Agenda

This month's latest news for Australian directors.

Strategy, growth and red tape key business focus

Managing strategy and maintaining an eagle eye on growth in times of economic and political uncertainty will occupy the minds of directors and chief executive officers (CEOs) over the next 12-24 months according to Deloitte’s fifth biennial Directors’ Cut survey.

The professional services firm interviewed 50 board chairs and CEOs of S&P/ASX 200 companies on a range of issues and themes, including their views on rule-making and red tape. This followed the release last year of another Deloitte report – Get out of your own way: unleashing productivity – that identified a $155 billion annual cost for the private sector to administer and comply with the rules it imposes on itself (surprisingly double the cost of government red tape compliance).

According to the report, company chairs acknowledged that internal red tape had been partly driven by their risk committees asking for more information as they were more aware of their liabilities as directors.

Deloitte assurance and advisory managing partner Richard Deutsch said: “Boards need to operate in this environment, and many chairs and their CEOs feel constrained by what they see as a burden. But it’s critical that they don’t lose sight of the more strategic issues confronting their organisations rather than being overwhelmed by compliance.”

The survey report finds that red tape and compliance can lead a board to lose sight of business risks, and that increased scrutiny has impacted the risk appetites of many companies. New rules are seen as the best tool to manage and reduce risk, but the obverse of this is the constraint internal red tape has on productivity.

With the average cost of a data breach per Australian organisation more than $2.5 million per year, and most organisations focused on prevention as opposed to detection, Deloitte also points to cyber risks as an important focus area, as threats evolve faster than organisations can react.

Financial losses, intellectual property theft, reputational damage, fraud and legal exposure are all at risk on this front, yet while 54 per cent of survey respondents were confident they understood the risks, nearly 40 per cent were neutral on the question of how they were being managed.

On increased shareholder activism, CEOs and chairs saw this as a generally positive development, as long as it represents all shareholders, and not just special interest groups. The overall view of proxy advisers, however, was a negative one – that they have too much power, and are often self-serving.

The big question

Q: I have a client that is under the liquidation process by court order. The company has failed to pay its workers compensation because of an administration error.

Before the liquidation process started, the company had ceased all its business and was not willing to process any other business. Now, the directors of the company want to pay off all of the company debt and close down the company.

Could you please advise what the best procedure for the company is?

A: The company may wish to voluntarily deregister itself. Details of the process can be found at: www.asic.gov.au/for-business/closing-your-company/deregistration/.

One of the requirements for the company to voluntarily deregister itself is that the company not have any debts. Thus, the directors of the company may wish to pay all of the debt of the company, and then seek to deregister it. However, it is important that not just some, but all of the debts of the company be paid.

Key factors in director selection

Director selection is a key topic for boards. Although many use external advisers that specialise in director recruitment, it pays to understand the nuances of director selection and think beyond the usual criteria.

James Beck, managing director of board consultancy, Effective Governance, says boards typically look at the alignment of skills with strategic direction; value-adding to the current board composition; cultural fit with the board; time it will take to be an effective contributor; and succession planning.

“Building the right board requires an understanding of director competencies, which involves consideration of the directors’ experience, skills, attributes and capabilities,” Beck says in his latest report on Effective Governance’s website.

He argues that boards often pay insufficient attention to director capabilities that are not always evident in a CV. These include an ability to assimilate and synthesise complex information quickly; develop and deliver a cogent argument; be innovative and think outside the square; and understand issues at a detailed and “big-picture” level.

Beck says that boards, prior to reappointing, nominating or appointing directors, should:

• Consider competencies and skills that the board, as a whole, should possess, recognising that the particular competencies and skills required for one board may not be the same as another.
• Assess which competencies and skills each incumbent director possesses. Since it is unlikely that any single director will possess all the competencies and skills required, the board should be considered as a group in which each individual makes their own contribution.
• Consider the character of directors and their fit with the current board culture. Some attributes worthy of consideration include self-awareness, integrity and high ethical standards. Boardroom dynamics will be impacted by the personalities and behavioural types, so attention should also be paid to these qualities.

Push for more female chairs

Corporate Australia continues to make progress on gender diversity. About 20 per cent of directors on the boards of S&P/ASX 200 companies are women, up from 8.3 per cent in 2009, latest AICD statistics show. But 31 boards in the ASX 200 still do not have female directors.

Women comprised a quarter of appointments to all ASX 200 boards this calendar year to July, versus 30 per cent in 2014. All up, 27 women have been appointed to ASX 200 boards so far this year – an encouraging trend, albeit off a base that is still too low.

AICD research shows 13 women chair Australia’s largest listed companies. Although that figure needs to rise, it shows some progress on gender diversity in Australia’s largest companies.

AICD in April called for all boards to ensure that 30 per cent of their directors are women and urged ASX 200 companies to meet this target by 2018.

Here is a list of women who chair ASX 200 companies:

Nerolie Withnall ALS
Elizabeth Bryan Caltex Australia
Jennifer Hutson G8 Education
Paula Dwyer Healthscope and Tabcorp Holdings
Deborah Page Investa Office Fund
Linda Nicholls Japara Healthcare
Nora Scheinkestel Macquarie Atlas Roads Group
Elizabeth Alexander Medibank Private
Margaret Jackson Spotless Group Holdings
Catherine Livingstone Telstra Corporation
Diane Smith-Gander Transfield Services
Kathryn Spargo UGL
Helen Nugent Veda Group

As at July 15. Source: AICD
 

Improving board evaluations

Few governance topics are more important than board evaluations. Understanding director and board performance, and areas for improvement, is a critical aspect of good governance.

Consequently, more boards are conducting formal board evaluation processes. The ASX Corporate Governance Council’s Principles and Recommendations require ASX-listed entities to disclose their process for board evaluations and whether the process has been applied.

One of Australia’s leading executive pay and board consultants, Guerdon Associates, in August identified several board evaluation trends. They included:

1. Start with strategy
Guerdon says board evaluations are most effective when an organisation has a clear strategy. “It may seem surprising but it is still not uncommon to find that this basic step has not been taken within some boards. This could be an outcome of an ineffective board.” Guerdon says a board evaluation conducted after, or even during, a board strategy review is most effective.

2. Diversity
Guerdon says the correlation between high director diversity and boards that seek external assistance is no coincidence. “One outcome of diversity appears to be more openness to others’ opinions, including a more mature reception of opinions emanating from a confidential board evaluation process.”

3. Non-director views
Observations from those who frequently interact with the board, such as management, external advisers or regulators, can help the evaluation process. “We often find there is a distinct difference in perspective from a board’s self-assessment and the assessment of others in a position to have observed the board function. Do not assume there is nothing new to learn about your board’s effectiveness. Adding in a new perspective, such as the perspective from management, can enhance the evaluation process.”

4. Independent advice and board renewal
Board renewal can lead to directors being encouraged to retire from the board. Guerdon says: “This is often a difficult process to conduct internally, and better addressed with neutral, independent assistance using processes that protect the individual confidentiality of board member assessments of their peers.” Not-for-profit organisations, such as superannuation boards, need an independent process to tackle these issues, says Guerdon.

5. Board skills matrices
The ASX Corporate Governance Council’s guidelines require ASX-listed companies to publish skills matrices, or explain why not. Guerdon says the board evaluation process is an opportunity to develop the skills matrix. “While these matrices have so far been fairly generic, the attention of proxy advisers and large investors will be brought home to some listed company chairman as they go into their 2015 engagement sessions. In coming years we expect more proxy adviser and investor probing of chairmen on the validity of their company’s published skills matrices.”