All articles in Volume 12 Issue 11

Big growth themes for your board’s agenda 

June 11 quoteIs your business focused on how it can innovate and gain first mover advantage in order to capitalise on the big global trends reshaping the business landscape?

A new report by professional services firm Deloitte, Australian Business Trends 2014: How Australian business can capitalise on the latest global trends, outlines three core growth themes which should be on your board’s agenda. They are:

New consumers

Selwyn D’Souza, lead strategy partner at Deloitte, says the growth in consumption in the Asia-Pacific region will offer huge opportunities to Australian companies, especially across the financial services, retail and telecommunications industries.

He expects the next wave of growth for Australian businesses to come from emerging Asian markets and their burgeoning middle classes.

It is projected that by 2020, 3.2 billion people will be considered “middle class”, up from 1.8 billion in 2009. Almost none of this growth will come from advanced economies. Instead, a major part of this increase will happen in Asia, Africa and Latin America.

As a rough estimate, D’Souza says a billion new people will be critical in shaping global demand over the next five years or so.

However, he says this new set of consumers will not have the discretionary spending power of traditional middle-class customers in advanced economies. “They are poorer, live in different conditions and will require different products and services. But they will provide the single biggest growth opportunity in many global companies’ portfolios.”

D’Souza believes that as a developed economy with a highly educated, technology savvy workforce, Australia is well placed to capitalise on the changing economic landscape, especially due to its proximity to the growth markets of Asia.

But he says: “The competitiveness of Australian companies will depend on a range of factors, but will ultimately come down to how quickly and efficiently we can innovate and adapt to the needs of customers in new markets and provide the products and services they will require. This will demand a greater awareness of social responsibility as we join the global race to lift vast numbers of people out of poverty.

“Strengthening our already strong relationships with the new global giants such as China and India will become more important than ever as we seek to establish a stronger presence in their markets and their companies continue to enter ours.”

New collaborations

The rapid growth of second and third-tier cities in Asia is likely to offer big opportunities for Australian companies wanting to do business there. Capabilities that were once exclusive to large businesses are now available on open markets, enabling organisations to capitalise on the increased adoption of digital technologies. 

“Businesses can benefit from leveraging infrastructure developments such as the National Broadband Network, and the remote pools of talent, to stimulate invention in regional industries and locations,” says D’Souza.

New leadership

The Deloitte report notes: “CEOs have more direct reports than at any time in the past. The positions that collectively make up the ‘C-suite’ in large businesses (so named because of the tendency for all of their titles to feature the word ‘chief’) have, according to one authoritative study, doubled since the 1980s. But the trend at the top of organisations is not just a matter of numbers – it’s also about composition.

“In C-suites today, functional specialists – including chief financial officers, chief marketing officers, chief human resources officers, and more – far outnumber the generalist heads of business units.

“If the original top leadership group of a handful of general managers constituted Version 1.0 of the C-suite, the prevalence of functional specialists puts us solidly in the Version 2.0 era. The problem is that this model is ill-matched to a business environment in which companies must transform themselves, and continue transforming themselves, to remain competitive.

“In the new era of globalisation, teams of functionally oriented executives sometimes struggle to formulate and act on integrated, coherent strategies for future success. For many businesses, it’s time for another reconfiguration of the top leadership team – here comes C-suite 3.0.”


Important reminders from the courts

The recent decision of the Federal Court in ASIC v Australian Property Custodian Holdings Limited shines a light on decision-making in the boardroom and corporate record-keeping.

In this case, the Australian Securities and Investments Commission (ASIC) brought proceedings against the Australian Property Custodian Holdings (APCHL) and each of its directors. Justice Murphy agreed with ASIC allegations, finding that the directors had breached their duties as directors and that APCHL had also breached its duties as a responsible entity.

According to Holding Redlich partner Sylvia Fernandez MAICD and general counsel Lyn Nicholson FAICD, his decision is a must read for directors and particularly directors of responsible entities because it considered in detail the value of consensual decision-making as against the obligation of each individual director to form and make known a clear position.

