As the Australian Governance Summit, run by the Australian Institute of Company Directors (AICD) raps up for another year, I was prompted by this exchange with Julie Garland McLellan to briefly share my thinking on director education in Australia and its many contradictions.
“What is the difference between director education in the USA and Australia?” asks universally respected board advisor and commentator Julie Garland McLellan. She had recently attended a course at the University of Pennsylvania called Boards That Lead: Corporate Governance That Builds Value. Her dissonance on returning home gracefully palpable:
Today I am at the AICD governance summit and looking forward to more insights. Yesterday was great with many excellent sessions and valuable ideas. It struck me that the conversation was very much about avoiding and managing risks whereas in the USA we had focused on the leadership and strategic aspects of directorship. Boards need to add value and actively grow their companies as well as ensure compliance. That is why the shareholders elect us.
Based on a book by Michael Useem and other serious scholars, the Wharton program is designed to showcase that latest thinking on how directors can make a leadership difference.
As a theorist, I look at Julie’s question from a different perspective. The issue is not about the differences in American and Australian education (Useem is outstanding but he is not representative of the current state of corporate governance scholarship in the USA). Rather, what is most troubling about that state of Australian director education is that it is theoretically underpinned by neo classical economics and not Australian company law.
Australian director education is a contradiction. It should be grounded in leadership and value creation (and taught by serious scholars) but it still firmly rooted in a neo-classical model of corporate governance that values managerialism and value protection above all else. This post seeks to trace the cause of the flaws to three factors:
using the wrong law;
developing the wrong pedagogy;
the pretense of professionalism.
Contradictions in Law : Teaching A Myth
Australian corporate law is based on the seminal finding in Salomon v. A. Salomon & Co Ltd that corporations are entities with separate existence. A proposition confirmed over and over by Australian courts. More importantly, the courts readily acknowledge that corporations have interests independent of both shareholders and stakeholders. Sure, they can intersect. But as a matter of principle, the corporation’s interest comes first. Finally, under Australian law no one owns a corporation (a shareholder owns a chose in action called a share).
It follows that the purpose of corporate law in Australia is to empower and enliven by providing a framework for the existence of an artificial but real entity, capable of transforming and dissipating socially useful energy in the form of value throughout society.
However, when the intellectual founder of the AICD, the late Professor Bob Baxt AO FAICD Life returned from Harvard law school in 1960’s he returned with more than his own baggage. With him was an undeclared and invasive legal doctrine that would come to fundamentally compete with Australian corporate law - economics and law. Australian corporate law would be retooled in theory and practice in line with the radical idea that the purpose of the corporation was to maximise profits within the law.
Overnight, the Australian corporation was reduced to “economic corporation”. The counterparty to homo economicus with no interests other than to maximise the wealth of its shareholders.
Since its earliest inception, Australian director education has been drawn from this late century legal tradition where corporations are considered as having no existence whatsoever and profits equal corporate purpose. Under the standard model imported largely from America, corporations are nominalised. Considered as nothing more than a nexus of contracts. The purpose of corporate law and corporate governance in these jurisdictions is to provide a pro-forma contract and to manage agency costs on behalf of so called owners - owners vs managers, owners vs other owners and owners vs the rest of the world. That’s pretty much it.
If Australian law considers that corporations exist and are real (albeit artificial) and no one owns them, why are company directors taught a curriculum based on a foreign model that not only denies corporate existence but is based on the make believe idea that shareholders own corporations. And why, despite AUstralia’s history of governance failures culminating in the Banking Royal Commission has, it been allowed to go on for so long?
This table illustrates just how far removed Australian director education is removed from Australian Corporate Law. They are diametrically opposite!
Theory of Value Vs. Theory of the Corporation
The roots of the problems with Australia’s director education lies in ignoring Australian law:
Corporations exist ;
Corporate utility is a measure of objective interest and not simply miximizing profits
to act in the best interest of a corporation is to exercise a power or discharge a duty so that the socially useful energy or value available to the corporation increases over time.
But, if we teach directors that corporation don’t exist, with no welfare gains and loses, it should come as no surprise that eventually they don’t. As Madam Cotard’s doctor thought to himself - if you don’t think you exist, you won’t have long to think! Cotard's sydrome, also known as walking corpse syndrome, is a sometimes deadly psychological condition in which the affected person holds the delusional belief that they do not exist. In pschology it’s considered a diesese but in Australian director education it is considered the theoretical foundation for teaching.
