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Government Business Enterprises Governance Reforms.

2 December, 2011

 

 

In brief:

 

The Federal Government has released an updated version of the Governance Arrangements for Commonwealth Government Business Enterprises that better reflect contemporary developments in corporate governance policy in the oversight of Government Business Enterprises. 

 

How does it affect you?

 

  • The Commonwealth Government Business Enterprise – Governance and Oversight Guidelines (the New Guidelines) represent an enhanced framework for the governance, accountability and supervision of Government Business Enterprises (GBEs), including more detailed quantitative reporting to shareholder ministers, and hence to Parliament and the Australian people.

 

  • The New Guidelines set non-legally binding standards of governance that recognise the significant economic and social impact of GBEs.

  • The New Guidelines:

 

  • align the governance of GBEs more closely with major private sector companies;

 

  • provide more detailed guidance on the Commonwealth's planning and reporting requirements; and

 

  • ​indicate a more activist role for the Commonwealth in the operation of GBEs.

 

Background

 

Commonwealth GBEs occupy strategic positions in the economic and social life of Australia, including such entities as Australia Post, Medibank Private and NBN Co. A GBE may be either a Commonwealth statutory authority or a Commonwealth company limited by shares.

 

The governance of GBEs is important to Australians (who are their ultimate owners), but also to their customers, suppliers and competitors on which their behaviour impacts.

 

The Howard Government introduced a new regime for the governance of GBEs in 1997 with the advent of the Commonwealth Authorities and Companies Act 1997 (the CAC Act), the Commonwealth Authorities and Companies Regulations 1997 (the CAC Regulations), the Auditor-General Act 1997, and the Financial Management and Accountability Act 1997. In conjunction with this, the Governance Arrangements for Commonwealth Government Business Enterprises (the GBE Guidelines) were introduced in order to inform and guide the relationship between GBEs and the Commonwealth. For those GBEs that are Commonwealth authorities (such as Australia Post) their governance framework includes their enabling legislation, the CAC Act and the CAC Regulations. For those GBEs that are Commonwealth companies (such as NBN Co), their governance framework is also informed by their constitution and, importantly, the Corporations Act 2001 (Cth) and therefore the common law and statutory duties of directors.

 

The New Guidelines came into force on 11 October 2011, following consultation earlier in the year as part of the Government's 'Better Government' agenda announced in December 2010.

 

Since their introduction in 1997, the GBE Guidelines have been an administrative instrument without statutory force. The New Guidelines' legal status remains unchanged, however, the Federal Government has foreshadowed future amendments to the CAC Act to give the New Guidelines statutory force under that Act.

 

Changes to the GBE Guidelines

 

Below is a survey of the key changes arising from the New Guidelines.

 

Mandate of GBEs

 

The mandate of GBEs will be reviewed more frequently by shareholder ministers under the New Guidelines. This may result in more frequent change to the objectives, purpose and function of a GBE as set out in that mandate. There is a strong sense from this amendment of the potential exercise of strategic control by shareholder ministers and their departments, consistent with their accountability to the Parliament and to the public.

 

It is interesting to note that it is no longer the 'ultimate objective' of a GBE to 'operate at world's best practice', as stated in the previous version of the GBE Guidelines. Doubtless this flows from the fact that such a standard is largely meaningless, particularly against a background of the New Guidelines' requirements for closer scrutiny of mandates, and upgraded reporting obligations against detailed quantitative measures.

 

Boards of directors

 

Reflecting, in part, the development of corporate governance policy in the private sector, the New Guidelines introduce a number of reforms to the composition and operation of GBE boards. In particular, the New Guidelines require:

 

  • boards to have regard to the Government's gender target of 40 per cent female, 40 per cent male and 20 per cent female/male board membership by 2015;

  • that the term of non-executive directors normally be limited to two terms (six years) or three terms (nine years) in the case of the chairperson, with exceptions considered on merit;

 

  • regular, systematic consideration of the composition of the board, including analysis of director attributes (including gender), functional requirements and succession planning;

  • directors to consider regularly their position in respect of independence, conflicts of interest and potential to cause embarrassment to the GBE or its shareholder ministers; and

  • the implementation of a structured program of review and reporting of the performance of directors and the board more generally.

 

Planning and reporting

 

The New Guidelines seek to enhance GBE planning and reporting to shareholder ministers and to Parliament and, in particular:

 

  • provide guidance on the content of corporate planning documents (including the corporate plan, quarterly progress report, statement of corporate intent and annual report);

  • specify a minimum set of quantitative measures that GBEs must target and report against, including financial performance, business efficiency, leverage/solvency, customers and stakeholders; and staff;

  • reaffirm the principle in the CAC Act that GBEs keep their shareholder ministers informed of operations in a manner akin to the continuous disclosure regime applicable to listed public companies;

  • introduce an additional guidance framework (known as a Commercial Freedoms Framework) that will further define (and potentially limit) the activities of a GBE;

  • require that urgent significant business initiatives and proposals (unable to be included in the normal corporate planning cycle, for example, new business ventures, major contracts and capital raising proposals) be treated as 'notifiable significant events' under the CAC Act, for submission to the shareholder ministers;

  • set out detailed minimum business case information requirements for new proposals that are submitted as part of the normal corporate planning cycle or as part of an urgent initiative; and

  • require that GBEs hold an annual strategic meeting to discuss their performance and their strategic direction, to which shareholder ministers are to be invited.

 

Financial governance

 

The New Guidelines provide additional advice on the financial governance of GBEs, including conveying the Commonwealth's expectation that a GBE:

 

  • should aim to achieve increases in shareholder value by exceeding a GBE-specific weighted average cost of capital;

  • will engage in normal, rather than aggressive, tax planning within the spirit of the law; and

  • will not include in loan agreements clauses (such as termination clauses) triggered by a change in control of the GBE.

 

Other governance matters

 

The New Guidelines continue to provide advice regarding the management of a GBE's relationship with its employees and subsidiaries. Of particular note, the New Guidelines:

 

  • encourage GBEs to apply the Government's workplace relations policy (currently the Australian Government Employment Bargaining Framework); and

  • require GBEs to ensure that the control of the affairs of a GBE subsidiary is exercised by a majority of the directors of that subsidiary who are directors/employees of the GBE or approved by the shareholder ministers as directors of that subsidiary.

 

 

For further information, please contact:

 

Ian McGill, Allens Arthur Robinson

ian.mcgill@aar.com.au

 

Simon Lewis, Allens Arthur Robinson

simon.lewis@aar.com.au

 

Maryann Muggleston, Allen Arthur Robinson

maryann.muggleston@aar.com.au

 

 

 

 

 

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