They say the case is a timely reminder that:

  • The minutes recording the board meeting should record discussions of important matters.
  • Those who prepare and approve board minutes are obliged to exercise a high standard of care.
  • Each director is required to actively support a resolution, actively oppose it or expressly abstain from supporting or opposing it, and it is his or her responsibility to ensure that his or her will is expressed and recorded in one of those ways. The practice of a chairman who does not call for votes for and against, but merely states “I think we are all agreed on that” and accepts silence as assent falls short of the standard required by the court. A director’s responsibility is to ensure that his or her will is clearly expressed and accurately recorded and the responsibility is amplified with the importance of the resolution.
  • Section 1308(2) of the Corporations Act 2001 makes it an offence to make a statement in a document required by or for the purposes of the Corporations Actwhich is false and misleading in a particular material. Company minutes are such documents. Section 1308(4) makes it an offence for the directors, and the company secretary, not to take all reasonable steps to ensure that a statement in such a document is not false and misleading.
  • Section 251A of the Corporations Act strictly requires the minutes to be placed in the minute book within one month.
  • It is an offence for a director of a public company to be present while the board considers a matter in which he or she has a material personal interest, or to vote on a matter. This means that a public company director should disclose the matter, should leave the boardroom before the meeting begins to consider the matter, should not speak to the matter under decision, and should not be present when the vote is taken and, of course, should not vote on the matter. For a director of a private company there remains the obligation to fully disclose the nature and extent of the interest

Avoiding entrapment in the family business

With an estimated 65 per cent of all family businesses having two or more generations working in them, it is vital to ensure that the older generation avoids entrapping younger family members in the business.

Andrew Mattner of Adelaide accounting firm Hattam McCarthy Reeves warns that in any generational transfer of a family business, there are numerous factors that create barriers to success and conflict between individuals. These include:

  1. The need to balance family concerns and business interests.
  2. Adequate compensation of family members working in the business.
  3. The ability of the business to generate adequate financial returns to support the family.
  4. The level of trust in the ability of potential successors to run the business.

However, in his experience, the issue that causes the greatest level of conflict - and which is perhaps the greatest barrier to success - is the third issue.

“When this occurs one of the common results is a symptom that we define in our office as ‘entrapment’,” he says.

“Entrapment in a family business occurs when the older generation employs family members in the business at lower than market rates on a promise that one day the family business will be theirs. Normally this occurs in underperforming businesses that are unable to financially support multiple generations or have not generated sufficient return to enable the older generation to step away in the comfort that they have sufficient ‘off-business’ assets to retire.

“Unfortunately, in a lot of circumstances, entrapment not only leads to the destruction of the business, but also to the destruction of the family.”

Mattner says this is because entrapment has the potential to:

  • Create significant conflict between generations working in the business.
  • Create conflict between siblings (between those working in the business versus those that are not when an untimely death occurs).
  • Create a “lazy” business that ultimately becomes financially unsustainable.
  • Create a knowledge “black hole” where the entrapped children are unable to financially support the educational needs of their children.
  • Lead to further generations walking away from the family business because they do not want to do what their parents did. (There is significant evidence of this in the rural sector as evidenced by the diminishing number of children electing to stay on the farm).

“There are countless examples of families that have managed this situation well and just as many that have not. Unfortunately for those that have not managed it well, so much damage is often done that it is difficult to repair,” says Mattner.

However, he says good family governance can help to help resolve this problem as it generally creates better communications. “This could include having a formal board or advisory board for the family business, obviously depending on size,” he says.

He also suggests introducing the following:

  • An agreed and adhered to meeting structure.
  • A family constitution. While not legally binding, it outlines how family members agree to work with each other in business.
  • Open communications. Because this does not always come easily, some external facilitation may be required.
  • Formal job descriptions and employment contracts for family members.
Mattner adds that the family needs to clearly set the rules at the outset of any arrangement and to have clear business strategies and financial plans in place. It should also ensure there is a clear transition plan in place that is agreed to and communicated to all.

What’s on ASIC's radar for financial year end reports 

Even though directors do not need to be accounting experts, they should challenge the accounting estimates and treatments used in their financial reports and should seek explanations and advice on these, particularly where they do not reflect their understanding of an arrangement.

That was the warning from the Australian Securities and Investments Commission (ASIC) when announcing its areas of focus for 30 June 2014 financial reports of listed entities and other entities of public interest with a large number of stakeholders.

