All articles in Volume 12 Issue 9

Budget provides mixed news for directors 

quote 14 MayLast night’s Federal Budget confirmed that the government plans to spend $50 billion on infrastructure by 2020 in a move that is likely to be welcomed by Australia’s director community.

The latest Director Sentiment Index (DSI), conducted from March 31 to April 13 on behalf of the Australian Institute of Company Directors, found that infrastructure was rated by directors as the top priority the federal government should address in both the short and long term.

But the government last night also proposed measures that are likely to disappoint directors if the broader results of the DSI are a reliable guide to their budget expectations. Sixty per cent of directors polled believed the level of personal taxation was already too high while 44 per cent said corporate taxation was too high.

Treasurer Joe Hockey confirmed in his budget speech that a temporary deficit levy is set to become a reality for those who pay the top marginal rate of tax. From 1 July 2014 until 30 June 2017, what will formally be known as the Temporary Budget Repair Levy, will be payable by those with taxable income of over $180,000 at a rate of two per cent on the excess over $180,000.

In other tax measures, the budget revealed the government remains committed to cutting the company tax rate by 1.5 per cent to 28.5 per cent from 1 July 2015 as previously announced, as well as to dumping the mining and carbon taxes.

However, it also remains committed to introducing a 1.5 per cent levy on companies with taxable income of more than $5 million to fund its paid parental leave scheme (expected to start from 1 July 2015).

The government’s tough budget is part of its plan to restore it to surplus as quickly as possible. Its sense of urgency is at odds with the views expressed in the DSI as only 26 per cent of respondents rated reducing the budget deficit as one of the top five issues the government should address in the short term. Only 30 per cent believed the government was having a positive impact on their business decision-making, down from 70 per cent previously.

However, it is too early to tell if the results of the DSI are the first signs of a trend in which  directors’ confidence in the government will slide over time. It is not unusual for a government to enjoy a honeymoon period before suffering a dip in popularity.

Indeed, directors’ perception of the Coalition government is still much more positive than it was towards the former Labor government. More than 80 per cent of the directors polled in the DSI this time last year believed the Labor government did not understand business, versus just 32 per cent in the most recent survey.

At a press conference last week to launch the results of the survey, Company Directors CEO, John Colvin, and a panel of senior directors identified the issues the government needs to address to restore the high optimism that accompanied its election win in September last year.

Colvin noted that directors’ sentiment towards the government was still ahead of the previous Labor government “by a country mile” and that the results of the DSI were likely a factor of political and budgetary realities that are often forgotten when a new government comes to power with an ambitious agenda.

President of Company Directors NSW division, Kathleen Conlon, identified several issues that could have dented directors’ confidence in the government, including a lack of progress on its promise to reduce red tape.

“Some of the discussions about moving activities from federal to state means you are likely to have more red tape because you are trying to deal with multiple states,” she said.

She added that there was also an inconsistency in policy, “in what was said during the election versus what has been delivered” and in the vision to make Australia more competitive.

Geoff Brunsdon, the executive chairman of investment bank ICS Advisory, added that directors may have expected much more consultation with the government on its reform agenda than had taken place. And, with all the talk about business contraction and job losses, he believed directors felt that there could be less emphasis on moving to a balanced or surplus budget and more emphasis on stimulating the economy.

Budget places NFP directors under more pressure

Last night’s Federal Budget is expected to place the directors of not-for-profits (NFPs), especially charities, under increased pressure.

Anne Robinson, the founder of Prolegis Lawyers, says: “NFP and charity directors will have to roll up their sleeves and step up because they will have a lot of work to do. They will have to work at building private philanthropy because they won’t be able to rely on some government-funded programs, in an environment where there is no reduction of red tape in sight.”

David Gilchrist, a director of Curtin University’s Not-for-profit Initiative, agrees, noting: “Firstly, the Budget directly and indirectly reduces the resources available to the sector and, secondly, it increases demand for the NFP sector’s services as a result of wider effects on those sections of the community that traditionally rely on the services of NFPs.

“In relation to resourcing, the most obvious and immediate issue is the government’s intention to reduce funding to social services organisations by $405 million. The $405 million will be withdrawn from grants and service delivery funding provided to NFPs. Typically, this type of funding reduction hits specialised service delivery, such as in the areas of mental health and youth services. The fine print is yet to be examined.

