Corporate Governance in Advance of an IPO

12 Sep 2018

This chapter addresses a common mistake made during the initial public offering (IPO) process: corporate governance as an afterthought. Corporate governance plays a key role in preventing corporate crimes, adding shareholder value, ensuring financial health and assisting in long-term sustainable growth. This chapter includes (1) a comparison of Australia’s corporate governance regimes to similar corporate governance regimes in the U.S. and the U.K.; (2) a case study on the cost of poor corporate governance based on lessons from the collapse of HIH Insurance Group (HIH); (3) the importance of a robust corporate governance regime in advance of an IPO; and (4) what companies listing in Australia should consider when implementing their corporate governance systems.


At a recent Governance Institute of Australia event hosted by the Australian Securities Exchange (ASX), Kevin Lewis, group executive and chief compliance officer of ASX Limited, remarked how ‘governance failures typically result in financial failures’. He was referring to the importance of corporate governance and learning from past failures, such as the collapse of HIH Insurance Group. (His speech, ‘My Governance Journey’, was delivered at the Governance Institute of Australia New South Wales Graduation Ceremony, ASX Exchange Square, 22 November 2017.)

The Royal Commissioner Justice Neville Owen’s examination surrounding the failure of HIH was instrumental in shaping corporate governance in modern Australia. Owen described ‘corporate governance’ as ‘the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms by which companies, and those in control, are held to account’ (HIH Royal Commission, in The Failure of HIH Insurance, Volume 1: A Corporate Collapse and Its Lessons. Canberra: Commonwealth of Australia, April 2003, p. xxxiv).

In Australia and other common law countries, it is a widely recognised principle that a director owes a fiduciary duty to the company and must act honestly, in good faith and to the best of his or her ability in the interests of the company, according to s180-183 of the Corporations Act 2001 (Cth).

Shareholders have a role to play in ensuring appropriate governance structures are in place. Shareholders are tasked with the appointment and removal of Directors and Auditors, as well as holding those appointed to account at mandated annual shareholder meetings. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put decisions into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meetings.

A poorly governed company is unlikely to benefit shareholders over the longer term. This result occurs regardless of initial growth, early strong share prices or even excellent products. Countless world experiences, including the Enron and WorldCom collapses in the U.S., and the subprime mortgage crisis continue to demonstrate this idea. These parallel experiences reiterate that without defined and exercised internal controls backed by external checks, companies and their investors are vulnerable to potential error, negligence, malfeasance and fraud.

The best time for establishing strong corporate governance frameworks is as early as possible. The company secretary should be tasked with ensuring that the board continues to meet its corporate governance obligations and establishing a process or framework to ensure its governance obligations are met.

In our experience, nowhere is this notion more relevant than in advance of IPO. When setting out to be a listed Australian Company, implementing corporate governance is one critical step towards setting up the organisational culture, process and practices for ensuring shareholders enjoy long-term sustainable growth. The first step of that process is establishing the company secretariat.

Overseas Experience

Organisations with the greatest propensity to affect the most people can also be the most difficult to govern. However, an expectation has arisen from employees, investors and the market that these entities be regulated.

The foundation of modern corporate governance principles can be found in Financial Aspects of Corporate Governance (1992), a report issued by the Committee on the Financial Aspects of Corporate Governance (the Cadbury Report). This report gave rise to the Organisation for Economic Co-operation and Development Principles of Corporate Governance, 2004 (OECD Principles). The OECD Principles was the first formal attempt to stamp out and prevent bad corporate behaviour.

Although compliance with their principles is still voluntary, the Cadbury Report and the OECD Principles are guides on ‘best practice’ for companies with respect to their targets around corporate governance. The principles can and are applied as a marking scale by analysts, regulators and countless investors when considering an entity’s corporate governance health.

The London Stock Exchange requires disclosure on compliance with the implementation of the U.K. Corporate Governance Code. The Code largely mirrors the recommendations in the Cadbury Report.

Similar developments occurred in the U.S. The Public Company Accounting Reform and Investor Protection Act of 2002 (commonly known as Sarbanes-Oxley) legislated some of the recommendations of the Cadbury Report.

A significant change is the requirement for the chief executive officer (CEO) and chief financial officer, or persons who perform that function, to provide a personal sign-off to the Securities and Exchange Commission. This approach acts as a formal recognition of management’s role in practicing good corporate governance and a reminder to directors of the need to ensure external oversight as part of its corporate governance regime.

The Australian Experience: A Case Study on HIH Insurance

The above-mentioned overseas experience of the need for focus and controls on governance holds true for the Australian listed company environment. The HIH collapse provided a catalyst for major corporate governance changes in Australia and acts as a reminder of the importance of ensuring a strong corporate governance framework in advance of an IPO.

