-
mission (ASIC)) that takes a lead role in instituting actions against directors for
a breach of their statutory duties.21 However, as was illustrated above, also in
terms of case law based on the breach of directors’ common law duties or equi-
table duties, the standards of skill, care and diligence expected of directors have
risen considerably over the past two decades, and the statutory standards of care
found under section 180(1) of the Corporations Act 2001 (Cth) (the Act) reflects
the common law standard.22
3.2 The organs of governance
The Report of the HIH Royal Commission (Owen Report)23 summarises very well
the concept of organs of a corporation in the context of corporate governance.24
Justice Owen explained that a corporation is a legal entity separate and apart
from its board of directors (one of the primary organs of a corporation) and
shareholders (the other primary organ of a corporation), and that the corporation
can only ‘act through the intervention of the human condition’.25 The classic
statement of this principle is to be found in Lennard’s Carrying Co Ltd v Asiatic
Petroleum Co Ltd per Lord Haldane:
My Lords, a corporation is an abstraction. It has no mind of its own any more than it
has a body of its own; its active and directing will must consequently be sought in the
person of somebody who is really the directing mind and will of the corporation, the
very ego and centre of the personality of the corporation.26
In 2008, Justice Owen again explained as follows in The Bell Group Ltd v Westpac
Banking Corporation (No 9):27
There are various organs that influence the decision-making processes of a corporation
and which are involved in corporate governance. But primary governance responsibility
lies with the board of directors. In formal terms the directors are appointed by, and
are accountable to, the body of shareholders. As a general rule it is the directors who
20 Bob Tricker, Corporate Governance: Principles, Policies and Practices, Oxford University Press, Oxford
(2009) 17.
21 See, for example, ASIC v Adler (2002) 42 ACSR 80; ASIC v Rich (2003) 44 ACSR 44; ASIC v Elliot (2004)
48 ACSR 621; ASIC v Vines (2005) 55 ACSR 617; ASIC v Vizard (2005) 145 FCR 57; ASIC v Maxwell (2006) 59
ACSR 373; ASIC v Macdonald (No 11) (2009) 256 ALR 199l; ASIC v Macdonald (No 12) (2009) 259 ALR 116.
22 Vines v ASIC (2007) 62 ACSR 1; ASIC v Macdonald (No 11) (2009) 256 ALR 199.
23 Report of the HIH Royal Commission (Owen Report), The Failure of HIH Insurance – Volume I: A Corporate
Collapse and its Lessons, Canberra, Commonwealth of Australia (2003).
24 Ibid 103 (Ch 6, s 6.1.1).
25 Ibid.
26 [1915] AC 705, 713.
27 [2008] WASC 239 (28 October 2008) [4365].
are ‘the directing mind and will of the corporation, the very ego and centre of the
personality of the corporation’: Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd,
at 713. The power to manage the business of the company has been delegated to the
directors. The delegation arises as part of, or by virtue of, the contract between the
shareholders and the company represented by the Articles of association.
Historically, the power to manage the business of all companies and corpora-
tions was conferred upon the board of directors. The practical reality that it was
impossible for a board of directors to manage the day-to-day business of large
public corporations was realised only quite recently (see discussion under ‘Board
functions’, below). Nowadays, the board of directors is seen as the primary gov-
ernance or supervisory organ. The 2007 Australian Securities Exchange (ASX)
Principles of Good Corporate Governance and Best Practice defines the term ‘board’
as:
the directors of a company acting as a board and, in the case of listed trusts and
externally managed entities, references to ‘boards’ and ‘directors’ are references to the
boards and directors of the responsible entity of the trust and to equivalent roles in
respect of other externally managed entities.28
The powers conferred upon shareholders are primarily conferred upon them by
the Act. The powers to appoint directors and to remove directors are some of the
most important powers of shareholders, but there are also several other decisions
in a company that cannot be taken without the approval of the shareholders by
way of a special resolution (a 75 per cent majority of the shareholders present at
a shareholders’ meeting in person or by proxy).29 Justice Owen commented on
the legal status of the two primary organs of a corporation:
In formal terms the directors are appointed by, and are accountable to, the body
of shareholders. The board will usually be constituted (and in the case of HIH was
constituted) by a chair, executive directors and non-executive directors.30
One of the most interesting aspects revealed by the Owen Report was that employ-
ees, falling in the group of middle management, have considerable powers in
large public corporations and often take decisions that may have huge conse-
quences for the corporation. Justice Owen explained this as follows:
It is difficult to define with precision the part that employees play in corporate gov-
ernance. It will depend on the extent to which the employee is involved in or can
influence the decision-making process. Senior management is more likely to have such
a role. But in large corporations or complex groups it may be that employees further
down the corporate hierarchy have a decision-making function that involves elements
of control of the process. There is a danger in the current emphasis on the role and
28 ASX, Principles of Good Corporate Governance and Best Practice (2nd edn, August 2007) 39, avail-
able at <http://203.15.147.66/about/corporate governance/revised corporate governance principles
recommendations.htm>.
29 One of the most important powers that the shareholders have is to change the company’s constitution (if
any) by way of a special resolution – see s 136(2) of the Corporations Act 2001 (Cth).
30 Owen Report, above n 23, 103 para 6.1.1.
responsibilities of boards of directors. It may cause to be overlooked the reality of the

necessarily greater part that executives and other employees play in the day-to-day
running of many corporate businesses.31
3.3 Board functions32
AWA Ltd v Daniels (Trading as Deloitte Haskins & Sells & Ors)33 is one of the
very few cases in which an attempt was made to explain the division of func-
tions between the board of directors and management; non-executive directors
and the chief executive officer (CEO) or managing director; and the chairman
and the board of directors.34 Rogers CJ explained that, apart from statutory
ones, a board’s functions are said to be normally four-fold, namely ‘(1) to set
goals for the corporation; (2) to appoint the corporation’s chief executive; (3)
to oversee the plans of managers for the acquisition and organisation of finan-
cial and human resources towards attainment of the corporation’s goals; and
(4) review, at reasonable intervals, the corporation’s progress towards attaining
its goals’.35
Rogers CJ pointed out the practical limitations on the ability of the board of a
large public corporation to manage the day to day business of the corporation:
The Board of a large public corporation cannot manage the corporation’s day to day
business. That function must of necessity be left to the corporation’s executives. If the
directors of a large public corporation were to be immersed in the details of the day
to day operations the directors would be incapable of taking more abstract, important
decisions at board level . . . 36
This distinction is nowadays also widely accepted in legislation. In the past

the power ‘to manage the business of the company’ was invariably conferred
upon the board of directors by way of the model set of articles of association
(Table A) that accompanied most of the Companies Acts that preceded the Act.
The current statutory recognition reflecting the practical reality that in large
public corporations the business of the corporation is not done by the board
as such, but under the direction of the board, is contained in section 198A(1)
(replaceable rule – see Chapter 6 for the meaning of the term ‘replaceable rule’)
of the Act, providing that ‘[t]he business of a company is to be managed by or
under the direction of the directors’. In proprietary companies, the business of the
31 Ibid.
32 For some interesting reflections on the gap between what directors in fact do and what the business
literature professes they should do, see Myles L Mace, ‘Directors: Myth and Reality’ in Thomas Clarke (ed.),
Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance, London, Routledge
(2004) 96 et seq, based on his book, Myles L Mace, Directors: Myth and Reality, Boston, Division of Research,
Graduate School of Business Administration, Harvard University (1971). For a more theoretical analysis,
distinguishing between ‘board tasks’ and ‘board functions’, see Morten Huse, Boards, Governance and Value
Creation, Cambridge, Cambridge University Press (2007) 33 and 38–40.
33 (1992) 7 ACSR 759.
34 At 865–8.
35 At 865–6.
36 At 866.
company will be managed ‘by’ the board, but in large public corporations it will be
managed ‘under the direction’ of the board. A similar recognition of the practical
realities in large public corporations is found in the American Law Institute’s
(ALI) Principles of Corporate Governance and Structure where § 2.01(a) provides
that ‘[t]he management of the business of a publicly held corporation should be
conducted by or under the supervision of such principal senior executives as are
designated by the board of directors’.37 § 8.01(b) of the American Model Business
Corporations Act captures this by providing that ‘[a]ll corporate powers shall be
exercised by or under the authority of the board of directors of the corporation,
and the business and affairs of the corporation shall be managed by or under,
and subject to the oversight, of its board of directors’.38
Stephen Bainbridge refers to § 141(a) of the Delaware General Corporation
Act, which provides that ‘[t]he business and affairs of every corporation orga-
nized under this chapter shall be managed by or under the direction of a board of
directors . . . ’ and mentions that this power conferred upon the board is enshrined
in every piece of state legislation, except in Missouri. He then calls the statutory
recognition of directors powers ‘the director primacy mode’39 and points out
that this ‘director primacy model’ he has developed ‘has been recognised by
several other commentators’.40 This is, indeed, a new and clever way to con-
trast that model with what has been called the ‘shareholder primacy model’ and
the ‘stakeholder primacy model’ (see discussion in Chapters 1 and 2) for many
years.
Bainbrige’s ‘director primacy model’ is based on the simple reality that even
though it is said that the shareholders ‘own’ the corporation, they have virtually no
power to control either its day-to-day operation or its long-term policies. Instead,
Bainbridge argues, the corporation is controlled by its board of directors.41 It is
the boards of the directors, and not the shareholders, other stakeholders or
managers, in large public corporations that actually control the corporation and
‘have the ultimate right of fiat’.42 This, in our view, could be described as the
‘boardtorial revolution’, or ‘directorial revolution’, in similar vein to what has
been identified as the ‘managerial revolution’ (see reference in Chapter 1).
The distinction between managing and directing the business of a corporation
is nowadays well accepted in managerial circles. As early as 1997, Bob Garratt
explained as follows:
But there is a vast difference between ‘directing’ and ‘managing’ an organisation.