“However, for many months now a myriad of NFP organisations providing significant services across the community have been awaiting confirmation or otherwise with respect to the future of their funding and now it appears that there will be significant cuts to programs.”

Robinson says the reduction in the overseas aid budget is a broken promise from the government.

“We are already so behind in the OECD so to put a cap on that and reduce that spending by $7.6 billion over the next few years is really embarrassing,” she says.

However, she believes this cut will not affect the NFP sector as much as people think. “The reason for this is that the vast majority – more than 80 per cent – doesn’t go through NFP charities. It goes through for-profit providers. It’s bad for the nation and there have been cuts already.”

Nonetheless, Gilchrist expects the cut to reduce some NFPs' capacity to deliver services. “This is likely to affect the quantum of donations they seek to maintain effective programs, effectively reducing the share of donations available to the remainder of the sector.”

He adds the $7 Medicare co-payment and increases in fuel levies will hit NFPs and recipients of their services significantly. “Service delivery NFPs, such as disability service providers and especially those providers involved in caring for the profoundly disabled, will be affected by these measures as they struggle to maintain their recipients' health and meet transport and other costs in the face of decreasing real funding across the board.”

Gilchrist says the budget repair levy, reduced welfare payments and rising cost of living are also likely to lead to a drop in disposable incomes, which could decrease donations provided to NFPs, thus reducing their income streams and the resources available during a period of likely higher demand.

Robinson says some welfare agencies will be very concerned about the Budget’s push for young people to earn, learn or "work for the dole". “This is because it is the vulnerable young people that will be affected – those with mental illness problems or that have very dysfunctional families.”

Similarly, Gilchrist says: “The treatment of young unemployed people, effectively reducing their income to nil for the first six months of their job search, will increase the demand for a number of social services ranging from suicide prevention to employment services as government has determined to discontinue apprentice support as well.”

He adds: “Pension decreases over time via removal of the wage indexation arrangements will see the pension level fall below the poverty line over time and so the demand on services will increase markedly. There is also little doubt that the requirement for people to work longer will also have the effect over time of reducing the pool of volunteers, thus reducing the resource base of many NFPs that will, in turn, critically reduce their capacity to address significant need within the community.”

 While no change in the government’s four year funding for the Australian Charities and Not-for-profits Commission (ACNC) was announced, Robinson says it is clear that the government still plans to dismantle it, which will put more pressure on the Australian Taxation Office.

“That’s really disappointing. The vast majority of directors of NFPs and charities, with very few exceptions, see the ACNC as a very important strategic regulation to enable the reduction of red tape across the board. It’s doesn’t cost much to run, but it’s the best chance we have of reducing red tape across the sector, particularly in the states. Hockey’s speech last night made a great deal about reducing federal and state duplication. That’s fine, but in fact the states are all different and are where the duplication of red tape occurs. The best chance of reducing this is to have the Feds step in to replace it.”

“Overall, the Budget is one that will place an already stretched sector under increasing strain as the various measures both reduce resources available to the sector and increase the demand placed on it for services as a result of the major budget elements reducing the incomes and increasing the expenses of the most vulnerable within our community,” says Gilchrist.

Super news for directors from the Budget

Last night’s Budget included an unexpected bonus for directors wanting to build up their retirement nest eggs.

Brad Eppingstall, a principal with accountant RSM Bird Cameron, notes: “Effective from 1 July 2013, any excess non-concessional (after-tax) contributions can be withdrawn from superannuation without being subject to excess non-concessional contributions tax at 46.5 per cent. The earnings generated on the excess non-concessional contribution will also be able to be withdrawn and be taxed at the individual’s marginal tax rate. This means rather than being penalised with a large tax bill for what is often an inadvertent breach of the caps, individuals will have the option to elect to withdraw the money from superannuation without any taxation consequences."

This is welcome news for directors with multiple roles because in the past mandatory superannuation guarantee (SG) contributions in respect of each directorship may have been combined to exceed the concessional (pre-tax) cap which, in turn, would have affected the non-concessional cap. If directors exceeded the non-concessional contribution cap, the amount in excess of the cap could have been taxed at up to 93 per cent. In October 2012, the Australian Institute of Company Directors made a submission to Treasury to express its significant concerns about this.