At the time of its collapse in March 2001, HIH was the largest corporate failure in Australian business history. The group debts were estimated at A$5.3 billion. The resulting Federal Government–initiated Royal Commission examined corporate governance above all else. Led by Justice Owen as the Royal Commissioner, the Commission was charged with investigating ‘the extent to which actions of directors, employees, auditors, actuaries and advisors contributed to the HIH failure or involved undesirable corporate practices’.

Corporate governance failings
Modern corporate governance principles recommend a clear distinction between the role of the board and the role of the CEO. With HIH, there was no clear distinction. Furthermore, there were no apparent restrictions on the authority of the CEO.

Role of the board to ask questions and provide oversight
According to Gregor Allan, a striking testament to poor management at HIH was its chronic under-reserving of a provision for cash reserves to pay out future claims (‘The HIH collapse: A costly catalyst for reform’, Deakin Law Review, 11, no. 2, 2006, p. 137).

The composition of HIH’s board when seen through the governance lens is self-destructive in this regard. The board of HIH set the payout provisions based on reports of independent actuaries and assessments of those reports by its auditor, Arthur Andersen (Andersen).

The board members failed to adequately consider the reports themselves and were found to have failed to ask questions of either the actuaries or the auditors on the contents of these critical reports. The ultimate finding was a distinct lack of due care and skill expected of a director of a general insurer (Allan, Deakin Law Review, p. 137).

Lack of independence
At the time, in Australia amongst the Standard & Poor’s/ASX top 100 companies, independent non-executive directors comprised only 45.3% of boards by personnel.

HIH did not have a single independent non- executive director on its board. Furthermore, of the four non-executive directors, two were former partners of the company’s auditors (Andersen), and the other two directors were involved in providing legal services to the group—creating a conflict of perceived interests.

Catalyst for change
The demise of HIH was one of several high- profile and dramatic failures around 2001. As a part of the Royal Commission, 61 policy recommendations were made to strengthen and reform Australia’s system of corporate governance.

Consequently, reforms have been introduced to bolster principles of corporate governance (Allan, Deakin Law Review, p. 137). In Australia, these reforms were implemented via the passage of the Corporate Law Economic Reform Programme (Audit Reform and Corporate Disclosure) Act (‘the CLERP Act’) on 25 June 2004.

Following the footsteps of the Sarbanes-Oxley reforms, in Australia the CEO and chief financial officer of listed companies now must declare in each annual report that the financial records:

  • have been properly maintained
  • comply with accounting standards
  • ‘give a true and fair view’.

Listed companies must also include details of directors’ remuneration and performance targets. Shareholders must be allowed time to discuss these matters at shareholder meetings.

Furthermore, as far as normal reportable disclosures, Australian shareholders must receive ‘such information as they would reasonably require’ to make an informed assessment of:

  • the operations of the entity
  • its financial position
  • its business strategies
  • prospects for future financial years.

In addition, whistle-blower protection laws were implemented and regulated to encourage employees to report suspected breaches of its company laws. Similarly, there are stricter rules for auditors to maintain their independence.

The Role of Effective Corporate Governance in Advance of an IPO

Although HIH remains a powerful example for highlighting the risks of a poor corporate governance environment, the report resulting from the investigation by Royal Commissioner Justice Owen also emphasised the interdependent relationship between corporate governance and company culture.

Organisational Culture
Many companies continue to act on the premise that corporate governance can be considered ‘an afterthought’. Where there is opportunity for poor corporate behaviours or unethical practices to deliver profit and create reward, management or the board can succumb (examples include WorldCom, Enron, Bank of America and Merrill Lynch). According to Ronald Francis, ‘with economic opportunities come criminal ones, as well as opportunities for unethical profit’ (Ethics and Corporate Governance, 2000, p. 19).

Good corporate governance should be instilled from the onset, not after it is too late.

Organisational culture provides an important makeup of a company’s ability to stay profitable, drive growth and achieve customer satisfaction. Poor governance can allow an undesirable culture to fester.

Uber provides an example of how a good business model and value can be undermined by poor corporate culture. Uber Technologies, Inc. fell foul when reports arose of a ‘Hobbesian environment where workers are pitted against one another and where a blind eye is turned to infractions from top performers’ (Mike Isaac, ‘Inside Uber’s Aggressive, Unrestrained Workplace Culture’, New York Times, 22 February 2017). In addition to reputational damage, Uber lost members of its board, its CEO and senior staff. There can be a tangible cost to the business where a framework of good governance is lost. It was reported that Uber, which was valued at US$70 billion (A$91 billion), lost US$20 billion (A$26 billion) of that value because of the scandal (Isaac, New York Times, 22 February 2017).

In Australia, poor practices by the big banks and in related services they provide (insurance and financial advice businesses) created the political climate for the Australian government to impose an additional $6.2 billion in taxes (James Eyers, ‘Budget 2017: Dismayed Bank CEOs Say Shock “Stealth Tax” May Weaken Banks’, Australian Financial Review, 10 May 2017). This represented a tangible cost to poor corporate behaviour.