ASIC added: “Although calculations supporting impairment or valuation of significant assets can be complex, directors should review the cash flows and assumptions used in the calculations prepared by management or experts, bearing in mind their knowledge of the business, its assets, and the future prospects of the business.”

To ensure that financial reports were of high quality and that useful and meaningful information was provided to users of financial reports, ASIC said entities should:

  • Have a culture focused on quality financial reporting.
  • Have adequate governance arrangements, processes and controls.
  • Ensure the financial literacy of directors was appropriate.
  • Apply the accounting standards.
  • Apply appropriate experience and expertise to financial reporting, and the underlying processes supporting the information in the financial report, including engaging external experts where appropriate.
  • Consider accountability and internal incentives for management that were focused on financial reporting quality.

ASIC added: “Financial reporting quality is supported by the quality of the independent audit, which is also important to confident and informed markets and investors. In this regard, directors should have regard to ASIC Information Sheet 196 Audit quality: the role of directors and audit committees (INFO 196).”

ASIC warned its focus this year would also be on impairment and accounting policy choices.

“We encourage preparers and auditors of financial reports to carefully consider the need to impair goodwill and other assets. We continue to find impairment calculations that use unrealistic cash flows and assumptions, including cases where entities have made unrealistic forecasts that have not been met over several reporting periods. We also continue to find material mismatches between the cash flows used and the assets being tested for impairment.”

It added that it was vital for preparers and auditors of financial reports to consider the appropriateness of key accounting policy choices that could significantly affect reported results. “These include revenue recognition, expensing of costs that should not be included in asset values,and the impact of new requirements for consolidations and joint arrangements.”

For more on ASIC's focuses for 30 June 2014 financial reports, click here.


Global directors say “no” to short-termism

The expanding Global Network of Director Institutes (GNDI) has called on boards of directors to abandon short-term perspectives in favour of longer-term considerations that will produce more sustainable outcomes.

The GNDI, which now consists of 13 of the world’s most influential governance groups and represents more than 100,000 company directors worldwide, argues in a new paper that excessive short-termism may lead to reduced shareholder value and returns over the longer-term as result of the following:

  • Missed opportunities to create enduring value for a company and therefore its shareholders.
  • Under-investment in value-creating opportunities such as research and development.
  • The rejection of long-term projects, or projects with high build or sunk costs, including infrastructure and high-tech projects.

“Directors should consider developing and disclosing a clear framework for managing long-term value creation and curbing excessive short-termism,” says GNDI chairman John H C Colvin FAICD.

The GNDI paper sets out some suggested practices, which extend beyond minimum regulatory requirements, that boards of listed companies could adopt to help foster longer-term value creation. These include:

  • Setting forward-looking strategic goals and implementation plans that are properly monitored.
  • Reporting practices that disclose short-term performance in the context of medium and long-term goals and strategies.
  • Executive remuneration that is based on long-term performance measures to avoid excessive weighting of short-term remuneration.

GNDI, founded in 2012, now brings together 13 member-based director associations from around the world after peak governance bodies in Hong Kong, Singapore and Mauritius recently joined its ranks, further bolstering its capacity to advocate on behalf of the global directors community.

“The growth of our network is recognition of the role that good governance plays in driving sustainable business performance for the benefit of shareholders, the economy and society in all countries,” says Colvin, who is also CEO of the Australian Institute of Company Directors.

“In its short life, GNDI has made an important contribution to global discussions around issues such as boardroom diversity, audit quality and shareholder communications. As our membership continues to grow, we will be able to exert more influence in the policy debate that affects global business.

“Our charter also requires us to explore emerging issues that have a global impact on corporate governance and to educate key influencers about the benefits of exemplary leadership in the boardroom.”

GNDI membership also includes director institutes in Australia, Brazil, Canada, Europe, Hong Kong, Malaysia, Mauritius, New Zealand, Singapore, South Africa, Thailand, the UK and the US.


Boardpad

Boardroom Report disclaimer:

The opinions in Boardroom Report do not necessarily represent the views of the publisher nor the publication. Every effort has been made to ensure accuracy, but no responsibility is accepted for errors. All rights reserved.