All articles in Volume 12 Issue 5

Keeping your cash flow on track

Mar 19 quoteAs an independent or non-executive director, your starting point when reviewing cash flow should be to never take anything for granted, remain alert and question the information provided about outstanding debtors.

That is the advice from Roger Mendelson, CEO of Prushka Fast Debt Recovery and a principal of Mendelsons Lawyers, who says he is amazed at how badly the functions of cash flow and debt collection are often handled.

According to the recent Westpac-Melbourne Institute Small Business Index, cash flow is one of the main problems that causes small and medium-sized enterprises (SMEs) to suffer financial difficulties and stress – two things that can easily be avoided at no added cost.

Westpac’s index also reveals almost one in 10 small businesses intend to seek credit in the next three months.

Mendelson has the following top tips to ensure new businesses and SMEs get their cash flow on track which, in turn, will make themselves more appealing to banks when asking for loans:

• Plan a clear calendar of where major expenses will occur and ensure funds are available.
• Where possible, use a payment system instead of taking on debt.
• Follow up any fees or debt owed to your business and ensure that these do not pass the 60-day mark. Once they are at this stage, they are far harder to recover.
• Ensure your trading terms are up to date so that any costs associated with recovering debt are covered by the debtor.
• In no circumstance be lured to a service offering to help you get out of paying bills. They will be trying to entice you to enter an arrangement pursuant to Part IV of the Bankruptcy Act 1966. Their fees for this will be massive and the plan will adversely effect your credit rating in the future.
• Seek out the most cost-effective suppliers and tradespeople; there is often a wide gap between the cheapest and most expensive.

Mendelson adds that many companies’ business drivers are invariably focused on growth, product development, marketing and generally the more exciting aspects of running a company.  “However, an independent director needs to be more cautious and be confident that the backroom functions are adequate to ensure successful cash flow.”

In most cases, SMEs do not have experience managing the often unexciting, but critical accounts receivable department.

When questioning the information provided to them, Mendelson says independent directors should ask for an aged debtor summary, broken up in under 30, 60, 90, 120 and 150 day categories.

He adds: “If this report cannot be produced for you within a short space of time, then treat this as a warning sign as it indicates that the company’s systems are poor.  

If the report is provided to you, but comments are made to the effect that ‘it may not be very accurate’, then treat this as an additional warning sign.

“In my experience, a significant percentage of companies would fail this particular test and it then leads to the question of how they really reconcile their accounts in the first place.

“Furthermore, request a copy of the company’s written credit policy and written billings and collections procedures manual.

“These are relatively simple documents. However, they form the foundation of all effective billings and collections systems.  Many successful companies would struggle to quickly produce these documents.  If the company can’t, then delve deeper into why.

“Also ask for a copy of the standard trading terms which apply to all customer categories.  Check if these are well drafted and have current trading terms or if the terms are a photocopy of a photocopy from something which originated 30 years ago.”

Mendelson says an essential part of an effective billings and collections system is to ensure it has a well drafted trading terms policy and processes in place for the customers to be legally bound by them.

“If you do not receive satisfactory responses to these questions, then you really need to investigate why,” he says.

“Problems with the integrity of the debtors’ ledger are generally at the forefront of failed companies, as most liquidators will confirm. Look back to telecommunications company, One Tel, where it became apparent that a high percentage of invoices were uncollectable and this then led quickly to liquidation.”

Getting on board to fight cyber crime

One in four Australian respondents in a recent study believes that their board does not yet fully appreciate the risk posed by targeted cyber-attacks. In addition, 39 per cent said they either did not have, or were not aware of, a crisis response plan in the event of an attack. 

The study, conducted by BAE Systems Applied Intelligence, also found that 84 per cent of Australian respondents expected the number of cyber-attacks to increase in the next two years. 

Richard Watson, managing director Asia Pacific and Middle East of BAE Systems Applied Intelligence, says: “Boards should adopt the mindset that a cyber-attack will happen at some stage. While some attacks will have a minor impact, others may threaten the global reputation of the organisation and a poor response to these attacks will often serve to worsen the fallout from a major incident. 

