A more troubling finding for institutional investors - poor composition in board committees - received scant coverage, even though the GFC reinforced the need for strongly independent audit, nomination and remuneration committees to safeguard shareholder interests.
With the annual general meetings season underway, board committee composition is unlikely to receive much attention compared to the executive pay debate or the second round of AGMs affected by the "two strikes" rule that can trigger a board spill. Yet in some ways, the composition of committees that oversee pay or audit matters is central to good governance.
ACSI's guidelines state that audit committees should consist only of independent non-executive directors.
The ASX Corporate Governance Council recommends the audit committee be entirely non-executive, majority independent and with an independent chairperson. Executive responsibility, related-party transactions and substantial shareholdings affect whether a company deems a director "independent".
ACSI recommends remuneration and audit committees should be majority independent and have an independent chairperson. In line with the ASX Corporate Governance Council, ACSI recommends the majority of board directors be independent.
Only 12 of a sample 87 companies, from the top 100 by market capitalisation, had boards that were not majority independent, as classified by ACSI. More worrying was 40 companies in the 101 to 200 ranking not having a majority independent board based on ACSI's classification.
About one in five audit committees in the top 100 sample did not meet ACSI guidelines to have only independent non-executive directors. About half of these complied with the ASX Corporate Governance Council recommendation on audit committee independence, but even that suggests one in 10 audit committees of ASX top 100 companies lack enough independence in such a critical function.
About one in two companies in the sample of companies ranked 101 to 200 had audit committees that did not meet ACSI's guidelines, and there were isolated cases of executive directors on audit committees, which goes against both ASX and ACSI guidelines.
Nomination and remuneration committees fared better. ACSI found only one in 10 companies in the top 100 sample did not have a nomination committee, with the board instead overseeing the evaluation of current directors, identification of potential directors, and board skills needed.
Across the ASX 101 to 200 sample, about one in four companies did not have a nomination committee and in almost all cases the board carried out this function.
In remuneration committees, only six companies in the top 100 sample, and 15 companies ranked 101 to 200, did not comply with ACSI's guidelines.
Some qualification is needed with these findings: ACSI's guidelines on audit committees are tougher than those of the ASX Corporate Governance Council, which are binding for members of the S&P/ASX 300 index under ASX Listing Rule 12.7. Some companies classify director independence differently to ACSI.
But ACSI's excellent research on board committee composition suggests at least two troubling findings: first, that several audit committees of large listed companies still lack sufficient independence; second, that there is much higher non-compliance with ACSI guidelines among listed companies ranked 101 to 200.
Institutional investors in the US are becoming more vocal about the independence of board positions, with two of the largest pension funds putting their weight behind a resolution calling for News Corporation to split the roles of chairman and chief executive, which founder Rupert Murdoch holds.
In Australia, 12 companies in the top 100 sample do not have an independent chairperson.
Perhaps it is time for more debate on whether board committees - and not just the main board itself - need faster improvement in their composition and independence.