Managing is literally, given its Latin root, a hands-on activity thriving on crisis action.
On the operations side of an organisation it is a crucial role. Directing is different.
37 ALI, Principles of Corporate Governance: Analysis and Recommendations, St Paul, American Law Institute
Publishers (1994) 82.
38 American Bar Association, Model Business Corporations Act: Official Text with Official Comments and
Statutory Cross-References Revised through June 2005, Chicago, American Bar Association (2005) 8–4.
39 Stephen M Bainbridge, The New Corporate Governance in Theory and Practice, Oxford, Oxford University
Press, (2008) ix.
40 Ibid, xi-xii.
41 Ibid, 3.
42 Ibid, 11.
Directing is essentially an intellectual activity. It is about showing the way ahead,

giving leadership. It is thoughtful and reflective and requires the acquisition by each
director of a portfolio of completely different thinking skills.43
He repeated these sentiments in 2003:
We seem to rely excessively on an ill defined and weakly assessed notion called
‘experience’ to get by. Unfortunately such experience is rarely directoral. It is usu-
ally managerial and professional, and so concerned with the day-to-day operations of a
business – these are not directoral roles and there is a big difference between managing
and directing an organization.44
Because of the different role of the modern board, it is often difficult for man-
agers who are promoted internally as directors to properly fulfil their directorial
responsibilities. There is a natural tendency for directors promoted internally
‘to ensure that their managerial successor does not mess up what they have so
painfully achieved’.45 These newly appointed directors also naturally have a ten-
dency to ‘sit on their [successors’] shoulders’, and that can lead to considerable
friction.46 That is also a forceful argument against the CEO of a company becom-
ing the same company’s chair of the board. As John B Reid, AO, former CEO of
BHP Ltd, puts it:
I think it can be argued that everything is working against CEOs in asking them to
detach themselves from thinking like an operational manager and to change their
thought process vis-a-vis every senior executive in the operation and to focus on the
issues that are the responsibility of the chairman. Not only that, but directors would be
asking the CEO to deliberately walk away from thinking about the matters that were his
or her earlier managerial responsibilities and to be detached from them. There are not
many people who can rejig their processes so easily and it is even harder in a familiar
environment where colleagues assume that the CEO has not changed very much. They
are probably right.47
The argument in favour of allowing a retiring CEO to become the chairperson

is based upon the notion of continuity and the desire to retain the experience
and intimate knowledge of the retiring CEO within the company. It is, however,
submitted that from a corporate governance perspective this is not a good enough
reason to allow this to happen. At the most, the retiring CEO can become a non-
executive director, but he or she will not be considered to be an independent,
non-executive director. A better practice probably is to agree, under specific
conditions that are clarified with the new CEO and the board, that the retiring
43 Bob Garratt, The Fish Rots from the Head, London, Harper Collins Business (1997) 4. See also Robert AG
Monks and Nell Minow, Corporate Governance, Oxford, Blackwell (3rd edn, 2004) 195 and 202–3; J B Reid,
Commonsense Corporate Governance, Sydney, Australian Institute of Company Directors (2002) 22; Stephen
M Bainbridge, Corporation Law and Economics, New York, Foundation Press (2002) 194–5.
44 Bob Garratt, Thin on Top, London, Nicholas Brealey Publishing (2003) 69.
45 Garratt, above n 43, 3; Nigel Kendall and Arthur Kendall, Real-World Corporate Governance, New York,
Foundation Press (1998) 8.
46 Garratt, above n 43, 3; Kendall and Kendall, above n 45, 15.
47 Reid, above n 43, 31. See also Tricker above n 20, at 60.
CEO can be consulted by the new CEO or the board. In this way he or she has
no continuing involvement with the company as a director who is expected to
attend all board meetings, but the experience and knowledge of the retiring CEO
could be retained as an ‘external’ consultant.
ASX’s Principles of Good Corporate Governance and Best Practice
Recommendations48 summarises the responsibilities of the board slightly more
elaborately than did Rogers CJ in the AWA Ltd case:
● overseeing of the company, including its control and accountability systems
● appointing and removing the CEO (or equivalent)
● where appropriate, ratifying the appointment and the removal of senior
executives49
● providing input into and final approval of management’s development of
corporate strategy and performance objectives
● reviewing, ratifying and monitoring systems of risk management and inter-
nal control, codes of conduct and legal compliance
● monitoring senior executives’ performance and implementation of strategy
● ensuring appropriate resources are available to senior executives
● approving and monitoring the progress of major capital expenditure, cap-
ital management, and acquisitions and divestitures
● approving and monitoring financial and other reporting.
The board’s responsibility ‘to guide and monitor the management of the cor-
poration’ has been emphasised in several Australian cases.50 The OECD, in its
Principles of Corporate Governance, considers it an important attribute of an effec-
tive corporate governance framework that the board should ‘ensure the strategic
guidance of the company’; should ensure ‘effective monitoring of management’;
and should be ‘accountable to the company and the shareholders’.51 Functions
such as ‘reviewing’, ‘monitoring’ and ‘overseeing’ are mentioned repeatedly in
the OECD Principles of Corporate Governance as core functions of the board.52
The board is indeed ‘the centre of the enterprise – “business brain” or central
processor – monitoring and coping with the results of the external and internal
processes of the whole enterprise’.53 The UK Institute of Directors identifies the
key purpose of the board as being to seek to ensure the company’s prosperity by
collectively directing the company’s affairs, while meeting the appropriate inter-
ests of its shareholders and relevant stakeholders.54 Bob Garratt explains that
48 Principles of Good Corporate Governance and Best Practice (2nd edn, August 2007), above n 28, 13.
49 Senior executives include all officers and employees who have the opportunity to materially influence the
integrity, strategy and operation of the company and its financial performance.
50 Commonwealth Bank v Friedrich (1991) 5 ASCR 115, 187; AWA Ltd v Daniels (Trading as Deloitte Haskins
& Sells & Ors) (1992) 7 ACSR 759, 864; Daniels v Anderson (1995) 13 ACLC 614, 614; ASIC v Macdonald (No
11) [2009] NSWSC 287 (23 April 2009), available at <www.austlii.edu.au/au/cases/nsw/NSWSC/2009/
287.html> at paras 101 and 255 et seq.
51 OECD Principles of Corporate Governance (April 2004), available at <www.oecd.org/dataoecd/32/18/
31557724.pdf> 22.
52 Ibid 60–3.
53 Garratt, above n 43, 9.
54 UK Institute of Directors, Standards for the Board: Improving the Effectiveness of Your Board, London,
Institute of Directors (2001) 4, 28.
boards are responsible for strategic decisions and, in order to direct strategically,
boards must agree on three things:55
● In which direction are we going?
● On which ideas are we working to get us there?
● On which information sources will we rely?
Taking all these aspects together, the board’s functions and responsibilities could
be summarised as to ‘direct, govern, guide, monitor, oversee, supervise and com-
ply’. The literature on management and managerial strategy makes a distinction
between two primary roles of the board, namely a ‘performance role’ and a ‘con-
formance role’. Robert I Tricker classifies ‘contributing know-how, expertise and
external information’; and ‘networking, representing the company and adding
status’ as being part of directors’ performance role. Under their conformance role
he includes ‘judging, questioning and supervising executive management’; and
a ‘watchdog, confidant and safety-valve role’.56 Bob Garratt sees accountability
(for quality of thinking, high ethical standards and values, to obey the law and to
treat stakeholders in a consistent way) and supervision of management (confor-
mance to key performance indicators, cash flow, budgets and projects) as part
of the board’s conformance task.57 Under its performance task he lists policy
formulation and foresight and strategic thinking.58 The distinction between the
board’s ‘performance’ and ‘conformance’ tasks seems a realistic explanation of
directors’ roles and mirrors the primary functions of the board. However, the
problem lies in the practical application of these roles or, to put it differently, to
strike the right balance. As Tricker puts it:
[E]very board faces a challenge to strike a reasonable balance between formulation and
policy making, the performance roles, on the one hand, and executive supervision and
accountability, the conformance roles on the other . . . The problem is that the more a
board concentrates its efforts on the conformance activity – management supervision
and accountability – the more that board comes to see its work as ensuring compliance
with the corporate governance requirements of respective codes, regulations, and the
law . . . The formulation of strategy and policy making is then largely delegated to top
management. By focusing on compliance, such boards tend to see corporate governance
activities as an expense and wonder whether it is cost-effective.’59
From a more practical point of view, the members of the board should not only
concentrate on the formal responsibilities they have, as explained above, but
should also ask some fundamental questions about their performance, account-
ability, effectiveness, the governance risks they face and improving their effec-
tiveness. Bob Garratt argues for a change in directoral mindset; directors should
55 Garratt, above n 44, 124.