For directors who rely on the SG, the government unexpectedly deferred its rise by an extra year from 1 July 2021 to 2022. It was originally going to pause the SG at 9.25 per cent for two years and then scale it to reach 12 per cent in 2021. However, Treasurer Joe Hockey says the SG will now go to 9.5 per cent next year (1 July 2014) and will then freeze at that rate until 30 June 2018. The SG charge will then rise by 0. 5 per cent each year until it reaches 12 per cent in 1 July 2022.

Deloitte national superannuation leader Russell Mason says: “Although this does of course mean that it will take longer for people to build up their super – especially when you consider that the previous Labor government had flagged 2019 as the 12 per cent SG date – the long term impact on superannuation savings individually will be minimal.” 

In addition, the Association of Superannuation Funds of Australia has welcomed the government's infrastructure package which includes spending of about $50 billion over the next six years on roads, rail and ports.

Its CEO Pauline Vamos says superannuation funds have a long history of investing in infrastructure and a strong appetite for further investment in this asset class. She notes that the current average asset allocation of super funds to infrastructure is around 7.5 per cent.

"But as the superannuation system continues to mature and more people move from accumulating super to taking income streams, stable, long-term and income-producing assets such as infrastructure will become more attractive and more suitable investments for super funds. Many of the public assets potentially earmarked for sale would be an ideal match for the risk-return profile desired by super funds in this changing demographic environment."


Advice to women considering a board career

New research reveals that there is no single pathway for women appointed to boards of S&P/ASX 200 companies and that the richness of experience collected along alternative routes to the boardroom could be equally valuable.

Research by the Korn Ferry Institute found that for some female non-executive directors (NEDs), a directorship was the result of careful planning and preparation. For others, it was an unexpected opportunity.

Asked how they planned their first NED role, three-quarters of respondents said they didn’t; rather, the chance came to them. Only 22.2 per cent had actively sought opportunities for a NED role because it had always been part of their career plan.

The importance of a strong network was also a recurring theme in conversations with the female 57 NEDs interviewed for the Korn Ferry Institute’s Beyond ‘if not, why not’: The pathway to directorship for women in leadership report.

The female directors interviewed were appointed to boards after 2010, when the Australian Securities Exchange (ASX) introduced changes to its Corporate Governance Principles and Recommendations on the reporting of diversity — known as the “if not, why not” disclosure rule.

 The survey revealed that revealed most respondents obtained their first board seat either through their network of contacts (56.3 per cent) or a specific sponsor (18.7 per cent).

 A third of respondents cited focusing on relationships earlier in their career as the thing they would most do differently. Other answers centred on more deliberate career shaping: 21 per cent wished they had been more strategic in their planning and 18 per cent said they should have put themselves forward for senior executive roles.

Korn Ferry Australasia managing director Katie Lahey says: “One mistake we see frequently is women who wish to transition to a board career too early. Our advice is to stay in your executive career as long as you can. Get experience in line roles, managing a profit & loss (P&L), and offshore if possible. Also gain experience on boards – which may be non-listed, government or not-for-profit.”

Survey respondents offered the following advice to women considering a board career:

  • Develop your executive career with an eye on your board career.
  • Be aggressive in advancing in your line management role. Don’t shift out of management too early. Gain as much senior corporate experience as possible, particularly a C-suite position with P&L responsibility. All these help secure high-profile board roles.
  • Ensure you have boardroom skills. Fill any gap in skills, particularly related to financials such as the balance sheet and cash flow drivers of a business. Be prepared not only to understand, but contribute to the debate on key accounting and financing issues. Complete the Australian Institute of Company DirectorsCompany Directors Course.
  • Obtain board experience. While still an executive, seek a seat on a subsidiary and/or not-for-profit board to gain experience.
  • Be a willing and active participant on industry committees and working parties. Consider government boards in which quality NEDs and good governance exist.
  • Know the right people. Networks are extremely important; new director selections are still heavily influenced by existing board members. Find a mentor — or better yet, a sponsor — who will open doors and introduce you to others. Ask senior board directors for recommendations and referrals.
  • Choose a board with care. Research the company, the directors, and their track record of governance. Do not underestimate the importance of board dynamics and personal relationships in determining whether you’ll find a board position fulfilling.
  • Try to select boards in which there is at least one other woman. Being the only woman on a board can be isolating.
  • Market yourself smartly. Have clarity on the kind of board you are interested in, and know what you would bring to such an opportunity. Have confidence and courage to put yourself forward for roles.
  • Display a maturity that is essential in the boardroom.
  • Remain confident in your ambition, and know that more often than not, rejection for selection is structural, not personal.
  • Don’t leave your executive life until you have secured some board seats, as you lose currency quickly. 

