• Date:01 Oct 2015
  • Type:Company Director Magazine

Latest news for Australian directors.

Turnbull policies the crucial test

The business community has welcomed Malcolm Turnbull’s elevation to Prime Minister and his cabinet reshuffle. But much work is needed to reform the economy, improve public debate on key issues and lift confidence in boardrooms.

The Australian Institute of Company Directors (AICD) managing director and chief executive officer, John Brogden, said Turnbull and his government need a strong and stable vision for the economy and a bold agenda for tax reform.

“The business community views the change of leadership in a positive light, but unless real reform can be delivered, key economic indicators won’t improve.”

Brogden described tax reform as “unfinished business”. The AICD supports a higher GST and tax reform across the states and Commonwealth.

“Although difficult and controversial, Australia needs to have a constructive debate on issues such as the GST and industrial relations policy if we are to continue our history of strong economic growth.”

At the National Reform Summit in August, the AICD called on political leaders to focus on four key areas: higher-quality national governance; a national program of tax reform; a national infrastructure plan; increased productivity and workforce participation.

Other business groups also welcomed the leadership change. The Business Council of Australia (BCA) said Turnbull’s strong message of building a more agile, innovative and creative nation resonated with industry.

BCA president Catherine Livingstone AO FAICD said: “We welcome Mr Turnbull highlighting critical themes the business community has been raising for some time, such as the importance of a growth agenda fuelled by innovation.” 

She added: “With massive global forces of change upon us – from digital disruption, to ongoing economic volatility, to a shift in economic activity towards a rising Asia – now is an ideal time to re-energise Australia’s economic and social policy agenda.”

The Australian Chamber of Commerce and Industry (ACCI) urged Turnbull to embark on important reforms to advance Australia’s productivity and competitiveness.
ACCI CEO Kate Carnell AO FAICD said: “We hope to see Mr Turnbull continue with efforts to repair government finances, fix the problems of federation, undertake critical tax reform and advance the cause of free trade.
“Business confidence remains fragile. The ongoing leadership instability, coupled with an obstructionist approach from the opposition and crossbenchers, has left some businesses reluctant to invest.”

The latest AICD Director Sentiment Index (DSI) reinforced the need for urgent reform and better national governance.
Released in May, the bi-annual DSI revealed that business confidence among directors had hit a two-year low and almost 40 per cent of directors surveyed had become more pessimistic about the general business outlook.
Directors were eager for higher infrastructure spending, tax reform and productivity growth initiatives, but concerned about the government’s ability to deliver.

The early response to Turnbull’s prime ministership has been positive. Opinion polls have shown a lift in support for the coalition and consumer confidence surveys have improved.
But the real test is whether Turnbull can convince the electorate of the need for change, work across the parties to advance the national interest and ensure much-needed economic reforms are delivered.Should that happen, boardrooms would feel more confident about investing for the future.

Factors driving M&A boom

The global mergers and acquisitions (M&A) boom has finally arrived in Australia, judging by a spate of recent bids. For boards, that means ensuring the organisation has appropriate takeover advice and strategies in place, should the situation occur.

Several factors are driving higher M&A activity. The lower Australian dollar is making our companies more attractive to foreign bidders in US dollar terms; corporate balance sheets are generally in good shape; equity valuations are lower after the sharemarket correction in July and August; and weak consumer and business demand is encouraging more companies to grow by acquisition and supplement organic growth.
As Company Director went to press, Veda Group, chaired by Dr Helen Nugent FAICD, received a $2.3 billion takeover approach from the US credit-reporting agency, Equifax. Veda has been listed on the ASX for about two years. That followed Brookfield Infrastructure’s $8.9 billion bid in August for rail and port operator Asciano Group, and Japan Post’s US$6.5 billion takeover of Toll Holdings in May. Australian logistics companies are in demand as multinational transport operators better integrate their global supply chains through M&A. 

Woodside Petroleum’s $11 billion bid for Oil Search was rejected by the latter’s board. Oil Search chairman Rick Lee AM FAICD described the bid as opportunistic and said it undervalued Oil Search. Nevertheless, Woodside’s move on Oil Search suggests more energy and minerals M&As are likely.

Meanwhile, the $1.67 billion sale of vitamins group Swisse Wellness to the Hong Kong-based Biostime International could be a portent for private-company takeovers. These and other Australian takeovers, confirmed or still in play, are small in the scheme of a global M&A market so far worth about US$3 trillion this year, according to Thomson Reuters. But M&A trends can quicken as high-profile deals encourage companies in similar industries to pursue acquisitions.

For boards, that means potential external pressure from predators looking to buy undervalued assets, and internal pressure for executive teams wanting to do deals. The best defence is understanding the organisation’s true value, ensuring the organisation has strategic clarity, a robust process to assess deals, and good advisors in place to help fend off unwanted advances – or make them.

Executive pay debate rekindled

The executive pay debate has flared up again after the Australian Council of Superannuation Investors (ACSI) said the statutory reporting of remuneration is understating rewards.
ACSI’s annual CEO Pay in ASX 200 Companies study, released in September, found the top 10 CEOs of ASX-listed companies earned $99.6 million in 2014 based on statutory reporting.
But after exercising options and performance rights and, along with vesting of shares through long-term incentive schemes, the total value of cash and equity received that year was $171.4 million.
“These figures suggest that the existing requirements for reporting executive pay may significantly understate the rewards received in a given year. Statutory reporting is, perhaps, disclosing only the tip of the iceberg in terms of the wealth accruing to senior executives,” ACSI’s CEO Louise Davidson said in a media release.