56 Robert I Tricker, International Corporate Governance, London, Prentice-Hall (1994) 98–100. See also
Bob Tricker, ‘From Manager to Director: Developing Corporate Governors’ Strategic Thinking’ in Developing
Strategic Thought: Rediscovering the Art of Direction-giving (Bob Garratt, ed.), London, McGraw-Hill Book
Company (1995) 11 at 16–18.
57 Bob Garratt, The Fish Rots from the Head, London, P Profile Books (2003) 109 et seq and 131 et seq.
58 Ibid, 57 et seq and 88 et seq.
59 Tricker above n 20, 139. See also Ken Rushton, ‘Introduction’ in The Business Case for Corporate Governance
(Ken Rushton ed.), Cambridge, Cambridge University Press (2008) 5.
not see themselves as sitting at the apex of a pyramid, but rather should see
themselves as the centre of the enterprise, the ‘business brain’ or central proces-
sor that monitors and copes with the results of the external and internal learning
processes of the enterprise.60 Leighton and Thain suggest that the board should
ask itself the following fundamental questions:61
1. How satisfied are our shareholders, and other stakeholders, with the per-
formance and accountability of the company and its board?
2. How effective is the board?
3. What are the governance risks and problems we face?
4. What exactly should we be doing to anticipate and avoid the embarras-
sing and costly mistakes in governance that have plagued so many other
companies?
5. What should we be doing to make our board more effective and how should
we do it?
From the discussion above it will be apparent that the board’s role is a complex
one. This is neatly illustrated by the UK Institute of Directors:
In pursuing its key purpose, a board of directors faces a uniquely demanding set of
responsibilities and challenges, the complexity of which can be seen in some of the
seemingly contradictory pressures it faces:
• The board must simultaneously be entrepreneurial and drive the business forward
while keeping it under prudent control.
• The board is required to be sufficiently knowledgeable about the workings of the
company to be answerable for its actions, yet to be able to stand back from the
day-to-day management of the company and retain an objective, long-term view.
• The board must be sensitive to the pressures of short-term issues and yet be informed
about broader, long-term trends.
• The board must be knowledgeable about ‘local’ issues and yet aware of potential
and actual non-local, increasingly international, competitive and other influences.
• The board is expected to be focused upon the commercial needs of its business while
acting responsibly towards its employees, business partners and society as a whole.62
Directors need to have some practical guidelines to ensure that they fulfil their
duties and responsibilities diligently. Mervyn King, in his book, The Corporate
Citizen, provides some excellent guidelines to directors in taking decisions or
making business judgments. He suggests that directors, taking decisions or mak-
ing business judgments, must ask 10 questions:
1. Do I as a director of this board have any conflict in regard to the issue
before the board?
2. Do I have all the facts to enable me to make a decision on the issue before
the board?
60 Bob Garratt, The Fish Rots from the Head, P Profile Books, London (2003) 4. See also Bob Tricker (Developing
Strategic Thought: Rediscovering the Art of Direction-giving) above n 56, 11.
61 David S R Leighton and Donald H Thain, Making Boards Work, Whitby, Ontario, McGraw-Hill Ryerson
(1997) 34.
62 UK Institute of Directors, above n 54, 4–5.
3. Is the decision being made a rational business decision based on all the
facts available at the time of the board meeting?
4. Is the decision in the best interests of the company?
5. Is the communication of the decision to the stakeholders of the company
transparent, with substance over form, and does it contain all the negative
and positive features bound up in that decision?
6. Will the company be seen as a good corporate citizen as a result of the
decision?
7. Am I acting as a good steward of the company’s assets in making this
decision?
8. Have I exercised the concepts of intellectual honesty and intellectual
naivety in acting on behalf of this incapacitated company?
9. Have I understood the material in the board pack and the discussion at
the boardroom table?
10. Will the board be embarrassed if its decision and the process employed
in arriving at its decision were to appear on the front page of the national
newspaper?
Bearing in mind the realities of decision-taking processes as described by Bob
Tricker in the second opening quote to this chapter, some may say it is unrealistic
to expect of directors, taking decision ‘on the run’, to ask all these questions.
On the other hand, especially as far as Australian directors are concerned, there
is very little doubt that if all the directors of James Hardie did ask all these 10
questions and could answer ‘no’ on questions 1 and 10 and ‘yes’ on questions
2–9, they would not have been held liable.63 Also, the names of the directors of
Centro Properties Group would not have been mentioned so prominently in the
media during October 2009 when ASIC announced that it would institute action
against the directors for a breach of their statutory duty of care and diligence64
if those directors had asked the 10 questions Mervyn King suggests and could
answer ‘no’ on questions 1 and 10 and ‘yes’ on questions 2–9.
3.4 Board structures
Generally speaking, there are two types of board structures, namely the unitary
board and the two-tier board. It is, however, not easy nowadays to make an exact
distinction between these two board structures, as most developed countries have
moved away from the traditional ‘unitary board’ structure in the case of large
public corporations. In most developed countries, board structures for large cor-
porations have some characteristics that are reminiscent of the more traditional
‘two-tier board’. A good way to illustrate this point is to start with a very basic
63 See ASIC v Macdonald (No 11) [2009] NSWSC 287 (23 April 2009), available at <www.austlii.edu.au/
au/cases/nsw/NSWSC/2009/287.html>.
64 See ‘ASIC Commences Proceedings Against Current and Former Directors of Centro’, ASIC Media Release
09–202 AD (21 October 2009), available at <www.asic.gov.au/asic/asic.nsf/byheadline/09-202AD+ASIC+
commences+proceedings+against+current+and+former+officers+of+Centro?openDocument>.
Board
Governance
Management Management
organization
Figure 3.1 [2.1]: The board and management differentiated
Figure 3.2 [2.2]: All-executive board
Figure 3.3 [2.3]: Majority executive board
distinction drawn by Tricker in his books International Corporate Governance65

and Corporate Governance: Principles, Policies and Practices66 between a so-called
‘managerial pyramid’ and a ‘governance circle’, and illustrates this by way of
five figures (reproduced with Tricker’s original numbering in square brack-
ets, figures 3.1–3.4 reproduced from International Corporate Governance and
65 Tricker (International Corporate Governance), above n 56, 44–5. See also Tricker, above n 20, 35–6
and 61–4.
66 Tricker, above n 20, 35–6 and 61–4.
Figure 3.4 [2.4]: Majority outside board
Figure 3.5 [2.5]: Two-tier board
figure 3.5 reproduced from Corporate Governance: Principles, Policies and

