February 2014 - Inside Your Institute - Policy Update

A monthly review of the Australian Institute of Company Directors' policy and advocacy team's key projects and issues.

NSW Incorporated Associations

In December 2013, we made a submission to the NSW Department of Fair Trading in response to a consultation paper on proposed changes to improve the governance of incorporated associations in NSW.

Broadly speaking, we support the government’s intentions for reform. Many of the proposals in the paper are aimed at providing the Fair Trading Commissioner with sufficient powers to deal with those “outlier” organisations that may be suffering from poor governance. However, we made a number of suggestions in our submission that we believe would assist the government to achieve its intended outcomes. These include:

• Not requiring all associations to appoint an independent returning officer. This will increase costs and introduce further unnecessary red tape for all associations. Members unsatisfied with election processes can access the association’s dispute resolution mechanism.
• Organisations should be free to nominate the alternative dispute resolution mechanisms that suit their individual circumstances.
• It is inappropriate to instil mandatory practice directions, particularly as to how they relate to governance standards.
• An officer of an association should not be removed from office unless this occurs by way of a court order.

Commissioner of Taxation’s statutory indemnity from directors

In November 2013, we lodged a submission with Federal Treasury regarding the operation of section 588FGA of the Corporations Act 2001. Under the Act, a liquidator of a company can seek a court order to recover a payment of specific taxes (particularly PAYG and superannuation guarantee charge contributions) that the company made to the Commissioner of Taxation on the basis that the payment was an “unfair preference”. If the court makes such an order, section 588FGA(2) of the Corporations Act provides that each director of the company at the time the payment was made is liable to indemnify the Commissioner for any loss or damage resulting from the order.

Section 588FGA puts the Commissioner in the unique position of being able to recover any amounts the court orders the Commissioner to pay back to the liquidator from the company’s directors. No other creditor is afforded this right. We believe the Commissioner’s position should be no different to that of any other creditor and section 588FGA of the Corporations Act should be repealed.

Auditing Standards

We are committed to measures that encourage a high standard of auditor reporting within an audit regulation framework that strikes the appropriate balance between business efficiency and regulatory compliance. To this end, we lodged a submission to the International Auditing and Assurance Standards Board in November, in response to its exposure draft, Proposed New and Revised International Standards on Auditing. We noted that the auditors’ report should provide information on the work performed by the auditor and how the auditor gathered evidence to support the opinions expressed in the report.

It should also be written in plain, easily understandable language that enables users of the financial statements to obtain relevant and valuable information.

The Key Audit Matters should focus on the “most” significant issues encountered by the auditor in performing the audit. The “going concern” paragraph should only be included when the auditors are of the view that there are material uncertainties about the ability of the entity to continue as a going concern. We are concerned that the current proposal to require listed entities to include Key Audit Matters in the audit report is likely to result in additional audit costs for many small listed entities, without significant benefit. We believe it may be appropriate for each international jurisdiction to determine which entities should be subject to this requirement.

Directors’ Remuneration in the UK

We believe there is an increasing tendency for Australian regulators to develop regulations based on those of other jurisdictions.  For this reason, and also because some of our members sit on the boards of UK companies, we lodged a submission with the UK’s Financial Reporting Council (FRC) in response to its consultation document, Directors’ Remuneration (December 2013).

While we did not comment on all of the issues raised in the consultation document, we did make some general comments regarding the issues raised by the FRC. Our comments highlighted the importance of companies being allowed maximum flexibility in adopting the remuneration and governance arrangements most appropriate for their circumstances. While the UK Corporate Governance Code applies on a “comply or explain” basis, the reality is that the practices set down in the code will be treated by most market participants – in particular, proxy advisory firms and the media – as being the practices companies must follow, making them quasi-prescriptive in nature.

We cautioned against the introduction of further principles without there being a sound governance benefit to do so. 

A matter should only be introduced as a requirement under the code where there is a reasonable expectation that adopting the practice will lead to improved corporate governance and better outcomes for investors. In addition, we believe there is no real evidence to suggest further requirements regarding executive remuneration need to be introduced into the code to regulate companies outside the financial services industry.

Governance Research Providers

In December 2013, the Global Network of Director Institutes (GNDI), of which we are a member, responded to the draft Best Practice Principles for Governance Research Providers. The submission was in response to a consultation paper issued by the Best Practice Principles for Governance Research Group, which was formed in early 2013 to address a recommendation by the European Securities and Markets Authority that the proxy industry should seek to improve its understanding and transparency of the role of service providers in the proxy research space.

The exercise of voting rights by shareholders is a critical component of corporate governance and proxy advisory firms play an important role in this. As such, we agree it is important for proxy advisers to be governed by a set of “good practice” principles and guidance.

For shareholders to make informed voting decisions, the information they are provided with must be accurate and not misleading, whether it is provided by the issuer, its directors or by some other intermediary such as proxy advisory firms. Despite proxy advisory firms playing such an important role and exerting significant influence over their clients regarding the exercising of voting rights, they are not held to any standard in terms of their communications to shareholders. This contrasts with issuers and directors who must comply with a number of regulations relating to shareholder communications. While the draft principles represent a useful step towards improved practices, they do not adequately address some remaining areas of concern. One is a proposal that the principles should apply on a “comply or explain” basis. At a minimum, proxy advisers should be required to meet the standards set by the principles (rather than having the option to disclose why they have chosen not to meet the standards).

Shareholder Communications 

The GNDI has also released a paper that describes its global perspective on board-shareholder communications. The paper offers suggestions intended to inspire improvements on both sides of the dialogue between corporates and shareholders. The GNDI believes board-shareholder communications should not be mandated through adoption of new legislation or regulation (except in those jurisdictions where legislation or regulation prevents such communications). Voluntary action is the key.

Boards play an important role in bridging the company’s actions to the interests of shareholders. Although directors must always exercise their judgement to represent the interests of the company as a whole, not merely its current shareowners, the board still needs to engage in shareholder communications and can do so in a number of different ways

Effective board-shareholder communications cannot depend on the board alone. Shareholders, too, have a responsibility to communicate effectively with the company. Shareholders can fulfil their role as owners of the company’s shares and monitor the value of their assets by taking a regular and active interest in the company and its strategy.

Integrated Reporting

We attended a meeting of the International Integrated Reporting Council (IIRC) in December. All IIRC members except us voted in favour of publishing the Integrated Reporting Framework.

While we support many of the goals included in the framework, especially those related to long-term thinking, we are very concerned that director liability should not be increased by the introduction of the framework, even if it is adopted voluntarily. The lack of an effective business judgment rule and director liability provisions in Australia, particularly in relation to forward-looking statements, is inconsistent with many of the framework’s principles.