Corporate Governance & the Audit Committee

34120838 - puzzle button: corporate governance

It has been raised by some councillors at neighbouring councils that there should be independent member/s on their audit committees, including for the chair. Worse still, it has also been mooted that this should be forced upon all councils; hence my interest. So, whilst not an exciting topic, I still thought I’d provide my thoughts on why this is unnecessary, slightly counter-productive and may only serve to increase costs.

The Perth Voice covered the City of Perth’s consideration of having an independent chair, and two weeks later they covered Vincent’s moves.

There are extremely close similarities to a councillor and a director on a board.  And on boards there are three main categories of directors; executive directors (someone who also works at the organisation), non-executive directors and independent non-executive directors (INED).

The gold standard in Australia for corporate governance is the Australian Stock Exchange’s ‘Corporate Governance Principles & Recommendations’, which states under Principal 2 that “An independent director is a non-executive director who is not a member of management and who is free of any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the independent exercise of their judgement.” The ASX then state that relationships which affect the independent status include being a substantial shareholder, previously working in an executive role there, been a supplier or customer etc.

I believe a councillor fits this description, and any other I have read, of ‘independence’. Ergo, there is no need to bring in independent audit members because they are already there.

There is one exception though, and that is the Mayor; and possibly also the deputy mayor as they sometimes fulfill the mayor’s role. Section 2.8 of the Local Government Act ’95 details the role of the Mayor, and one of the few differences between a mayor and a councillor is that the mayor “liaises with the CEO on the local government’s affairs and the performance of its functions.” This, their circa threefold increase in remuneration, and their closer relationship with the local government’s staff arguably moves the mayor closer to an executive director rather than an INED.

Turning again to the ASX’s Corporate Governance Principles & Recommendations, Principle 4 (Safeguard integrity in financial reporting) contains the following under Recommendation 4.2:

“The audit committee should be structured so that it:
consists only of non-executive directors
• consists of a majority of independent directors
is chaired by an independent chair, who is not chair of the board
• has at least three members.”

So from this, I believe that if you’re wanting to reach the highest levels of corporate governance:

  1. Any councillor other than the mayor or deputy mayor can be chair.
  2. The mayor (possibly also deputy mayor) should not be on the audit committee.

It’s important to be aware that in addition to countless internal controls, policies and processes, local governments also appoint an external audit company which goes through the financials every year. This is a very thorough process. In addition, awesome local governments like the City of Bayswater, go further still and appoint an external audit company to review their internal processes; the City recently had this done on their cash handling.

I have no objection to making the audit committee open to the public. I have no problem in appointing a couple of suitably qualified/experienced ratepayers or residents to join the audit committee. I do have a problem if there is a payment for this though. And I believe it ill advised to have a non-councillor as chair of an audit committee because they simply wouldn’t know enough about that particular local government to be as effective.

As always, I welcome your comments.

Power to the people.

(Please be aware that these views are my own and have not been endorsed by the City of Bayswater)

Disclaimer: I am currently the chair of Bayswater’s audit committee and am, and have, studied corporate governance.

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