Practices):
Figure 3.2 portrays the typical board structure for proprietary companies and
also, in the past, the board structure of most public corporations. However, with
the drive to have objective checks on management and to bring independence
into the board, the move has clearly been towards the board structure depicted
in Figure 3.3. More recently there have been several moves to have a majority
of non-executive directors and, in particular, a majority of independent non-
executive directors (Figure 3.4). The German system is perhaps best described
by Figure 3.5, with the governance circle representing the supervisory board
and the managerial pyramid representing the management board. The most
recent trends towards independent non-executive directors will be explained
in greating detail in Chapter 4, while the German two-tier board will be dis-
cussed in Chapter 13. Figure 3.6 illustrates a board with no executive director.
Figure 3.6 [3.4]: The all non-executive director board
1-10 individuals
Figure 3.7: The statutory arrangement for South African close corporations
It is rare to find this in listed public companies, but Tricker points out that it is
sometimes the board structure for not-for-profit entities such as charitable organ-
isations, arts, health and sports organisations, and ‘qualgos’ (quasi-autonomous
non-government organisations)’.67 Figure 3.7 depicts the South African close
corporation, where the statutory presumed or default arrangement is based on
the premise that there is a complete overlap between the governance circle and
the managerial triangle in small businesses.68
Tricker’s basic models could be used to further refine and explain board struc-
tures and an effective corporate governance model (see discussion and illustra-
tions). There are several indications that traditional common law jurisdictions
recognise the distinctive roles of ‘the board’ and ‘management’. The primary
67 Ibid, 64.
68 See further Jean J du Plessis, ‘Reflections and Perspectives on the South African Close Corporation as
Business Vehicle for SMEs’ (2009) 15 (4) New Zealand Business Law Quarterly 250 at 252–3 and 257 for some
of the reasons for having separate legislation applying to SMEs.
function of ‘the board’ is to ‘direct, govern, guide, monitor, oversee, supervise

and comply’, and ‘management’s’ function is to ‘manage the day-to-day business
of the corporation’. This becomes clear if one looks at what is nowadays under-
stood under the ‘functions of the board’, as explained above. There is no longer a
place in large corporations for the board to ‘manage the business of the corpora-
tion’, but to provide strategic direction to the corporation and the development
and implementation of risk management policies are key functions of the board.
For these reasons, these days it is misleading to express a preference for ‘a unitary
board’ or ‘a two-tier board’ without clarifying what is meant by these terms.69
It is also unfounded to make a prediction of a ‘convergence towards a unitary
board approach’, without defining what is meant by a ‘unitary board’.70
Where the business of the corporation is not managed by the board but is
‘under the direction of the directors’71 – with a majority of independent (or
outside) non-executive directors, a senior independent director, an independent
non-executive director as chair and several sub-committees72 – it can hardly be
said that such a corporation has a ‘unitary board’ comparable to the ‘unitary
board’ (see again Figure 3.3 above) that was the focus of attention of many
studies over many years.73
It is nowadays beyond dispute that the contemporary – or should we say,
reinvented – ‘unitary board’ has much more in common with the traditional
‘two-tier board’ than some would be prepared to admit.74 The modern ‘unitary
board’ does not look as one-dimensional as some would have us believe. On
the other hand, the modern German ‘two-tier board’ is not as two-dimensional
as it has been made out to be.75 Due to the way in which the traditional ‘uni-
tary board’ has been reinvented, the score would probably be slightly in favour
of the ‘two-tier board’76 if a winner had to be selected in the ‘unitary board’
69 For a typical example of such a misleading approach, which seems to have been perpetuated over
time in the various South African King Reports, see King Report on Governance for South Africa 2009 (King
Report (2009)), Institute of directors (2009) 9, available at <http://african.ipapercms.dk/IOD/KINGIII/
kingiiireport/> at 39 para 62.
70 Cf Garratt, above n 43, 42–3.
71 See s 198A(1) of the Corporations Act. See further AWA Ltd v Daniels (Trading as Deloitte Haskins & Sells
& Ors) (1992) 10 ACLC 933.
72 See Financial Reporting Council, The Combined Code on Corporate Governance (UK Combined
Code (2008)) (June 2008), available at <www.frc.org.uk/corporate/combinedcode.cfm>; and ASX,
Principles of Good Corporate Governance and Best Practice (2nd edn, August 2007) 3, avail-
able at <http://203.15.147.66/about/corporate_governance/revised_corporate_governance_principles_
recommendations.htm>. See also Review of the Role and Effectiveness of Non-Executive Directors (Higgs Report),
(January 2003), available at <www.berr.gov.uk/files/file23012.pdf>.
73 See Tricker (International Corporate Governance), above n 56, 44–5.
74 See Comparative Study of Corporate Governance Codes Relevant to the European Union and its Members
(hereafter ‘European Commission Comparative Study’) (January 2002) 4–5; The German Corporate Gover-
nance Code (hereafter ‘the German Code’) (May 2003), available at <www.corporate-governance-code.de/
eng/download/DCG K E200305-m.pdf> 1; Sir Geoffrey Owen, ‘The Role of the Board’ in The Business Case
for Corporate Governance (Ken Rushton, ed.), Cambridge, Cambridge University Press (2008) 10 at 21–2.
75 See Carsten Berrar, ‘Die zustimmungspflichtigen Geschäfte nach § 111 Abs. 4 AktG im Lichte der Corporate
Governance-Diskussion’ (2001) 54 Der Betrieb (Zeitschrift) 2181, 2185–6.
76 Garratt, above n 43, 187 has no hesitation in stating that United States boards are ‘closer to the German two-
tier board’, while John L Colley (Jr), Jacqueline L Doyle, George W Logan and Wallace Stettinius, Corporate
Governance, New York, McGraw-Hill (2003) 43, state that ‘[t]he committee of outside directors is somewhat
similar to the European two-tiered model of governance, in which there is a supervisory board and an executive
board’. See also Alistair Howard, ‘UK Corporate Governance: To What End a New Regulatory State?’ in
versus ‘two-tier board’ contest, but at the end of the day it is perhaps best to
accept that the so-called ‘fit-all board structure’ does not – and probably never
will – exist.77
The frequent overstatement of the differences between the contemporary
‘two-tier board’ and the contemporary ‘unitary board’ is neatly summarised by
Weil, Gotshal and Manges (on behalf of the European Commission, Internal
Market Directorate General) in their report, Comparative Study of Corporate
Governance Codes Relevant to the European Union and its Members:78
Another major corporate governance difference embedded in law relates to board