“Consequently, a board should satisfy itself that management has effective processes to identify attacks early and then to respond to these in a structured and repeatable manner, with a clear delineation of responsibility. 

“It is also common for the best recovery plans to fail on first contact with a major event so the board should ask about the extent of testing of these processes.” 

Watson warns that sophisticated cyber-attacks often rely on tricking or coercing internal staff to open malicious attachments or visit malicious websites that compromise the computer they are using, establishing a command and control challenge and spreading laterally inside the network. 

“Hence, a key control is establishing a culture where staff are aware of the risks associated with cyber-attacks and confident enough to flag concerns about suspicious things through an effective mechanism. This should also include specific training for high-risk staff such as IT administrators,” he says. 

Watson adds that the cyber-attack challenge may still be viewed as a technology problem alone, rather than something that must be tackled at CEO and board level.

However, he notes that it is also becoming more common to see the role of chief information security officer (CISO) created. This role usually reports to the CIO, COO or CEO and is responsible for an organisation’s cyber security posture. 

“The board needs to ensure this role is sufficiently empowered to effect change and is also not reporting in a way that means it is competing for resources with regular IT projects which are often seen as more of a priority by some parts of the business.”

Watson says boards should ask the following types of questions to establish if their crisis plans are mature:

  • Effective detection: Does the organisation have the right controls in place to detect targeted cyber-attacks? How can the organisation be confident that the most sophisticated types of attack will be detected? “In a number of recent examples of covert cyber-attacks (to steal information rather than cause high-profile disruption), the attack has gone unnoticed for a period of over a year, despite the organisation having firewalls, anti-virus, intrusion detection systems and regular penetration tests of the perimeter. These kind of attacks are often based on compromising end-user computers and establishing command and control channels into the organisation,” says Watson.
  • Formalising where critical information resides: Has the organisation established which information is of high value and identified which departments, business processes, IT systems, suppliers and staff process or have access to this information?
  • Roles and responsibilities: Are roles and responsibilities clearly marked in the event of a crisis? “A common problem is the lack of a clear chain of command for effective and timely decision making,” says Watson. “A crisis will often require difficult decisions, such as at what point to turn off key systems or services or to engage with customers or the media. In some industries and countries, it is mandatory to inform a regulator or the end customer if their information is breached.”
  • Access to specialists: Does the organisation have clarity over which specialist partners will be used (for example, cyber security incident response or media relations)? Are these organisations on “retainer” deals so they can be called in at short notice? A common challenge is when an organisation having a crisis doesn’t have pre-existing commercial arrangements in place at a time when it needs urgent support, says Watson.
  • Testing the crisis plan: Are the plans periodically tested to ensure they are effective? A common problem is that plans are made but never tested or disseminated so that all stakeholders understand their roles.

Helping in the push towards greater gender diversity

The percentage of women on Australia’s top corporate boards has more than doubled over the past four years, new figures from the Australian Institute of Company Directors show.   

Company Directors CEO John Colvin notes that despite the need for more progress, large strides are being made as Australian companies embrace the need for greater gender diversity on their boards and in senior management. 

He notes that it has been just over four years since Company Directors announced it Board Diversity Initiative - a plan of action aimed at boosting the inadequate number of women on Australian boards.

“We believed we had to take a leadership role on this issue. We wrote to all chairmen of S&P/ASX 200 companies outlining our initiatives, seeking their support in achieving greater representation for women on boards and in senior executive ranks.

“Believing that actions speak louder than words, we also introduced a range of practical programs which we thought would really make a difference, and which have all since made a significant contribution to greater gender diversity on Australian boards.

“There is no doubt that improvement is occurring and that our efforts, and those of other organisations, are helping to achieve that.” 

Company Directors’ figures show that the total percentage of female directorships on ASX 200 boards has more than doubled from 8.3 per cent at 1 January 2010 to 17.6 per cent by 14 February this year.

Women now hold 23.8 per cent of directorships in the ASX 20, 21.4 per cent of directorships on the ASX 50 and 20.5 per cent of directorships on the ASX 100.

The number of ASX 200 boards without any female directors has also more than halved from 87 boards in June 2010 to 42 boards. Similarly, the number of female chairmen on ASX 200 boards has doubled from five (2.5 per cent of all chairmen) in 2010 to 10 (five per cent).

