Tucked away in the Australian Government's extensive White Paper, Australia in the Asian Century (October 2012), are some statements that reflect an arguably out-dated view about corporate governance. The Government advocates that by the year 2025, one-third of board members of Australia's top 200 publicly listed companies and Commonwealth bodies should have deep experience in and knowledge of Asia. But is the board the right place to inject this expertise? How is this qualification for board membership to be weighed against the more traditional ones? And perhaps most importantly, why does the White Paper assume that the remainder of the board will, and can, remain in the dark?

The White Paper's corporate governance proposals

Australia in the Asian Century is about what the Prime Minister describes as the transformation of the Asian region into an economic powerhouse of the world, a process that is not only unstoppable, but is gathering pace.  It is intended to provide a road map for the whole of Australia - governments, business, unions and the broader community - into the next phase of our relationship with Asian nations including China, Japan, India, Indonesia and South Korea.

The White Paper identifies 25 national objectives for 2025.  One of them is this:

14.  Decision makers in Australian businesses, parliaments, national institutions (including the Australian Public Service and national cultural institutions) and advisory forums across the community will have deeper knowledge and expertise in countries in our region and have a greater capacity to integrate domestic and international issues.

• One third of board members of Australia's top 200 publicly listed companies and Commonwealth bodies (including companies, authorities, agencies and commissions) will have deep experience in and knowledge of Asia.
• One third of senior leadership of the Australian Public Service (APS 200) will have deep experience in and knowledge of Asia.

There are 'pathways' set out, to map the way to achieving these goals, including the following pathways that specifically relate to business corporations:

• Encourage boards to include more business people with direct experience from within the region.
• Encourage the Australian Institute of Company Directors to integrate Asian cultural competency training into its company directors course.
• Encourage leading peak business organisations to report annually on progress, including through cooperation with the ASX Corporate Governance Council to incorporate into its principles and recommendations reporting on business practices and processes to promote relevant Asian experience and knowledge.
• Build stronger relationships through interactive programs and regular exchanges of senior officials at mid-career points, including through the university sector.

A critique of the White Paper's corporate governance

An issue for management rather than the board?

The White Paper identifies the need for 'Asia-capable workplaces'.  This is because 'organisations that are successful in the Asian century will need staff who have specific knowledge of the products and markets of Asia, along with the cultural and language capabilities needed to be active in the region'.  That is primarily a need for Asian expertise in corporate management.  But the White Paper immediately moves in a different direction (at p 179).  Presumably because it is taken for granted that corporations perceiving this need will actively recruit management with Asian expertise, the recommendation jumps to the board level.

Clearly enough, boards of directors need to understand the company's business, risks and opportunities, and actively encourage management to settle an effective strategy.  Where the company does business overseas, this implies that the board must have some understanding of the markets, business and culture of the countries in which it does business or proposes to do business in future.  But that does not mean members of the board must have the same level of expertise as the executive staff hired specifically for that purpose, and certainly does not prescribe for non-executive directors that they must be fluent in the languages of the people with whom the company deals.

Selection criteria for Asia experts

Directors of listed public companies need to have a range of skills and experience that they can deploy at the board table.  For instance, they need to appreciate the role and importance of business strategy and an effective business model; be financially literate; understand business principles relating to the development of profit-making opportunities and dealing with customers and suppliers; be able to anticipate, identify and manage risk; and also to understand the regulatory regime within which the company operates.

The recent changes to the ASX Corporate Governance Principles and Recommendations which require companies to have diversity policies for senior corporate appointments are intended to facilitate the appointment of men and women with the best available skill-sets to board and management roles.  The White Paper proposal makes it clear that the Government believes a key component of the requisite skill-set will be deep experience and knowledge of Asia and Asian markets, businesses and cultures.   To achieve the objective of the White Paper proposal that one third of the board should have this particular experience and knowledge, within a timeframe of a little over 12 years, would require significant changes to the composition of the boards of the ASX 200. If the individuals with the all-round skill-set are not available, the question becomes, should listed companies give priority to Asia-expertise over the full suite of directorial skills?