structure – the use of a unitary versus a two-tier board. However, notwithstanding
structural differences between two-tier and unitary board systems, the similarities in
actual board practices are significant. Both types of systems recognise a supervisory
function and a managerial function, although the distinctions between the two func-
tions tend to be more formalised in the two-tier structure. Generally, both the unitary
board of directors and the supervisory board (in the two-tier structure) are elected
by shareholders although . . . in some countries employees may elect some supervisory
body members as well. Typically, both the unitary board and the supervisory board
appoint the members of the managerial body – either the management board in the
two-tier system, or a group of managers to whom the unitary board delegates authority
in the unitary system. In addition, both the unitary board and the supervisory board
usually have responsibility for ensuring that financial reporting and control systems
are functioning appropriately and for ensuring that the corporation is in compliance
with law.
Each board system has been perceived to offer unique benefits. The one-tier system
may result in a closer relation and better information flow between the supervisory and
managerial bodies; however, the two-tier system encompasses a clearer, formal sepa-
ration between the supervisory body and those being ‘supervised’. With the influence
of the corporate governance best practice movement, the distinct perceived benefits
traditionally attributed to each system appear to be lessening as practices converge.
In various reports, such as the Cadbury Report (UK), King Report (South Africa)
(1994, 2002 and 2009), Higgs Report (UK), and Owen Report (Australia), the
‘unitary board’ structure was preferred to the ‘two-tier structure’ but, as men-
tioned above, these so-called alternative board structures are not really alterna-
tive in the strict sense of the word, but rather have some similarities and some
differences. Another problem with simply accepting the ‘unitary board’ as the
preferred structure is that it does not open up consideration of other possibil-
ities, nor does it stimulate debate on the best possible board structure or on
the relative merits of alternative board structures. There were some indications
European Corporate Governance (Thomas Clarke and Jean-Francois Chanlat, eds), London, Routledge (2009)
218 at 226.
77 As Paul Davies, ‘Employee Representation and Corporate Law Reform: A Comment from the United
Kingdom’ (2000) 22 Comparative Labor Law and Policy Journal 135, 137, points out, ‘there is no one best-
system of corporate governance’.
78 European Commission Comparative Study, above n 74, 4–5.
that the Hampel Committee (UK) was at least prepared to compare other board
models with the ‘unitary board’,79 but in the end nothing came of it.
The resistance even to discussion of alternative board structures is probably
directly linked to the vested interests of groups such as the shareholders and cur-
rent directors, who may fear that a ‘two-tier board’ would open the door for other
stakeholders, such as employees, to gain representation on the board. However,
a two-tier board does not equate to co-determination or, to put it differently,
does not have to embrace the concept of co-determination (employee partici-
pation at supervisory board level: see Chapter 13 for further discussion of this
concept). Even in Germany there is currently considerable debate surrounding
co-determination and the actual advantages of employee participation at super-
visory board level.80 This debate is continuing within the context of the two-tier
board, which is accepted as the norm in Germany for large public companies. The
German two-tier board has been considerably improved over the past 10 years or
so,81 but there are strong indications of mounting pressure in Germany against
co-determination or employee participation at supervisory board level. It is not
the German two-tier system as such that is in danger, but co-determination.82
We do not propose that one board structure is superior to the other, but rather
that a ‘unitary board structure’ could not simply be rejected in favour of a ‘two-
tier board structure’ or vice versa. Deciding on a particular board structure will
depend on many variables (for example, the size of the company, the quality
of persons sitting as non-executive directors, the corporate culture within a
particular corporation etc). As Justice Owen put it:
I think that any attempt to impose governance systems or structures that are overly
prescriptive or specific is fraught with danger. By its very nature corporate governance
is not something where ‘one size fits all’. Even with companies within a class, such
as public listed companies, their capital base, risk profile, corporate history, business
activity and management and personnel arrangements will be varied. It would be
impracticable and undesirable to attempt to place them all within a single straitjacket
of structures and processes. A degree of flexibility and an acceptance that systems can
and should be modified to suit the particular attributes and needs of each company is
necessary if the objectives of improved corporate governance are to be achieved.83
Promoting the concept of objective overseers or outsiders (that is, independent

non-executive directors) in a unitary board structure is nothing but a move
79 Kevin Keasey and Mike Wright, ‘Introduction: Corporate Governance, Accountability and Enterprise’ in
Kevin Keasey and Mike Wright (eds), Corporate Governance: Responsibility, Risks and Remuneration, New
York, Wiley (1997) 17.
80 See Otto Sandrock and Jean J du Plessis, ‘The German Corporate Governance Model in the Wake of
Company Law Harmonisation in the European Union’ (2005) 26 Company Lawyer 88–95; Jean J du Plessis and
Otto Sandrock, ‘The Rise and the Fall of Supervisory Codetermination in Germany?’ (2005) 16 International
and Commercial Law Review 67–79.
81 Jean J du Plessis, ‘Reflections on Some Recent Corporate Governance Reforms in Germany: A Transfor-
mation of the German Aktienrecht?’ (2003) 8 Deakin Law Review 389.
82 Jean J du Plessis, ‘The German Two-Tier Board and the German Corporate Governance Code’ (2004) 15
European Business Law Review 1139, 1164.
83 Owen Report (2003), above n 23, 105 para 6.12.
towards a quasi – or perhaps even a de facto84 – two-tier board structure; namely,

the managers and executive as one tier and a board consisting of a majority of
non-executive directors as the second tier. Recognising that the board of directors
cannot manage the day-to-day business of a large public corporation, and that
the business of the corporation could at most be managed ‘under the direction
of the board’85 is another indication that the division between managerial and
supervisory functions is becoming a practical reality in large public corporations.
It is for these reasons that the ‘two-tier board structure’ has been studied with
renewed interest, and has even gained some ground in certain circles.86
The Japanese Suzuki Report also stated unequivocally that the ‘functions of
the board of directors and any management board should be separate so that
corporate decision-making and business execution are clearly distinguished’.87
It is, however, to be expected that – depending on one’s understanding and
definition of a ‘unitary board’ – strong support for such a board system will
continue to be expressed in certain circles.88
3.5 Board structures in the broader context of a

good corporate governance model
3.5.1 Overview
Good corporate governance practices require more than just effective board
structures. The view presented here is that corporate governance, and in particu-
lar a good corporate governance model for any specific country, should be judged
against several other criteria. The South African King Report (2002) argued as
follows:89
22. . . . In East Asia, in 1997 and 1998, it was demonstrated that macro-economic
difficulties could be worsened by systematic failure of corporate governance,
stemming from:
22.1 weak legal and regulatory systems;
22.2 poor banking regulation and practices;
84 John C Shaw, ‘The Cadbury Report, Two Years Later’, in K J Hopt, K Kanda, M J Roe, E Wymeersch
and S Priggle (eds), Comparative Corporate Governance: The State of the Art and Emerging Research, Oxford,
Clarendon Press (1998) 21, 22.
85 An author like Huse, above n 32, 106 generalises that ‘[i]n the Anglo-American model there is one board,
which also has direct responsibility for the day-to-day running of the firm’. The statement may be correct in
so far as he refers to ‘one board’ and also if the statement is applied to the majority SMEs, but it is not correct
in so far as large public companies are concerned, where ‘the board’ nowadays will not and cannot run the
day-to-day business, as was pointed out above.
86 Thomas Sheridan and Nigel Kendall, Corporate Governance, London, Pitman (1992) 161; John Brewer,
‘Hong Kong Society of Accountants’ Report on Corporate Governance’ (1996) (June) The Corporate Gover-
nance Quarterly 10, 12.
87 Corporate Governance Committee of the Corporate Forum of Japan, Corporate Governance Principles: A
Japanese View (Final Report) (Suzuki Report), 26 May 1998, 48 (Principle 7A).
88 See Garratt, above n 43, 42–3 and 210.
89 Executive Summary–King Report on Corporate Governance (King Report (2002)), Parktown, South Africa,
Institute of Directors in Southern Africa (March 2002) para 22. See also Güler Manisali Darman, Corporate
Governance Worldwide: A Guide to Best Practices and Managers, Paris, ICC Publishing (2004) 30.
22.3 inconsistent accounting and auditing standards;

22.4 improperly regulated capital markets;
22.5 ineffective oversight by corporate boards, and scant recognition of the rights of
minority shareowners.
Justice Owen in the HIH Royal Commission Report adopted a highly realistic and
broad approach to corporate governance, observing that:
The relevant [corporate governance] rules include applicable laws of the land as well
as the internal rules of a corporation. The relationships include those between the
shareholders or owners and the directors who oversee the affairs of the corporation on
their behalf, between the directors and those who manage the affairs of the corporation
and carry out its business, and within the ranks of management, as well as between the
corporation and others to whom it must account, such as regulators. The systems and
processes may be formal or informal and may deal with such matters as delegations
of authority, performance measures, assurance mechanisms, reporting requirements
and accountabilities.90
It will be clear from the quotes above that several factors play a role in determin-
ing the effectiveness of a good corporate governance model for any particular
country. We are of the opinion that the following criteria will all, to a greater or
lesser extent, play a role in ensuring good corporate governance practices:
● effective board structures, recognising the supervisory role of the board
and the managerial role of management
● effective support mechanisms to assist the board in fulfilling its functions
properly; for instance, board committees (appointment, remuneration,
audit, risk management, shareholders etc.) and the company secretary
● effective statutory provisions, in particular in the areas of corporations law,
banking law, regulating capital markets and ensuring auditing standards
● effective regulators, in particular in the areas of corporations law and
capital markets
● effective codes of best practice and conduct.
We will now discuss each of these criteria in turn.
3.5.2 Effective board structure

As explained above, the ‘fit-all board structure’ does not exist, but that does
not mean that sound corporate governance principles to ensure an effective
board structure could not be extracted generally. As has already been pointed
out, the board’s functions to ‘direct, govern, guide, monitor, oversee, supervise
and comply’ should be distinguished from management’s function to ‘manage
the day to day business of the corporation’. This could be illustrated by using
Tricker’s ‘governance circle’ and ‘managerial pyramid’, but placing them at an
equal level rather than having the ‘governance circle’ on top of the ‘managerial
90 Owen Report (2003), above n 23, 101–2 para 6.1.