There are now only five ASX 100 boards and one ASX 50 board without a female director - and none in the ASX 20.

In addition, the percentage of females among appointments to ASX 200 boards has risen from five per cent in the calendar year 2009 to 22 per cent in 2013. Indeed, women have made up 39 per cent of new appointments to ASX 200 boards to date in 2014.

Colvin is confident this improvement will continue as more boards recognise the value of diversity and actively seek out female talent. He believes the idea of mandated quotas for female representation on boards is wrong in principle, has difficulties in practice, is tokenistic and is counterproductive to the end goal of increasing board diversity. 

Company Directors’ initiatives aimed at improving gender diversity over the past four years have included:

  • The Chairman’s Mentoring Program: In its third year, it has involved ASX 200 chairmen and directors mentoring 202 highly talented female directors.
  • The Board Diversity Scholarship: Jointly funded with the federal government, its two programs so far have provided governance education for 140 highly talented women.
  • The Victorian Women’s Governance Scholarship Program: Supported by the Victorian government, it provides governance education to women in the not-for-profit (NFP) sector in Victoria.
  • Public Sector Mentoring Program: A targeted mentoring program for aspiring women in the ACT’s public sector.
  • Directorship Opportunities: An online directorship listing site which enables greater transparency and access to all board vacancies. Female candidates are also identified for board opportunities on request.
  • The Board Ready Program: It provides experiential governance education for talented senior executives reporting to the main board, sitting on or being considered for subsidiary, joint venture or government advisory boards or planning to transition to non-executive board roles.
  • Education events: To raise awareness of the importance of diversity on boards.
  • Tomorrow’s boards: Creating balanced and effective boards: The first Australian book to bring together key research on the positive correlation between diversity and improved corporate performance.
  • A dedicated board diversity website: It provides valuable diversity research and information, as well as the only real time diversity statistics on ASX 200 female board appointments.
  • Taking a leadership role in developing the ASX Corporate Governance Principles and Recommendations on Diversity which created new reporting guidelines on diversity.

Interestingly, over a quarter of the female appointments over the past four years are past or current mentees in the Chairmen’s Mentoring Program. And, almost three quarters of the appointees are members of Company Directors. “A large number of participants in our scholarship programs have also gained directorships on listed company boards and in the NFP and public sectors,” adds Colvin.

Watch your remuneration benchmarks carefully

Remuneration committees should ensure they do not make claims which cannot be substantiated due to flawed or oversimplified benchmark practices, warns John Egan, chairman of Egan Associates and a leading adviser on executive and board remuneration.

He says it is not unusual for remuneration benchmarking to cause conflicts between the board and management after both seek information and advice from different providers.

To illustrate possible conflicts that may arise in such a situation, Egan Associates analysed the fixed remuneration and total annual remuneration (including annual incentive payments) of six CFOs in different listed companies based on:

  • The population of the ranked sample (either ASX 21-50, 51-100 or 101-200).
  • Market capitalisation.
  • Revenue.
  • Total assets.

It found that using information relating to an organisation’s relative rank on the ASX can be unhelpful and achieve vastly different results to those obtained using other more specific filters. Using a customised comparator group had the potential to exacerbate this effect.

“Remuneration consultants will apply more than one lens when conducting a remuneration review, taking the most appropriate metrics for each organisation into account to obtain a well-grounded recommendation,” says Egan.

“Benchmarking will often be overlaid by the application of further lenses, including organisations whose operations are primarily Australasian as distinct from substantially international, or organisations in a comparable industry sector.”

In discussions with both management and members of remuneration committees, Egan Associates has also observed a significant number of other challenges arising from:

  • Varying perspectives regarding the most relevant benchmark sample, which may be companies with comparable revenues or assets under management or may be industry specific, a customised company benchmark, a broad ASX index or a blend of local and international companies.
  • A different interpretation of the same data.
  • Omissions in clarifying the assumptions used.
  • Varying interpretations when management or the board seek a prospective as distinct from a retrospective view of market award levels.
  • A blurring in some instances of whether payments under a retirement plan or legacy benefit plans are included or excluded when describing fixed remuneration.
  • The basis of allocation of share rights.
  • Confusion around awards realised under long-term or annual incentive plans, which are at variance with values reached by accounting treatments and the values of target awards or maximum awards.
  • Varying views on the degree of difficulty of long-term incentive plan hurdles.
  • Erroneous assumptions that executives receiving fixed remuneration at the median are also receiving annual incentives and long term incentives at the median – they may be receiving incentives at well above or well below the median.