Davidson added: “While the packaging and disclosure of CEO pay has undoubtedly become more disciplined in recent years, thanks to legislation like ‘two strikes’ and termination pay – as well as challenging scrutiny from ACSI and others – company investors and owners cannot afford to lose sight of the quantum of reward being delivered.”

Statutory reporting of executive pay is designed to show the expense to the company, not the reward to the individual. “The bottom-line test for any reward structure is, however, whether the outcome for the executives is aligned with that of the company’s owners,” Davidson added.

She said the difference between the statutory reporting of pay and real outcomes “invites further discussion in the boardrooms of Australia’s leading companies about whether these were the intended outcomes for their respective pay structures”.

However, the research, prepared by proxy advisor Ownership Matters, also shows some executives received less than expected because of weaker company performance. 

“While some executives have clearly reaped far more value from their employment arrangements than was previously thought, in other companies, where the equity failed to vest because performance hurdles were not met, CEO pay was not as large as previously believed,” Davidson said.

The big question

Are hard copies of board minutes required to be kept, or is a PDF version sufficient? And is the chair required to sign the minutes?

Section 251A(1) of the Corporations Act 2001 (the Act) requires companies to keep minute books with records of:

  • Proceedings and resolutions of meetings of the company’s members.
  • Proceedings and resolutions of directors’ meetings.
  • Resolutions passed by members and directors.
  • The making of declarations by the director (where the company is a proprietary company with only one director). 

Failure to keep minutes books is an offence under section 251A(5A) of the Act. Section 1306 of the Act allows books to be kept by electronic means. However, electronic copies must be capable of reproduction in written form.
In relation to the signing of the minutes, section 251A(2) of the Act requires that minutes of meetings must be signed by the chair and any electronic copy of the minutes should include a visible signature (e.g. a scanned copy of the original minutes). The minutes must be signed within a reasonable time after the meeting by either the chair of the meeting or the chair of the next meeting. 

As minutes of meetings are important documents that represent the actions of the board and may be examined later by the auditors or the court, you may wish to keep hard copy “back ups”, in addition to any soft copies.

Working capital best for five years

Capital Survey by PwC shows the “first significant improvement in global working capital since 2010, driving an impressive 11.3 per cent jump in cash over the past year” and “making them more awash with cash than they have been for the last five years”.

The survey researched 10,215 of the largest listed companies worldwide, but excludes financial services, real estate and the insurance sector. A total of 281 companies within Australasia were included in the research and broken down to draw comparisons.
While the global result showed 44 Days Sales Outstanding (DSO), the Australasian result was 32 days. Similarly, Australasian Days Inventory Outstanding (DIO) was 47 days against a global 52 days, and Days Payable Outstanding (DPO) was 51 days against 57 days globally. These provide a benchmark for Australian boards. Australasian companies showed the second-highest percentage of working capital improvements.
In many of the indicators, Asia has been revealed as underperforming in the area of working capital. However the authors state that “the increased complexity of many supply chains, due to the shift of the economic centre of gravity towards the east, has a dramatic impact on working capital growth levels,” with Asia now representing 33 per cent of total net working capital globally. This shift to Asia has also resulted in Asian DSO rising to 50 – the only region where this measure has deteriorated over the past five years.

The report states that current global revenue growth will require EUR€237 billion in cash funding next year and that working capital management may be the bridge for this, rather than debt. The authors point out that up to EUR€950 billion could be released from balance sheets through improved capital performance

The report also states four key factors in working capital performance. They are: 

  • The type of business.
  • The economic maturity of the region.
  • The company size. 
  • Whether management cares about cash. 

Rise of the “seniorpreneurs”

Senior entrepreneurs are Australia’s fast-growing segment of entrepreneurs, according to joint research by Swinburne University of Technology and Queensland University of Technology.

Senior Entrepreneurship in Australia: Active Ageing and Extending Working Lives, the first study of its kind in Australia, examines the intentions of entrepreneurs aged 50 and over – the so-called “seniorpreneurs”.

Company Director has followed the rise of seniorpreneurs and their implications for boards. It noted in October last year that growth in senior entrepreneurship could create opportunities for experienced company directors to participate in start-up businesses owned by seniorpreneurs, either as board members, angel investors or part-time executives.

Led by Swinburne’s Dr Alex Maritz, Senior Entrepreneurship in Australia confirms the emergence of older entrepreneurs in Australia. Similar trends are evident in the US and UK as more people view entrepreneurship as a late-career alternative.

The Swinburne/QUT report studied more than 460 seniors through interviews, focus groups and surveys. It was supported by National Seniors Australia, the National Seniors Productive Ageing Centre and the Commonwealth Department of Social Services. The report attracted media and academic attention upon its release in September. Key findings include: 

  • Thirty-four per cent of all young firms in Australia are now led by seniorpreneurs and their average age is 57. 
  • More than a third of seniorpreneurs can be classified as “serial entrepreneurs” who start multiple ventures.
  • An entrepreneurship rate of 8 per cent for the 55 – 64 age group in Australia is three percentage points higher than the average for innovation-driven economies . 

The research also found:

  • Seniorpreneurs are more capable of starting a business than their younger peers.
  • An attractive work-life balance motivates them to start and run a business.
  • They have more developed networks, better business experience, superior technical and managerial skills, and a stronger financial position than younger entrepreneurs.

But there are significant barriers in Australia for seniorpreneurs:

  • A lack of financial support and insufficient information on how to run a business.
  • Ageism barriers, including declining health, financial disincentives, age discrimination, the opportunity cost of time and lack of awareness about entrepreneurship.
  • Insufficient government support for aspiring seniorpreneurs.