Figure 3.8: Separation and interaction of management and governance
pyramid’ – they function ‘side-by-side’.91 There should be a healthy interaction

between the ‘governance circle’ and the ‘managerial pyramid’.
The functions of the ‘governance circle’ and the ‘managerial pyramid’ should
be separated, as illustrated by the perforated vertical line in Figure 3.8, but
there should be a healthy interaction between those who fulfil the respective
functions, as illustrated by the horizontal arrow pointing in both directions.
Exchange of information, consultation and collaboration should be key features
of the division between the function to ‘direct, govern, guide, monitor, oversee,
supervise and comply’ and the function to ‘manage the day to day business of
the corporation’. The composition of the ‘governance circle’ and the ‘managerial
pyramid’ may differ considerably, depending on the corporations law of a par-
ticular country. At one extreme is the German system, where the ‘governance
circle’ consists of one-third or one-half employee representatives and two-thirds
or one-half shareholder representatives, with no overlap between the ‘gover-
nance circle’ and the ‘managerial pyramid’. At the other end of the scale is a
model in which there is considerable overlap between the ‘governance circle’
and the ‘managerial pyramid’, but with at least some (not the majority) of the
members not part of the ‘managerial pyramid’. The position preferred by sev-
eral recent corporate governance reports, which could probably be described
as roughly the middle position, would have a majority of independent mem-
bers in the ‘governance circle’. Some reports suggest that at least half of the
‘governance circle’ should consist of independent members. This has been the
recommendation in the earlier UK Combined Code and ASX’s Corporate Gover-
nance Council in Australia. The South African King Report (2009) is currently
one of the only leading corporate governance reports not requiring a majority
independent non-executive directors to fill the board. The requirement is only
that there should be majority non-executive directors and that the majority of
them should be independent.92 The argument has consistently been that the
91 Kendall and Kendall, above n 45, 53.

92 Principle 2.9, King Code of Governance Principles for South Africa, Johannesburg, Institute of Directors in
South Africa (2009) 25.
board should comprise a balance of power – ‘[n]o one individual or block of indi-
viduals should be able to dominate the board’s decision-making’.93 In theory this
approach makes sense, but the practical reality is that the potential is there in any
case that a majority non-executive director (even if not all of them are ‘indepen-
dent’), can dominate the board’s decision making. However, as will be seen in
Chapter 4, the expectation of having a majority independent directors on the
board to ensure independence is open for criticism.
3.5.3 Effective support mechanisms to assist the board in

properly fulfilling its functions
The idea that the board should be assisted by several standing board committees
in fulfilling its primary functions to ‘direct, govern, guide, monitor, oversee,
supervise and comply’, has gained considerable support over recent years. In
this regard, appointment committees, nomination committees, remuneration
committees, audit committees, risk management committees and shareholder
committees have become particularly prominent. Some of these committees were
pertinently mentioned in the American Law Institute’s Principles of Corporate
Governance: Analysis and Recommendations; some were also promoted in the
Cadbury, Hampel, Greenbury, King and Higgs Reports. One key feature of most
of these committees is that they are supposed to fulfil their tasks independently
of management, and ensure that they bring some objectivity to the tasks they
fulfil.
Another key position mentioned in several recent reports as being able to
assist the board in fulfilling its tasks properly is the company secretary. The
company secretary can play a vital role, not only in assisting the board to fulfil
its tasks, but also in ensuring a healthy and free flow of information between the
‘governance circle’ and the ‘managerial pyramid’. If these aspects are taken into
consideration, our corporate governance model can be illustrated as shown in
Figure 3.9.
3.5.4 Effective statutory provisions

It is important that effective legislation exists to ensure a proper corporate gov-
ernance model for any country. The areas of most importance are those of cor-
porations law, banking law, regulating capital markets and ensuring auditing
standards. It is necessary to have effective legislation, not only to ensure that cer-
tain abuses and misuses are identified, but also to provide for effective remedies
and penalties. The remedies and penalties should be civil as well as criminal and
should be aimed at punishing corporations contravening the legislation and the
individuals who are responsible for the acts of corporations. The list of possible
93 King Report (2009), above n 69, at 39 paras 62–5.

Company
secretary
Appointment or nomination committees

Compensation or remuneration committee
Audit committee
Risk management committee
Shareholder committee
Figure 3.9: Support mechanisms to assist the board
remedies and penalties is far too long to include here,94 but in Australia there has
been considerable success in using disqualification orders, compensation orders
and civil penalties orders against directors of several corporations that collapsed
after 2001.95
There have in recent years been considerable changes to legislation in sev-
eral countries to ensure proper audit standards. The main impetus for better
regulation in this area came from collapses such as those of Enron, WorldCom,
Tyco, HIH, One.Tel etc. Perhaps the most far-reaching reforms in this area were
implemented in the USA through the Sarbanes-Oxley Act of 2002. In Australia,
the Corporate Law Economic Reform Program (Audit Reform and Corporate Dis-
closure) Act 2004 (the so-called CLERP 9 Act) introduced into the Corporations
Act some drastic changes to regulation of the audit profession and new provi-
sions regarding continuous disclosure and protection for whistleblowers. These
developments will be discussed in greater detail in later chapters.
3.5.5 Effective regulators

As was pointed out in the King Report (2002), effective regulation in the areas
of corporations law and the capital markets is essential to ensure good corporate
governance. The importance of this principle was again emphasised in Australia
94 See Mirko Bagaric and Jean J du Plessis, ‘Expanding Criminal Sanctions for Corporate Crimes – Deprivation
of Right to Work and Cancellation of Education Qualifications’ (2003) 21 Company and Securities Law Journal
7–25.
95 See Jean J du Plessis, ‘Reverberations after the HIH and other Recent Australian Corporate Collapses:
The Role of ASIC’ (2003) 15 Australian Journal of Corporate Law 225, 225–45.
with the collapse of the HIH group of insurance companies. The Australian Pru-
dential Regulatory Authority (APRA) has been heavily criticised for not reading
the signs of doom for HIH sooner and for not stepping in earlier.96 There were
serious allegations that APRA had been made aware of financial difficulties in
HIH at least six months before HIH went into provisional liquidation in March
2001.97 Although the Report of the HIH Royal Commission (Owen Report) did
not go so far as to blame APRA for not picking up earlier on financial difficulties
experienced in HIH, or suggest that it could have prevented the collapse, Justice
Owen did not hesitate to explain the reasons for APRA’s inaction, and mentioned
that ‘[i]n many instances – even taking account of the constraints it was under –
APRA did not react appropriately’.98 Amendment of the legislation to improve
the effectiveness of APRA followed this criticism.99 The importance of effective
regulators has again been emphasised with the 2008–9 global financial crisis,
and it is to be expected that there would be an increasing expectation of regu-
lators to regulate effectively and perform their regulatory duty properly. There
is little doubt that, globally, increasing regulation of the financial markets and
corporate law began to emerge100 and at the end of 2009 there were predictions
that in Australia more regulation can be expected.101
With the collapse of the Geelong-based Chartwell Enterprise Group, there
were some serious speculations that the Australian Tax Office (ATO) did not
fulfil its duty to inform ASIC earlier that Chartwell Enterprises had not paid taxes
for a considerable period of time before it eventually collapsed. During this time,
several investors invested in Chartwell Enterprises, believing that the company
was just going through a natural downturn, rather than experiencing serious
financial problems. These investors argued that they would not have invested
if ASIC had been informed by the ATO of the company’s taxation status, and
ASIC had begun an investigation. ASIC itself was criticised for not acting sooner.
There were some speculations that ASIC was made aware of serious problems in
Chartwell Enterprises long before the company actually collapsed. Thus, an area
that will have to receive serious attention in future is the nature of the respective
duties of all the corporate regulators and how their regulatory tasks and roles
can be coordinated to make the regulatory environment as effective as possible
without restraining business unnecessarily. It is accepted that it is a formidable
task and that striking the right balance would require careful consideration,
96 M De Martinis, ‘Do Directors, Regulators, and Auditors Speak, Hear, and See No Evil? Evidence from
Enron, HIH, and One.Tel’ (2002) 15 Australian Journal of Corporate Law 66 at 72–3; Rick Sarre, ‘Responding
to Corporate Collapses: Is There a Role for Corporate Social Responsibility’ (2002) 7 Deakin Law Review 1.
97 Stephen Bartholomeusz, ‘After Enron: The New Reform Debate’ (2002) 25 University of New South Wales
Law Journal 580, 581.
98 Owen Report (2003), above n 23, li.
99 See the Australian Prudential Regulation Authority Amendment Act 2003 (Cth) – an important amendment
was the replacement of the APRA Board and CEO with a full-time executive governing body.
100 See in particular Stilpon Nestor, ‘Regulatory Trends and Their Impact on Corporate Governance’ in The
Business Case for Corporate Governance (Ken Rushton, ed.), Cambridge, Cambridge University Press (2008)
176 et seq.
101 Kate Gibbs, ‘General Counsel Prepare for Regulation Onslaught’, TheNewLawyer, 17 December 2009
at 3, available at <www.thenewlawyer.com.au/article/general-counsel-prepare-for-regulation-onslaught-
in-2010/508724.aspx>.
but it is something that cannot be postponed indefinitely. It is, therefore, to be