Contradictions Teaching: Advocating Managerialism
The first thing an Australian director is taught is that directors should not manage. The next thing the director is taught is to embrace the ethos of a manager.
Directors are taught monitoring and oversight, setting risk appetite, formulating risk tolerances, adopting standards, delegating responsibilities, establishing risk committees, implementing risk programs etc. While no one wants to admit it, corporate governance training has distinct managerial characteristics captured in the phrase “things right”. Much of this is critical but it’s also a half baked conception of the role of the board.
The managerial feel to corporate governance education flows from the first contradiction - corporations don’t exist and the only thing standing between success and failure is agency cost. Informed by neoclassical economics, a core assumption of the standard model is that but for corporate governance, managers will take off with the money. Three insights follow:
First, there is a direct line between the pedagogy of director education and the maddening assumptions of neo-classical economics -ie. director independence, remuneration; behavioral dynamics focused on oversight, monitoring, challenging etc (as opposed to guiding, inspiring and helping) are all grounded in agency thinking.
Second, there is little room in the pedagogy of director education for value creation because it is either taken as a given or outside the ambit of agency problems. If value creation is discussed it’s tacked on. Often reduced to “strategy”.
Third, the idea that a director should guide and inspire the executive as a means to create value is opposed to the assumptions of agency theory. Remembering that but for the board’s intervention managers are presumed to pursue their own interests. The perverse implication of the theory, as manifested in teaching, is that directors are somehow conflicted if they are seen to be leading the executive rather than monitoring and challenging.
In short, the standard model is a negative theory of corporate governance. It can’t provide any answers as to how value is created. The thinking is not designed to predict success. Only that corporations will fail if the board does not follow the theory’s management style prescription. The problem is that corporations also fail when they do practice good governance. Like a broken clock, a theory that only predicts failure will occasionally be accurate.
Though many company directors intuitively reject the managerial governance in practice (you can’t protect what doesn’t exist), the combination of managerialism and distrust is hard coded into the curriculum. Worse still, not for profit directors and officers are being trained in a form of governance based on assumptions that are wholly inappropriate for the for purpose sector.
To be clear, the standard model assumptions and the “good governance” practices that focus predominantly on value protection contradict the Australian company law model. The legislators did not assume value creation was assured. They were not fools. Indeed, they placed value creation at the heart of the director’s duty - to act in the best interest of the corporation. Whether by design or accident the iron clad laws of existence are expressed in section 181 of the Corporations Act. The director’s duty is no less than to ensure surplus value (meausred by in terms of capacity to do useful work and embodied in all its forms and types of capital) is created to enliven the corporation to assure its longevity. Again, value was to be created before it could be protected. And value was never intended to mean money. An “interest” for the purposes of a director’s duty is not a synonym for financial interest. Interest is no less than energy it its socially useful form - value. But due to this second contradiction only a fraction of director’s training is focused on directorship and value creation.
Contradictions in Practice : The Pretense of Professionalism
The third, and perhaps most dangerous aspect of director education, flows from the second contradiction. To teach an Australian model of value creation in the boardroom takes months if not years. What makes the standard model of corporate governance attractive to both directors and educators is that the basics of value protection are relatively simple and can be taught in a matter of days:
Day One: The role of the board and the practice of directorship; and decision making.
Day two: Directors’ Duties and Responsibilities and the Board’s Legal Environment.
Day three: Risk and Strategy
Day four: Financial literacy for directors and driving financial performance.
Day five: Board effectiveness and learning into practice.
And what can you expect to take away on the final day? For one cohort of aspiring directors it was this - “Always act in the best interests of shareholders.”
The greatest problem is not getting the law wrong ( it’s best interest of the corporation as a “distinct”, “separate” and “independent” entity) or that the program is misguided by its preoccupation with risk and compliance, it is the risk of creating the pretense of professionalism without the work of becoming a professional.
With apologies to the 40,000* plus who have completed the program, a short course (the equivalent of perhaps a single undergraduate subject) should not entitle the AICD to misappropriate from academia the word “graduate” or to grant post nominals that are invested with personal experience and little more than five days course work, a 3000 word assignment, an online quiz and a written exam. To an outsider, it comes across as a form of virtue signalling with questionable virtue.
Unfortunately, this is not what disturbs most.
