The James Hardie scandal has returned the topic of corporate governance to the lounge rooms of Australia. Just months after amendments to the Corporations Act 2001 were introduced under CLERP 9, politicians and advocacy groups are calling for further changes. According to traditional wisdom regarding corporate governance, however, it is virtually impossible to force companies to be good through the rule of law.

Justice Neville Owen, chair of the HIH Royal Commission, believes attempting to legislate good behaviour is a dangerous undertaking: “I think that trying to impose governance structures that are overly prescriptive or specific is fraught with danger,” he wrote in the Commission’s final report. “By its very nature, corporate governance is not something where ‘one size fits all’. Even with companies within a class, such as publicly listed companies, their capital base, risk profile, corporate history, business activity and management and personnel arrangements will be varied.”

In an unusual reversal of the argument for a more prescriptive, US-style corporate governance regime here, several of Australia’s largest fund managers recently kicked up a fuss over News Corp’s planned move to the state of Delaware in the US. The funds claimed corporate governance principles in the US are in fact weaker than those here.

The ASX, whose Corporate Governance Council’s principles represent Australia’s foremost corporate governance benchmark, purposely took a principles based approach, rather than opting for a more prescriptive set of guidelines. While the Council has argued its approach was deliberately non-prescriptive, thrashing out the principles took months and involved 21 industry groups, but has still left many unsatisfied.

“It is an argumentative issue, but it is an important one because basically how you define it leads you to some very different outcomes,” Professor Ian Ramsay, director of the University of Melbourne’s Centre for Corporate Law and Securities Regulation, told Lawyers Weekly. “There are two key definitions: The first talks about corporate governance as a way in which suppliers of finance assure themselves of getting a return on their investments which is effectively focused on shareholders and their interest. But generally we’ve seen broader definitions applied to focus on corporate governance as the relationship between key stakeholders in a company and who manages those relationships. There are some big differences in regulatory outcomes depending on how you define corporate governance.”

So where does all this leave Australia? According to the Howarth 2004 Corporate Governance Report, slightly worse than in 2003. The report, widely regarded as the definitive study of corporate governance, found that in 2004 corporate governance structures of 51.6 per cent of the top 250 Australian companies could be described as good or better; in 2003, it was 54 per cent.

Despite knee-jerk reaction to the Hardie scandal, most commentators maintain legislation is not the answer and suggest recent history shows why. “Personally, I don’t think we should try and legislate corporate governance,” said Michael Linehan, corporate advisory partner at Holding Redlich. “In Australia, there is a series of corporate collapses and then there is a legislative response. That increases the amount of prescriptive legislation in one area and we’ve seen that with the recent amendments to CLERP 9. I think you can get to a point where the level of legislation itself can hinder corporate development and risk taking and appropriate development of resources and finance.”

Ramsay agrees. “I think that the balance is appropriate, as a general rule, between government regulation, the ASX rules and also industry guidelines,” he said. “Significant corporate collapses are a challenge because you need to respond to them but that response might be broader than just dealing with that collapse, so you have the potential to undercut what’s a good balance across the economy. I look at the recent legislation, mostly that balance is about right.”

Evidence from both the US and the UK supports this argument. In the US, for example, the Sarbanes-Oxley Act effectively criminalises bad corporate governance, and although the UK’s approach is less prescriptive, the debate there has concluded that corporate governance is effectively becoming a legal liability issue.

Cathy Walter, the ASX director who rose to prominence with her tough stance on corporate governance at the National Australia Bank following the forex scandal earlier this year, believes Australia has largely got it right. “This is a marked improvement to the US system, which seemed to have been originally politically motivated by the hope that symbolic TV picture opportunities, rather than meaningful corporate regulation, would erase memories of previous malfeasance,” she said last month. “Instead, it transmogrified into highly prescriptive and onerous regulation.”

With both the Australian and US systems still bedding down, there is plenty of debate on corporate governance still to come, and no doubt it will intensify when the next corporate bad boy in Australia is unmasked.

Stuart Fagg is editor of Lawyers Weekly’s sister publication Risk Management