welcomed that ‘the role of the regulator’ becomes more prominent, also in other
books dealing with corporate governance.102 However, it is a case ‘of finding the
right balance’. As Sir Bryan Nicholson puts it:
While comply-or-explain and the market-based approach to raising standards are

preferable to prescriptive regulation, they nonetheless have to be backed up by a
supportive regulatory framework. Government and regulators should not act as a sub-
stitute for the market, but they do have an important role to play in making sure that
the market works effectively.103
Since the first edition of Principles of Contemporary Corporate Governance, we

have emphasised the importance of effective regulators as part of the complete
picture of developing an effective corporate governance system.
3.5.6 Effective charters, policies and codes of best practice

and conduct
Since the Cadbury Report in 1992, the idea of self-imposed, good practices in
corporate governance through codes of good practice has become prominent.
Huse explains that most of the recent reports on corporate governance have
contributed to developing and formalising structures and norms by way of codes
of conduct, but he explains that in fact, ‘[c]odes are important when other
mechanisms attempting to improve governance fail’.104 He then asks some very
pertinent questions:
Which problems do codes solve? Should there be the same codes for all kinds of
firms – small as well as large – and all kinds of ownerships? Should family firms and
firms listed on stock exchanges have the same codes?105
Just as with corporate governance generally, the one-size-fits all code of conduct
is not achievable. In the UK, the UK Code of Corporate Governance sets the cor-
porate governance standards for listed corporations; comparable standards are
required of corporations listed on ASX through the ASX Corporate Governance
Council’s Principles of Good Corporate Governance and Best Practice Recommen-
dation. However, the King Report (2009) has now gone further. It recommends
that the so-called ‘King Code of Governance Principles’ should apply much wider:
In contrast to the King I and II codes, King III applies to all entities regardless of the
manner and form of incorporation or establishment and whether public, private sectors
or non-profit sectors. We have drafted the principles so that every entity can apply them
and, in doing so, achieve good governance.106
102 Sir Bryan Nicholson, ‘The Role of the Regulator’ in The Business Case for Corporate Governance (Ken
Rushton, ed.), Cambridge, Cambridge University Press (2008) 100.
103 Ibid, at 106.
104 Huse, above n 32, 176 and 181.
105 Ibid, 182.
106 King Report (2009), above n 69, at 17.
A common feature of these codes is that it is not mandatory to follow the principles
of the code. Some form of explanation is, however, required if a core principle or
recommendation is not followed. This approach has been called the ‘comply or
explain principle’, ‘if not, why not?’ principle, or, as has more recently become
fashionable, the principle of ‘apply or explain’. The problem identified with the
principle of ‘comply or explain’ was that it could lead to ‘mindless compliance’,
rather than acceptable appliance with good corporate governance principles.
Thus, there was a move by the United Nations to promote the principle of ‘adopt
or explain’, which was refined slightly in the Netherlands code, referring to ‘apply
or explain’. This is also the current principle adopted in the King Report (2009).
The approach followed in the USA after the adoption of the Sarbanes-Oxley Act
2002 (see discussion in Chapter 12) has been described as the ‘comply or else’
approach.107
In recent years it has become apparent that a code of best practice could be used
just as effectively in a jurisdiction in which a traditional two-tier board structure
is the norm for large corporations. Thus, in 2002 Germany adopted a Corporate
Governance Code for listed corporations. The ‘comply or explain principle’ was
also introduced, showing that there are several principles of good corporate
governance that can be superimposed upon a traditional ‘unitary board’ as well
as on a traditional ‘two-tier board’.108
Lately, it has also been recommended that companies should develop internal
codes of conduct. In this regard, ASX’s Principles of Good Corporate Governance
and Best Practice Recommendations sets an excellent example. It requires com-
panies to have a code of conduct. Recommendation 3.1 expects companies to
establish a code of conduct and disclose the code or a summary of the code as to:
● the practices necessary to maintain confidence in the company’s integrity
● the practices necessary to take into account their legal obligations and the
reasonable expectations of their stakeholders the responsibility and
● the responsibility and accountability of individuals for reporting and inves-
tigating reports of unethical practices.
The purpose of a code of conduct is explained as follows:
The board has a responsibility to set the ethical tone and standards of the company.
Senior executives have a responsibility to implement practices consistent with those
standards. Company codes of conduct which state the values and policies of the com-
pany can assist the board and senior executives in this task and complement the
company’s risk management practices.109
It is interesting to note that under the 2007 ASX Principles of Good Corporate
Governance and Best Practice it is specifically provided that it is not necessary for
companies to establish a separate code for directors and senior executives. It is
explained that, depending on the nature and size of the company’s operations,
107 Ibid, at 6 and 7. Also see Peter Montagnon, ‘The Role of the Shareholder’ in The Business Case for
Corporate Governance (Ken Rushton, ed.), Cambridge, Cambridge University Press (2008) 81 at 83–4.
108 See Du Plessis, above n 81, 389–404.
109 ASX Principles of Good Corporate Governance and Best Practice (2nd edn, August 2007), above n 28, 21.
the code of conduct for directors and senior executives may stand alone or be part
of the corporate code of conduct.110 It is also interesting to note the difference
from the 2003 ASX Principles of Good Corporate Governance and Best Practice;
the 2007 ASX Principles of Good Corporate Governance and Best Practice does not
require a separate code on ethical and legal conduct or a code of conduct towards
stakeholders. This is unfortunate as these different codes were considered to be
useful instruments to accentuate the importance of ethical and legal behaviour
and also to recognise the importance of stakeholders other than shareholders
in the corporation. They were also seen as promoting an inclusive approach to
corporate governance, as reflected in the definition of corporate governance set
out in Chapter 1.
Building upon the previous illustrations, a good corporate governance model
would, therefore, look as follows:
Effective legislation Effective regulators
Duties Charters,
policies
and codes
Remedies of best
practice
and
conduct
Company
secretary
Appointment or nomination committees ASX
Compensation or remuneration committee Legal and ethical behaviour

Audit committee Stakeholders:
Risk management committee Employees
Clients
Customers
Shareholder committee Consumers
Community
Figure 3.10: Complete corporate governance model
3.5.7 Corporate governance rating systems for companies

Over recent years it has become increasingly important for companies to achieve
financial ratings as an indicator of their financial credibility. A few problems were
110 Ibid, 22.