The contradiction is that the pretense does not match the reality either for directors or the peak body. Company directors have fiduciary duties, personal responsibility for 1hundreds of laws, can be liable for the debts of their corporations and are exposed to civil and criminal prosecution in their role. Directors have all the obligations of professionals but none of the rights and protections that come with years of appropriate education that stand behind professional qualifications. It’s unconscionable.
The only benefit is that unlike other professions, company directors do not seem accountable to their peak body.
Dr Christine Murphy spells out part of the problem in the context of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry:
You might pay the circa AU$7,000 to gain the Australian Institute of Company Directors course graduate letters after your name ‘GAICD’ and feel satisfied that you are now eligible to be bestowed by a plethora of directorship opportunities. I hate to rain on your post nominal parade - but most, if not all, those people who have been grilled in front of Commissioner Hayne over the past months and who, one by one, have reluctantly admitted responsibility for the most unethical practices, hold membership of AICD in common.
Now, the AICD cannot be held responsible for the conduct of those who pass its course or qualify for membership. Dr Murphy’s position is more sophisticated. Her argument is that our director institutions must hold their members accountable and also be held to account in the much the same way:
as a former fellow of the institute; the peak body has been deathly silent and MIA when it comes to publicly renouncing these high profile directors and by not cancelling these memberships (or at the very least, suspending them) due to their inevitable breaches of AICD’s own codes of practice.
AICD chief executive Angus Armour makes no mention of disciplinary action in his response to the final report. However, he does offer this.
"We've seen some very significant failures in the past few years and we are still going through commissions which could reveal even more, so this is not the time to stick our head in the sand, we need to push forward and lead a conversation,"
It begs the question. If the AICD’s head wasn’t in the sand, where was it during these failures? After all, as the peak body for directors, they’ve been leading the conversation and educating directors since 1975. But director education being unregulated, there is no accountability from the AICD other than the occasional hand ringing.
To their credit the AICD is undertaking some soul searching:
Hayne’s findings on governance require the AICD to reflect on our work, positions and guidance to directors. In the near term, we must test our curriculum and resources in light of the report’s findings. Issues of measuring and assessing culture, cultivating effective board dynamics and strengthening remuneration governance may require additional resources.
More broadly, it is time to consider the ways in which corporate Australia, including the director community, can promote professionalism, accountability and purpose.
Not that this initial response inspires confidence. In fact, it looks like they’re running out of ideas. The greatest advantage of the standard model is also its biggest limitation. Easy to teach but it has no theoretical depth from which to draw substantive solutions to the wicked problems exposed by the Commission. Indeed, what is proposed is arguably rooted in the same contradictions that led to the royal commission in the first place. Rather than use the Commission’s findings to challenge the assumptions underpinning the coursework, the approach is literally to recommit resources to it and double down.
The challenge is that the flaws in governance training are buried so deep and are so entrenched that I suspect no one within knows they are there. It was baked in on the first day. And even if they were looking and had the skills and knowledge required to see the legal flaws, it would be a brave person who dared to call it out (the irony is not lost on me - as they say we teach what we need to learn )? Forewarning the irony that plagues this profession - today’s governance solution becomes tomorrow’s governance crisis.
Outsiders, like Dr Murphy are prepared to call it out “There is a dire need for new thinking within the boardroom and inside the peak bodies. The time is nigh for radical disruptive change in the corporate and non-profit boardrooms and the institutions that are charged with preparing directors for their challenging responsibilities.”.
Though the thinking is not new and the warnings sounded long ago:
The system is not designed to create value. The set of corporate governance principles and practices we call "best practice" is producing too many “governors” focused on protecting value and not enough directors focused on creating it. Public companies have become over governed and under directed because corporate governance regulation and education is designed to ensure the "correct" board structure, process and composition rather than ensure "imagination, creativity, or ethical behavior in guiding the destinies of corporate enterprises"[vi].
Despite the assurances of the AICD, the frameworks for director education in this country are not fundamentally sound. They are built on two false assumptions that are at the root of a value crisis. That corporations don’t exist but shareholders do and that value is only measured in dollars and profits. Community trust will not be restored until director education is grounded in Australian corporate law. Maybe then we’ll get a summit that is as Australian in practice as it is in name.
art by Banksy at the junction of Tottenham High Road and Philip Lane Tottenham, north London (sadly now removed).
* according to the AICD in 2022 the Company Directors Course™ has been completed by over 65,000 directors. The emphasis is mine as I don’t know whether this means active directors or people who just identify as a director.