All articles in Volume 12 Issue 14

Make a fresh start this financial year

BRR quote July 23

Small and medium-sized enterprises (SMEs) should look to make a clean start early in the new financial year, advises Roger Mendelson, CEO of debt recovery company Prushka.

“Many SMEs tend to carry over their bad debts into the new financial year, because write-offs must be made prior to June 30 and most don’t get around to doing it,” he says. “While it is too late to write off those outstanding debts for last year’s tax purposes, well over-due accounts should be outsourced to a collection agency and any not paid should be written off during the 2015 tax year.”

Mendelson adds: “Directors tend to not receive adequate reports about the credit and collection system of the company and tend not to ask, on the basis that doing so is micro-managing. However, a role of a director is to ensure that the company is handling its billing and collections functions properly. Asking for the right reports is a good starting point. Ask for aged debtor summaries, broken down into 30 days, 60 days, 90 days and over 90 days and ask what steps are being taken with 60-day-plus accounts.”

Prushka’s recent research found that 46 per cent of SMEs were looking to grow in the second half of 2014.

“For most SMEs, a good way to grow is to grant credit and to compete by offering attractive payment terms, rather than competing on price,” says Mendelson.

“This of course means taking on more credit risk. However, this shouldn’t be a daunting prospect as long as you have some stringent back office functions set  to protect your cash flow.

“Use the new financial year as a reason to revise your trading terms and make sure they are set up properly to protect your business. Create a new client form which will provide you with basic information on your new customers to allow for a quick and easy credit assessment – name, address and if they are a home or property owner. Also include a clause in this form so that when a client signs it, they acknowledge that if they default on their payment, they are liable for all collection costs on top of what they owe.

A standard new customer form can be downloaded free of charge from www.prushka.com.au and you can adapt this for your business.

“Finally, refer any of your old, written off debts to a collection agency which offers a ‘no recovery, no charge’ service, meaning you can chase these debts at no additional cost.”

With growth now being the focus for many SMEs, after several years of survival mode, it is important for boards to ask management the following questions:

  • What steps are being taken to grow the business? Evaluate the steps you are taking to expand your business and ensure you are set up to handle an increase in clients. Provide flexibility on payments by granting credit to clients. It’s a great way to attract new customers and increase business from your current ones.
  • What are your business trading terms and collection policies? Ensure your trading terms are set up to provide that in the event of default, the bad paying customer becomes liable for all your collection costs. Importantly, also ensure you have a stringent collection policy with a clear timeline of steps and stick to them. For example, put in a call to the debtor on the date payment is due and refer accounts to a collection agency after 60 days. Slow payers will take advantage of any weakness so it is important to enforce your collection policy consistently. One follow-up statement is ample. Anything more sends the message that you aren’t serious.
  • Do we have overdue debts and what are we doing to recover them? Prushka’s research has found that businesses are holding onto debts for longer in an effort to avoid collection costs (63 per cent of accounts referred in the past three months are older than 90 days). Unfortunately, the longer a debt is left, the harder it is to collect. Management should review the ledger and ensure that debts are outsourced no later than 90 days and preferably after 60 days. With the correct clause in your trading terms, the collection costs will be added to the outstanding debt.

Charities to be again regulated by ASIC and the ATO

The federal government has released an options paper detailing its regulatory and compliance plans once the charity regulator, the Australian Charities and Not-for-profits Commission (ACNC) is disbanded.

In the paper, the government confirms that the regulatory functions performed by the ACNC will be returned to the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC).

It is proposed that ASIC, ATO and state and territory governments will rely on their current powers to provide an appropriate compliance framework. Those director duties, obligations on charities and compliance measures which existed under the Corporations Act 2001 that were turned off by the ACNC legislation will be reinstated.

The ATO will again become responsible for determining eligibility for charitable status. In the options paper, the government acknowledges concerns raised over the possible conflicts of interests that could result from the ATO determining charitable status and related tax concessions while also being responsible for raising revenue. It proposes two options to safeguard against this:

  1. Establish an independent panel made up of external experts who would provide advice on objections raised by charities that disagree with the initial ATO assessment on the determination of charitable status. This panel would operate in a similar way to others that are maintained by the ATO, such as the General Anti-Avoidance Rules Panel.
  2. Form a separate area within the ATO that would be responsible for determining outcomes for applicants who object to the findings on eligibility for charitable status and related tax concessions. Officers would not have a dual role of assessing charities and providing a right of review, mitigating the potential bias.