The modern independent director

The White Paper proposal, that one third of the board should have Asia-expertise, seems to reflect an outdated view of corporate governance.

At one stage in the development of corporate governance thinking, it was assumed that a well constituted board would comprise individuals selected for their special skills in particular areas useful to the company: for example, some who were experienced in the company's business (such as a retired chief executive); some who were experienced in the industry in which the company's business is found; some with expertise in finance; some with expertise in technology; and some with expertise in HR skills.  Now, according to the White Paper, we need to add 'some with expertise in the Asian countries with which the company has business connections'.

The 'collection of experts' model has been superseded by developments in corporate governance theory and in particular, the rise of the independent director.  Nowadays the majority of the board of an ASX 200 company will comprise independent directors, as defined in the ASX Corporate Governance Council's Principles and Recommendations.  To a degree, independence is incompatible with expertise with the company's or its industry's business, because the definition of independence excludes many of those who are most likely to have that expertise.

The new model is of the 'professional' independent public company director, who has a range of special skills that are adapted to any business, together with a preparedness to learn the business specifics quickly on the job.  Given the general acceptance of this model, it may not make a great deal of sense to require one-third of the board to have Asia-expertise, without addressing the skill-set of directors as a whole.  It would be sensible to recommend that knowledge of the markets, businesses and cultures of the Asian countries likely to be encountered should become part of the portfolio of skills to be acquired by every member of the board.

How should the board make use of its Asia experts?

If one-third of the directors are appointed for their Asia-expertise and the others do not have that expertise, how should the board deploy the Asia experts?

One approach, recently suggested in the financial press, would be to constitute the Asia expert directors as a board committee, to which pertinent matters could be delegated for determination.  However, there could be a problem for the board if directors appointed for their Asia-expertise do not have the rounded skills needed for corporate decision-making.  Under the Corporations Act, s 190, if the directors delegate decision-making power to a committee on which they do not serve, they can avoid responsibility for the decision only if they believe on reasonable grounds that the delegates will exercise their power in conformity with the duty of directors, and that they are reliable and competent to do so.  It could be risky for directors to delegate a decision-making function to experts of any kind, (including Asia-experts) who may not have the rounded skills and judgment that would normally be required to serve on the board. 

It is much more common, when board committees are used, for the committee to give advice and for the full board to make the final decision.  In that case, under s 189 of the Corporations Act the full board can rely on the information and advice provided by the board committee only if they make an independent assessment of it, having regard to their own knowledge of the corporation and its operations (including operations in Asia).  In this context, a pre-requisite to making an independent assessment will be for every director to have a sound understanding of the relevant Asian markets, businesses and culture.

That being so, perhaps little is to be gained by establishing a separate board committee for issues concerning the Asian countries in which the company does business. It will be far better to bring the Asia expert directors into the full board discussion, where their expert views can be received and independently assessed by every board member.  But again, this presupposes that every director has a sound understanding of the relevant Asia issues.

Conclusion

The Asian Century is presenting, and will continue to present, huge challenges and opportunities for Australian corporations, their management and directors. Skilling up, in terms of Asian markets, businesses and cultures, is a high priority for executive management.  In their case, skilling up will often mean they must have at least a general familiarity with the relevant Asian languages, as well as markets and business practices.

The White Paper makes an important contribution by drawing attention to the need for boards, as well as executive staff, to engage in a skilling up process (though probably not, for non-executive directors, going so far as requiring Asian language facility).  But the assumption in the White Paper, that Asia expertise should be acquired by making specific board appointments, representing only a percentage of the full board, is at best incomplete and perhaps misconceived.  The challenge that is presented is for every director of a company that does business with one of Australia's Asian trading partners to acquire sufficient understanding of that country's markets, business environment and culture that they can carry out the board's essential function: namely, guiding and monitoring management in the conduct of the business.