“In interpreting reward data, either developed internally or provided externally, boards need to be assured that the criteria used in sampling is the most relevant for the company,” says Egan. 

“Consistency year-to-year on the method of choosing the customised comparator group is also important. Boards must also be cognisant of the fact that the smaller the comparator group, every company that is included or excluded will potentially make a large difference to the resulting analysis.

“It is also necessary for boards to carefully examine total reward, not elements of reward in isolation of the other core components and in this context the three critical ingredients would be: fixed remuneration; annual incentive award outcomes and/or annual incentive award opportunity; and long term incentive award value using a common methodology.”

Your obligations to stop bullying

The issue of workplace bullying has been catapulted to the top of the agenda with the recent introduction of anti-bullying provisions in the Fair Work Act 2009, which came into effect on 1 January 2014. 

While much of the recent focus has been on the power of the Fair Work Commission to make stop bullying orders, Matthew Orr, a lawyer at Holding Redlich, says directors must remember they have significant personal obligations under safety legislation to ensure that bullying does not occur in the first place.

He says: “Bullying is repeated and unreasonable behaviour that is, whether intentional or not, humiliating, intimidating, threatening or undermining and which creates a risk to health and safety. Under safety legislation, officers have a non-delegable and proactive duty to take reasonable steps to ensure their business protects the health and safety of its workers. It follows that directors must take reasonable steps to protect workers from the risk of bullying.”

Orr says directors are required to take the following steps to satisfy the due diligence requirements of their officer duty under section 27(5) of the Work Health and Safety Act 2011. 

1.Knowledge of work health and safety matters
Directors are required to acquire and maintain current knowledge of bullying issues. This is best achieved through a systematic knowledge management process such as a safety briefing or subscription to a safety bulletin.

2. Understanding of operations, hazards and risks
Directors need to understand how their organisation’s specific operations, and the industry in which it operates, may create a risk of bullying. This means having an awareness of the organisation’s working environment to determine whether there is a bullying culture that underlies it or the risk of one developing. For example, if your business involves apprentices there could be initiation practices going on which amount to bullying. If your business is more office-bound, there may be a risk of managers being subject to aggressive or abusive directions which could easily amount to bullying.

3. Availability of resources and processes
It is critical that directors ensure that their business has a clear anti-bullying policy that outlines a zero tolerance stance. This policy, which should be provided to employees on commencement and be available on any intranet, must explain what constitutes, and what is not, bullying. It should also set out the rights and responsibilities of workers and the consequences that might flow from unacceptable behaviour.

Directors must also ensure that adequate resources are provided to conduct training programs (including refresher courses) on anti-bullying so that employees can understand how the policy applies in practice. In addition, employees need access to a clear reporting system, which sets out how their complaint will be dealt with, including the business’ approach to conducting a fair and efficient investigation process.

4. Monitoring safety performance
It is all very well to have good policies and reporting processes in place, but directors must check that their business also has effective investigating and monitoring systems. Reports of bullying must be responded to in an appropriate and timely manner. This may range from informal discussions with the bullied employee to a full-blown investigation conducted by an independent third party.

To comply with their duties, directors must question management as to whether the organisation not only takes steps to deal with the incident that is the subject of complaint, but also implements control measures aimed at preventing similar incidents in the future. Directors should also query whether monitoring of those controls (such as through anonymous staff surveys) is being undertaken to ensure their ongoing effectiveness.

5. Legal compliance and verification
Directors need to ensure their organisation implements a legal compliance audit process to check that the systems in place are operating effectively and to avoid any breaches of the safety legislation. Key to this is ensuring that the audit reviews the frequency and adequacy of training and instruction of workers about bullying.


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.