Should an organisation continue to dispute the decision, it would have a legislated right to appeal to the Administrative Appeals Tribunal.

Rather than reporting to a separate entity, the government proposes that charities be required to maintain a publicly accessible website which contains the following information: the names of responsible persons, details of all funding received from government (Commonwealth, state and local) and financial reports. They can provide more information to the public if they so choose to.

To ensure that reporting requirements are consistent with other organisations operating as companies limited by guarantee or Australian registered bodies, charities registered under the Corporations Act would have those ASIC reporting obligations reinstated which were “switched off” when the ACNC was established.

In keeping with the principle of reduced reporting, the government will consider giving those organisations that already make information publically available through another Commonwealth regulator an exemption from separate reporting requirements.

Written submissions in response to the options paper can be submitted by 20 August 2014 using the template available at the Department of Social Services website.

Meanwhile, separate consultation has been carried out by the Centre for Social Impact (CSI) into the creation of the Civil Society National Centre of Excellence (NCE).

Operating independently of government, the NCE will help build the capacity of civil society organisations by, for example, supporting collaboration, education and training and advocacy, and working to reduce reporting requirements and red tape.

CSI’s interim report is expected to be received by the government this month.


New report backs calls for employee share scheme reforms

A new report backs widespread calls for the government to reverse the 2009 legislative changes to employee share schemes (ESSs), showing that reforms could potentially boost the Australian economy by $1.4 billion over a decade.

The former Labor government’s 2009 tax changes were aimed at executives who tried to reduce tax by channelling income into share options. But technology start-ups and investors have complained these changes have hurt the economy and stopped them from hiring talent through share options instead of high salaries.

The report, compiled by Employee Ownership Australia and New Zealand (EOA), Link Market Services and Computershare, found that a reversals of the 2009 changes to salary sacrifice plans and option plans could increase tax revenue by over $215 million a year.

The report, Employee Share Schemes – Their Importance to the Economy, adds that following a reversal, the use of salary sacrifice plans were likely to immediately increase by 10 per cent, affecting 40,000 employees and increasing the average amount of savings per employee to $5,000. Over time, this would lead to a potential increase in tax revenue of $84 million, year on year.

The report also notes that there are a growing number of employees made redundant who face a tax liability on their equity due to the rules relating to tax at cessation of employment. These rules mean employees face large tax liabilities when they are made redundant, when they can least afford to pay. In addition, individuals who face these tax liabilities rarely receive the full equity grants when they are tested up to three years later.

“This reform is much needed and long overdue and this report shows it will deliver a significant boost to the Australian economy. Broad-based employee share ownership has been unequivocally shown to promote employee savings, innovation and productivity,” says Angela Perry MAICD, the chairman of EOA and Link Market Services’ global head of equity plan solutions.

She notes that Australia lags behind the rest of the developed world in the area of employee share ownership. While broad-based employee share ownership is relatively widespread in the listed company sector in Australia offering employee share plans, it is estimated that only three per cent of private and unlisted companies have “all-employee” share ownership schemes, compared to 23 per cent in the US.

Research by the former Department of Employment and Workplace Relations found the major reason employee share ownership had not grown in Australian SMEs was due to complexity and compliance issues, particularly surrounding the costs of implementing employee share ownership.

The government’s response to a discussion paper outlining current ESS arrangements and possible options for change is expected out soon.


The differences between executive and non executive directors

A recent court decision describes the legal differences between an executive director and a non-executive director.

As summarised by Guerdon Associates, key points made by Justice Dixon in the Supreme Court of Victoria in the recent decision of Jaques v AIG Australia Ltd [2014] VSC 269 (13 June 2014), include:

  • The essential characteristic of an executive director is his or her discharge, usually as an employee, of executive functions in the management and administration of the company. Non-executive directors are usually independent of corporate management. In contemporary corporate governance theory, the role of independent, non-executive directors is encouraged.
  • The directors rely on management to manage the corporation. The board does not expect to be informed of the details of how the corporation is managed.
  • Another division of function is between the non-executive directors and the CEO or managing director. Generally a CEO is a director to whom the board of directors has delegated its powers of management of the corporation’s business. Usually the CEO is employed under a contract of service which will either include an express term or, in the absence of an express term, an implied term, that the CEO will exercise the care and skill to be expected of a person in that position.
  • The degree of skill required of an executive director is measured objectively. In contrast to the managing director, non-executive directors are not bound to give continuous attention to the affairs of the corporation. Their duties are of an intermittent nature to be performed at periodic board meetings and at meetings of any committee of the board on which the director happens to be placed. Notwithstanding a small number of professional company directors, there is no objective standard of the reasonably competent company director to which they may aspire.
  • It is well accepted that the office of managing director, the classic executive director, has powers of day-to-day management of a company that are exercisable without reference to the board as a delegated executive management function. In contrast, appointment as a director, other than as managing director, carries no express or implied grant of executive power.
  • The position of director does not carry with it any ostensible authority to act on behalf of the company. Directors can only act collectively as a board and the function of an individual director is to participate in decisions of the board.
  • It is a question of fact whether a person has assumed the powers of a managing director or an executive director, with the approval of the company. The critical aspect of that inquiry is whether the company approved, or perhaps acquiesced, in that assumption of power.
  • Whether a director, other than the managing director, is an executive director may depend on whether there is some feature of the company’s constitution or conduct of the company in general meeting or of the board of directors that evidences the delegation of executive function to that director to operate as an executive of the company. The classic example is board approval of a contract of employment of a director as an executive of the company.
  • Usually, an executive director has simultaneous parallel duties owed to the company, on the one hand by virtue of the office of director under statute and at general law, and on the other hand, as an executive employee under an express or implied employment agreement. 

The power of one woman

Having just one woman on the board can improve governance and make a difference, a study in Canada has found.

Judith Zaichkowsky, professor of marketing at the Beedie School of Business, Simon Fraser University in Vancouver, Canada, found that while companies with the most women scored the highest on corporate governance, there is significant improvement with one woman over none on boards, especially in male-dominated industries, such as energy and mining.

In a paper entitled “Women in the board room: one can make a difference”, recently published in the International Journal of Business Governance and Ethics, Zaichkowsky says her findings suggest that strategically, it is better to get a foot in the door of male-dominated boards with one woman who understands the business, rather than barging in with, say, three women.

She notes that lone women board members in her study exhibited a certain pride in being a highly qualified company director. “They were accustomed to their outsider status and needed no additional support from the presence of members of their own gender group.”

Zaichkowsky adds: “The theory that women are well-suited to be board members is indeed strong (Arfken et al., 2004). Women are well-educated, contributing members of organisations, and effective managers. They are also consumers who buy and have much decision-making power in the marketplace. However, not all women are alike, just as not all men are alike. Boards should be comprised of people who have the best understanding of the business and the best concerns for a viable, profitable organisation which treats its employees and customers to the highest standards.”

Noting a push for representation quotas in many countries, including Canada, the US and UK, Zaichkowsky says an issue that became evident while doing her research was that the same women were board members for multiple companies.

“In 2006, Norway led the way by legislating that 40 per cent of board directors had to be women. It achieved that goal by 2008. The results of the quotas show that a few women are holding many directorships, with one woman on eight different boards by 2009 and 61.4 per cent of the women on the boards holding at least three different directorships. So, there is a dramatic increase in multiple board appointments for the same person.

“Norway has more boards with women, but not necessarily more total women in the mix. A similar situation appears in Canada without a quota ruling. There is one woman with seven directorships; three with six board seats; five with five board seats; and 23 with four board seats.

However, this is not a trend which appears to exist in Australia. A recent report by Company Directors on female non-executive director appointments to ASX 200 boards (2010-2014) show that more than half (53.8 per cent) of female appointments had no previous or current ASX 200 non-executive directorships, highlighting that in Australia the pool of female directors has significantly expanded in the last four years.

Zaichkowsky continues: “Korn/Ferry suggests that the maximum numbers of boards a person can adequately handle are three to four, with one or two additional appointments for persons holding CEO positions. So, why are the same women appointed to more than three boards?

“A common recruitment assertion is that ‘when you interview for a job, it is all about your qualifications, but when you interview for a board it is about how compatible you can be’. The key is said to be in signalling that you can ask the right questions. Or maybe it is not asking the wrong questions. Future research that documents the reasons for appointing women to multiple boards could be very insightful.”

For purposes of this study, Zaichkowsky analysed data from 2004, 2006, 2009, 2011, and 2012 from two unique databases: “board games” by the Globe and Mail (G&M) newspaper, the source for corporate governance scores, and CSR ratings by Corporate Knights (CK) magazine. 


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