Don't turn your back on your board
By Lucy Battersby | theage.com.au | 14 March
Company directors, rather than governments or executive officers, are responsible for preventing business collapse, says a visiting British corporate governance specialist.
Bob Garratt, a company chairman and academic, said weak and ineffective boards failed to prevent the subprime crisis and consequent credit crunch because they had not assessed their political, economic and trade environments.
Professor Garratt, who is a founding member of the Commonwealth Association for Corporate Governance, was speaking to a Melbourne audience of 360 board members from leading companies, not-for-profit organisations, unions and the public sector.
He said Britain's Northern Rock Bank, which was recently nationalised to stop a run on funds, collapsed because the board did not think the cheap credit it was using to fund mortgages would ever dry up, and had failed to critically assess the business model the company was using.
"It was a lack of due diligence by the board," he said. "We had a situation where terrorist groups were self-certifying mortgages. Nobody had even gone to see if the property existed - it didn't - and they (the terrorists) have gotten huge amounts of very cheap money and disappeared."
That would never have happened if the board of directors had implemented prudent control systems, he said, and such situations could not be prevented by more regulation.
"Governments can't really control human behaviour; what they can do is make penalties so strong that if you do break the law you are in trouble," he said.
Professor Garratt applauded Australia's corporate environment, saying it had the lowest rate of corruption in the world.
He said the Australian Securities and Investments Commission's call for directors to reveal their margin loans was a good move, but it was up to the board to prevent market manipulation.
"The ultimate responsibility - and the legal responsibility - lies with the board, unless the executives have committed fraud."
He criticised the business culture in the US, where chief executives often regarded directors as irrelevant, and where poor business practices flourished under inconsistent and weak state regulations.
Professor Garratt is in Australia as a guest of the Australian Institute of Company Directors.
First published by TheAge.com.au on March 14 2008
Visit theage.com.au for the latest news updated throughout the day