identified with the system of financial rating.111 First, there is only a limited
number of companies and institutions that provides this rating, most promi-
nently, Standard and Poor which, to a large extend monopolises the market.
Second, over time the independence of these financial rating institutions or
organisations could be compromised because they do not provide these ser-
vices free of charge. A poor financial rating will almost inevitably lead a client to
attempt to get a better financial rating from another company or organisation.112
Third, different criteria are used for such ratings. All these factors together led to
situations in which companies and, in particular financial institutions, received
AA or even AAA financial ratings, but the global financial crisis revealed that
several of them were not as financially stable as what the ratings indicated.113
Another rating system that has become popular in recent times is corporate
governance rating systems. It goes almost without saying that most of the prob-
lems identified with the financial ratings apply to corporate governance ratings.
For current purposes it suffices to list some of the corporate governance rating
agencies:114
● Standard and Poor’s <http://www.standardandpoors.com/home/en/us>
● The FTSE Group <http://www.ftse.com> in collaboration with
International Shareholder Services (ISS) <www.answers.com/topic/
institutional-shareholder-services-iss#>
115
● RiskMetrics Group (RMG) <www.riskmetrics.com>
● GovernanceMetrics International (GMI) <www.gmiratings.com/(k11w1
m45uhzr1tzqm3y45355)/Default.aspx>
● Deminor corporate governance ratings <www.deminor.com>
● Thai Rating and Information Service (TRIs) <http://thaiwebdirectories.
meelink.com/company_profile/index/Company/id/18965/Company
Name/TRIS.CO.TH>
● The International Finance Corporation (IFC) <www.ifc.org>.
111 For a more comprehensive discussion on the failure of credit-rating agencies as gatekeepers, see John
Coffee, ‘Understanding Enron: It’s About the Gatekeepers, Stupid’ (2002) 57 Business Law 1403; Claire Hill,
‘Rating Agencies Behaving Badly: The Case of Enron’ (2003) 35 Connecticut Law Review 1145; Claire Hill,
‘Regulating the Rating Agencies’ (2004) 82 Washington University Law Quarterly 43; John Hunt, ‘Credit
Rating Agencies and the “Worldwide Credit Crisis”: The Limits of Reputation, the Insufficiency of Reform
and a Proposal for Improvement’ (2008), available at <http://preprodpapers.ssrn.com/sol3/papers.cfm?
abstract_id=1267625&rec=1&srcabs=991821>.
112 Patrick Boltion, Xavier Freixas and Joel Shapiro, ‘The Credit Ratings Game’, Working Paper (February
2009), available at <www.nber.org/papers/w14712>.
113 See, for example, Marco Pagano and Paolo Volpin, ‘Credit Ratings Failures and Policy Options’,
Centre for Studies in Economics and Finance, Working Paper no. 239 (November 2009), avail-
able at <www.csef.it/WP/wp239.pdf>. For law reform proposals, see ‘Joint Report by the Trea-
sury and ASIC: Review of Credit Rating Agencies and Research Houses’ (October 2008), available at
<www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rep143.pdf/$file/rep143.pdf>; Technical Commit-
tee of International Organisation of Securities Commissions (IOSCO), ‘Code of Conduct Fundamentals for
CRAs’ (revised May 2008), available at <www.iosco.org/library/pubdocs/pdf/IOSCOPD271.pdf>; US Secu-
rities and Exchange Commission, ‘SEC Votes on Measures to Further Strengthen Oversight of Credit Rating
Agencies’, (September 2009), available at <www.sec.gov/news/press/2009/2009-200.htm>. See generally
Thomas Clarke and Jean-Francois Chanlat, ‘Introduction: A New World Disorder?’ in European Corporate
Governance, London, Routledge (2009) 1 at 15–16.
114 See Tricker, above n 20, 322–4 for a short explanation of all these agencies and organistions.
115 In March 2010, RMG announced a comprehensive review of its corporate governance rating system and
introduced several new Governance Risk Indicators (GRIds). This was done in direct response to the global
financial crisis and unreliable past governance risk indicators.
3.6 Conclusion
We started this chapter by focusing on the organs of a company and then discussed
the main functions of a board of directors. It was pointed out that although
there is no ‘one-size-fits’ all governance model, there are certain general criteria
that can be used to judge whether a particular country has a good corporate
governance model. Effective board structures, effective support mechanisms to
assist the board in fulfilling its functions properly, effective statutory provisions
and effective regulators have all been identified as elements from which it could
be judged whether a country adheres to a good corporate governance model.
At the end of the day, a good corporate governance model will translate into
well-governed corporations. This in turn, will ensure that investors will see the
benefits of investing in well-governed companies to maximise the return on their
investments. An additional advantage is that all of this leads to the creation
of wealth, which will stimulate a country’s economy and improve the living
standards of its citizens.
Because of these factors, Durnev and Kim have established that often corpor-
ations in countries with weak investor protection mechanisms in place and only
requiring minimum corporate governance standards, will do more than just the
minimum to adhere to good corporate governance practices. In fact, they were
surprised by the number of high-quality governance firms in such countries.116
Also, increasingly, more research is being done and studies undertaken on the
key elements of an effective corporate governance system. This ensures that
investors are able to quantify the benefits that they get from investing in well-
governed companies, also called ‘private benefit of control’ by economists.117 In
our view, together, all these factors will ensure that corporate governance as a
subject area will remain of considerable importance in future.
116 Art Durnev and E Han Kim, ‘Explaining Differences in the Quality of Governance Among Companies’, in
Global Corporate Governance (Donald H Chew and Stuart L Gillan, eds), New York, Columbia Business School
(2009) 52 at 53.
117 Alexander Dyck and Luigi Zingales, ‘Control Premiums and the Effectiveness of Corporate Governance
Systems’, in Global Corporate Governance (Donald H Chew and Stuart L Gillan, eds), New York, Columbia
Business School (2009) 73. See also Sir Bryan Nicholson, ‘The Role of the Regulator’ in The Business Case for
Corporate Governance (Ken Rushton, ed.), Cambridge, Cambridge University Press (2008) 100 at 101–3.

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3

Board functions and structures

3.1 Higher community expectation of directors

3.1.1 Initially low standards of care, skill and diligence

2 Lagunas Nitrate Company v Lagunas Syndicate [1899] 2 Ch 392 at 435.

3.1.2 Legal recognition of changed community expectation

Once upon a time a directorship was a sinecure – an occasional meeting between

13 Daniels v Anderson (1995) 16 ACSR 607 (CA (NSW)) at 657.

As will be seen in Chapter 10, director liability in Australia is dominated by

3.2 The organs of governance

responsibilities of boards of directors. It may cause to be overlooked the reality of the

3.3 Board functions32

This distinction is nowadays also widely accepted in legislation. In the past

But there is a vast difference between ‘directing’ and ‘managing’ an organisation.

Directing is essentially an intellectual activity. It is about showing the way ahead,

He repeated these sentiments in 2003:

The argument in favour of allowing a retiring CEO to become the chairperson

55 Garratt, above n 44, 124.

3.4 Board structures

Figure 3.1 [2.1]: The board and management differentiated

Figure 3.2 [2.2]: All-executive board

Figure 3.3 [2.3]: Majority executive board

distinction drawn by Tricker in his books International Corporate Governance65

Figure 3.4 [2.4]: Majority outside board

Figure 3.5 [2.5]: Two-tier board

figure 3.5 reproduced from Corporate Governance: Principles, Policies and

Figure 3.6 [3.4]: The all non-executive director board

function of ‘the board’ is to ‘direct, govern, guide, monitor, oversee, supervise

Another major corporate governance difference embedded in law relates to board

Promoting the concept of objective overseers or outsiders (that is, independent

towards a quasi – or perhaps even a de facto84 – two-tier board structure; namely,

3.5 Board structures in the broader context of a

22.3 inconsistent accounting and auditing standards;

3.5.2 Effective board structure

90 Owen Report (2003), above n 23, 101–2 para 6.1.

Figure 3.8: Separation and interaction of management and governance

pyramid’ – they function ‘side-by-side’.91 There should be a healthy interaction

91 Kendall and Kendall, above n 45, 53.

3.5.3 Effective support mechanisms to assist the board in

3.5.4 Effective statutory provisions

93 King Report (2009), above n 69, at 39 paras 62–5.

Appointment or nomination committees

Figure 3.9: Support mechanisms to assist the board

3.5.5 Effective regulators

but it is something that cannot be postponed indefinitely. It is, therefore, to be

While comply-or-explain and the market-based approach to raising standards are

Since the first edition of Principles of Contemporary Corporate Governance, we

3.5.6 Effective charters, policies and codes of best practice

Effective legislation Effective regulators

Appointment or nomination committees ASX

Compensation or remuneration committee Legal and ethical behaviour

Figure 3.10: Complete corporate governance model

3.5.7 Corporate governance rating systems for companies

110 Ibid, 22.

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