Falling from Olympus

Having more women on boards, formal whistleblowing policies, compulsory rotation of auditors and prison sentences for wrongdoers will help cut down on corporate fraud, says Michael Woodford.

Woodford, who was in Sydney last week to help launch the CFA Institute’s Investor First Week, is known for having exposed massive corruption at Japanese optics and reprography product manufacturer, Olympus Corporation.

Woodford worked for Olympus for 30 years, becoming the head of its European operations and then president and COO of its Japanese operations. Two weeks after being appointed as its first non-Japanese CEO in October 2011, he received evidence of a massive accounting fraud involving the $1 billion acquisition of three “Mickey Mouse” companies plus US$700 million paid to an unknown consultancy company in the Cayman Islands for mergers and acquisitions advice.

“It wasn’t a complex fraud,” says Woodford. “A child would have known that you don’t pay $1 billion for companies that don’t produce any turnover… You can only play those games in the Alice of Wonderland of Japan.”

He wrote six letters to the board and from letter number four onwards, he copied in the chairman and senior partners of Olympus’ auditors. He then commissioned an auditing firm in London to investigate the matter. It came back with a damning report.

Yet, despite all the evidence, all 14 of Olympus’ directors, including its three non-executive directors (NEDs), fired him immediately.

After turning over a file to a Financial Times journalist, Woodford fled Japan, fearing for his life. He subsequently exposed the fraud through massive publicity in the Western media and became one of the most highly placed executives to turn whistle-blower.

The scandal led to the resignation of the entire Olympus board and several arrests of senior executives, the company's former auditor and bankers, among others. And, it left Woodford even more cynical about human nature than he was before.

He says he had known many of his colleagues around the world for 30 years and some had been around for the birth of his children. “But an hour after I was dismissed, phone calls and texts went unanswered. People move away in a way that is haunting to see. I realise how arrogant I must have been in my judgement. These people are mostly still with the company and are bright and intelligent. But I thought they were decent and ethical… They would not help me. They excommunicated me. Most people in business will not get involved. The problem for whistle-blowers is the isolation.”

That’s why Woodford is a strong believer in whistle-blowing and has lobbied strongly for this via the UK charity Public Concern at Work, of which he is a patron.

“If there is some wrongdoing, then people in most organisations will know about it at some level. How do you get that information out? Because I was the president of huge company, a foreigner running the company, I could get the media’s attention. And I also had the [finances]. I spent $1 million pounds in 12 weeks on lawyers. The person I worry about is the junior manager in a company.” 

Woodford adds that it’s not easy to go to the media regulator or law enforcement unless you have substantiated evidence. Yet, most companies don’t have defined whistleblowing procedures.

He says every organisation, private or public, over a certain size should have defined whistleblowing procedures and that whistle-blowers should report to a NED.

“If you are a NED and things go wrong and you haven’t demonstrated oversight and scrutiny, you are personally liable. The NED will have to register the report from a whistle-blower, investigate and come back to the whistle-blower.

“We also need to put the bad guys in prison. While large companies may pay fines for wrongdoing, the regulators don’t go after individual officers.”

Woodford also believes that having more women in the boardroom may help avoid the problems experienced at Olympus.

“Macho, ego and vanity are not uniquely male traits, but they can create dominant or authoritarian leaders,” he says, noting that the Olympus chairman was like an emperor who people just bowed down to.

“Despite overwhelming evidence, they followed him blindly. That’s in Japan, but I have seen people behave like this all around the world.

“Powerful men need to be held to account. So it’s very important that there are NEDs on the board and that they really are independent. Overwhelmingly male boards are always a bad sign.”

Woodford was awarded a large settlement for defamation and wrongful dismissal from Olympus, reportedly of £10 million, and now consults on corporate governance and whistle-blowing laws. He has also published a book about the scandal, called Exposure, and vows never to work in corporate life again after his Olympus experience.


Gradcert

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.