Investor Confidence
Corporate governance sets a framework for a company’s organisational behaviour (Eyers, ‘Budget 2017’). This concept is important because of how much easier it is to establish a good organisational culture than to fix a bad culture.

A corporate governance framework also provides a ready yardstick for investors to assure themselves that appropriate systems and processes are in place for that entity, in its circumstances and market segment.

A 2014 poll was conducted by Global Proxy Solicitation and the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne. It asked 1,000 retail investors about the impact of corporate governance on company performance. An overwhelming proportion of investors (80 percent) stated that they sought a rating system to identify poorly governed companies and would stay away from companies if they were rated poorly (Kylar Loussikian, ‘Investor confidence takes a tumble over corporate governance, volatility’, The Conversation, 24 February 2014).

In Australia, a company’s IPO prospectus is required to make disclosures about its corporate governance policies and practices. Disclosures form part of investors’ decision matrix for investment.

In an increasingly competitive capital market, ensuring an appropriate framework for corporate governance in advance of an IPO can be crucial for encouraging investor confidence and securing funding commitments. In addition, corporate governance reporting is an annual obligation imposed by the ASX.

Pre-IPO Corporate Governance Consideration

In Australia, with a company listing on the ASX, the main document to consider in setting a corporate governance framework is Corporate Governance Principles and Recommendations (third ed.), published by ASX Corporate Governance Council, 2014, and referred to as CGPR.

The principles contained in the CGPR are intended to:

  • minimise conflicts of interest for decision makers
  • ensure independent review of company actions and claims
  • align company policies and procedures with applicable laws and regulations.

The company secretary is often tasked with managing a company’s corporate governance framework. Engaging a qualified company secretary early in the pre-IPO stage is a tangible step towards ensuring that best practice is implemented well in advance of an IPO.

ASX Corporate Governance Principles
The CGPR guides listed entities on best practice; however, it is not a rule book. The ASX Corporate Governance Council recognises that there should not be a ‘one-size-fits-all approach’ given the various maturity stages of entities. Instead, the council has adopted what is referred to as an ‘if not, why not,’ approach to self-reporting.

This approach means that if a listed company does not abide by any of the principles or recommendations, then the listed entity must explain why it chose not to follow that principle. The ASX requires that this disclosure must be lodged at the same time as the company lodges its financial reports.

Companies considering an Australian IPO should be familiar with the CGPR to assist in decision making and understanding best practice. The CGPR can also be a tool for educating an entity and its officers about the risks associated with detracting from the CGPR.

The CGPR is structured around, and seeks to promote, the following eight central principles (CGPR, p. 3):

  1. Lay solid foundations for management and oversight: A listed entity should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated.
  2. Structure the board to add value: A listed entity should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively.
  3. Act ethically and responsibly: A listed entity should act ethically and responsibly.
  4. Safeguard integrity in corporate reporting: A listed entity should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting.
  5. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.
  6. Respect the rights of security holders: A listed entity should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively.
  7. Recognise and manage risk: A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework.
  8. Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders.

Other Considerations
Because there is no ‘one-size-fits-all’ approach to governance in Australia, the onus remains on the entities in advance of an IPO to take a holistic approach to their corporate governance framework. Corporate governance always includes broad principles of accountability, transparency, integrity and stewardship. These principles form the basis of the CGPR and, as standards of behaviour, are very much at the core for any overarching governance framework for listed entities (Simon Pordage and Frank Bush, Corporate Governance and the Company Secretary, Governance Institute of Australia, 2009, p.4).

Role of the Company Secretary
The Corporations Act 2001 (Cth) dictates that a public company in Australia (of which a listed entity must be) has an appointed company secretary. The company secretary is charged with managing the company’s corporate governance and regulatory obligations (Pordage and Bush, Corporate Governance and the Company Secretary). This person has a key role in advising the board on best practice, appropriate disclosures and managing the governance landscape.

When considering an IPO in Australia, it is important to engage a qualified company secretary, either as an employee or through a provider of professional company secretarial services, at the earliest opportunity. This approach will ensure that you commence the IPO process with corporate governance in mind.


Responses for global regulators and governments to prosecute and impose fines and increase taxes on entities with poor records is testament to the importance of adequate corporate governance and the need to outsource company secretary. Poor corporate governance can result in significant cost for entities, and punishments range from fines to imprisonment for officeholders.

The pre-IPO stage provides a perfect opportunity to adopt appropriate policies and practices before the entity is in the public eye and under the review of shareholders and a market operator. Establishing effective corporate governance in advance of an IPO is important to start your listed company’s journey on the right foot.

This article was published in the Entrepreneur’s Guide. Download the electronic version of the guide at:

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Tom Bloomfield

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