ACCT3031 Chap.4 Ownership, Control and Board Governance
Ownership, Control and Board Governance
Boards direct companies, and this chapter explains how. It maps the four functions of the board on time and focus, separating performance roles from conformance roles, explains why the chair, the chief executive and the non-executive directors must work as three relationships, and examines shareholder engagement, voting and institutional investors.
The HIH acquisition of FAI shows how a board can approve a major decision without the process that would justify it. It also sets up the question that runs through both reports: what evidence beyond formal composition would show that a board actually works.
What this chapter covers
- 01
Directing and the four board functions
- 02
Performance and conformance roles
- 03
Chair, chief executive and non-executive directors
- 04
The HIH FAI decision
- 05
Shareholder engagement and voting
- 06
Institutional investors and proxy voting
Worked example · free
Sort four board activities into performance and conformance roles
- +1Approving the growth strategy is strategy formulation: future-facing and outward, a performance role.
- +1Adopting the procurement policy is policymaking: it turns strategy into rules, also a performance role.
- +1Reviewing results against budget is executive supervision: present-facing and inward, a conformance role.
- +1Signing off the annual report is accountability: present-facing and outward, a conformance role.
Key terms
- Performance roles
- The board functions of strategy formulation and policymaking, which shape the company's future direction.
- Reserved powers
- Decisions a board keeps for itself rather than delegating to management.
- Institutional investor
- An organisation, such as a superannuation fund or insurer, that professionally invests pooled money for others.
- Proxy adviser
- A firm that helps shareholders, usually institutions, decide how to vote at listed companies' meetings.
Ownership, Control and Board Governance FAQ
What are the four functions of a board?
The module identifies four: formulating strategy, making policy, supervising executives and providing accountability. The first two are performance roles that look to the future, and the last two are conformance roles that look at the present. In a unitary board all four are core work, while a two-tier board splits them between management and supervisory boards.
Does separating the chair and chief executive solve the problem of power?
It helps but does not settle it. The Cadbury Report recommended separation so that no one person holds unfettered power, yet the relationship between the two people still has to work, and the module asks whether separation automatically balances power. Its answer is no, which is why board behaviour matters as much as board structure.
What went wrong with the HIH board's decision on FAI?
The board approved the acquisition at a meeting called that day, with several directors overseas and some joining without papers, and without due diligence. The Royal Commission distinguished appropriate reliance on management from dependence on it. The board had no basis for judging the risk, and FAI-related losses later exceeded $530 million.
How do institutional investors influence boards?
Institutional investors such as superannuation funds and insurers hold large pooled stakes, so they can engage directly with management and directors, vote on resolutions and use proxy advisers. A 2008 parliamentary committee found barriers to effective proxy voting, including missing audit trails and tight timing between annual general meetings.
What is the difference between relying on management and depending on it?
The HIH Royal Commission drew this line. Reliance means directors use management's information and expertise while still testing it, asking questions and seeking more when needed. Dependence means accepting management's proposals because the board lacks the time, information or will to test them, which is what happened when HIH approved the FAI acquisition.
Assessment move
Sketch the four-function matrix from memory and test yourself by classifying items from a real board charter. For case questions, judge the board's process before its outcome, using the reliance and dependence distinction, and practise one paragraph on what evidence would show that an independent board actually challenges management.
For the group report, look for disclosures about board meetings, attendance and committee work, and ask what each one can and cannot show about behaviour.
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