All articles in Volume 13 Issue 12

Do directors need an “identity number”?

24JuneBRRThe Productivity Commission has proposed that company directors be allocated a “director identity number” (DIN), in its draft report on business set-up, transfer and closure. A director would have only one DIN regardless of how many directorships he or she holds.

To assist the Australian Institute of Company Directors’ consideration of this issue, please complete the director identity number survey (there are only two questions) by 12pm Monday 29 June. We will use the results in our response to the Productivity Commission on this proposal.

The purpose of this proposal is to better enforce laws relating to phoenix activity by providing a means to identify directors other than an unverified name and address, and seeking to prevent the use of fictitious identities.

Current directors would be required to apply to the Australian Securities and Investments Commission for a DIN and then provide the DIN at the annual review date for the company as a change to the company details. Otherwise, a DIN would be allocated to an individual at the time of his or her first directorship. In order to obtain a DIN, an individual would be required to provide 100 points of identification proof and also verify that he or she has read materials on director’s legal responsibilities that would be provided as part of the director registration process.

More information about the proposal can be found in Chapter 15 of the Productivity Commission’s draft report at pages 382 to 384.


New cultural diversity scholarships

The Australian Institute of Company Directors (AICD) and the Minister assisting the Prime Minister for Women, Senator the Hon Michaelia Cash, will launch a new Cultural Diversity Scholarship Program on Friday 26 June for talented women who identify as Aboriginal or Torres Strait Islander, or who come from a culturally and linguistically diverse background.

The 55 scholarships, which are jointly funded by the Federal Government and the AICD, are available to senior executives and existing female directors who wish to improve their credentials. Recipients will be eligible to complete either the Foundations of Directorship program or the Company Directors Course. Scholarship applications close at 5pm AEST Monday 20 July

These latest scholarships are part of the AICD and Federal Government’s joint Board Diversity Scholarship Program. A total of 195 women will have been granted a scholarship since September last year, which is more than double the number awarded in each of the two previous rounds of the program.

Since the launch of the Board Diversity Scholarship Program in 2010, there has been an encouraging increase in women on the boards of Australia’s largest companies. Monthly statistics compiled by the AICD show that women comprised 20 per cent of the directors on S&P/ASX 200 boards at 31 May 2015, versus 8.3 per cent in 2009.

Click here for further information.


Towards good governance

The Great Governance Debate: Towards a good governance index for listed companies, launched by the Institute of Directors in the UK, sets out a new framework for assessing corporate governance. This index is designed to move away from a focus on compliancetowards a more complex measurement which combines public perceptions with a range of objective factors.

The report sets out the initial findings from six months of research into the measurement of corporate governance in UK-listed companies. Its purpose is to encourage the study of good governance and stimulate debate on the importance of corporate governance in rebuilding the reputation of the UK business community.

The report follows several other attempts in the UK to establish a Corporate Governance (CG) Index. These have been relatively unsuccessful as companies have learned to “game” the index, according to reports. Not surprisingly, the study concludes that corporate governance is difficult to measure and outcomes are even more difficult to predict.

Interestingly, the study does not rely on publicly availably company reports. This alone may cause concern about the ultimate value. The researchers use a new list of indicators that are not related to the UK Corporate Governance Code. These “instrumental factors” include board effectiveness, audit and risk, remuneration and reward, shareholder relations, stakeholder relations and business environment. Evaluation against these factors included both objective, numerical data and the results of stakeholder perception surveys.

No single instrumental factor stands out as having a strong correlation with governance. The most significant single-factor correlations are the percentage of shares held by a single shareholder and position in Britain’s Most Admired Companies rankings.

Launching the report, Ken Olisa, chairman of the advisory panel, said. “It is simply not correct for a company to say that because they have ticked certain boxes, they show good governance.

Now is the time for some bold thinking on how we define and measure governance, including the recognition that it is essentially an organic process involving the interaction of groups of people.”

To download the report, click here.


ASIC releases impairment guidance

The Australian Securities and Investment Commission (ASIC) has released useful information to assist directors in considering the value of non-financial assets as shown in company financial reports.

ASIC said it continues to find issues with the impairment of goodwill and other non-financial assets in these reports with common issues being unrealistic cash flows and assumptions. While ASIC states that “directors do not need to be accounting experts” it does strongly indicate that directors should seek explanations and assistance from experts and even “challenge asset values in the financial report”.

The assets most often associated with impairment testing are:

  • Goodwill.
  • Identifiable intangible assets.
  • Property, plant and equipment.

The value of these assets in the balance sheet needs to be the recoverable amount – which is the higher of its fair value less disposal costs and its value in use.

ASIC suggests that directors question the company’s approach to impairment testing especially if they suspect that the assets may be materially impaired. Directors should review the future cash flows and the assumptions used in the context of the business, the assets and the external environment, both present and future. Given the subjectivity of many of these elements, it is important that directors then consider whether the disclosures are adequate for users of the reports.

The document provides essential guidance with helpful questions to consider when assessing:

  • The need for impairment testing.
  • The process for assessing impairment.
  • Common issues with impairment calculations.
  • Questions to ask external auditors.

Directors should consider based on their understanding of the business whether there are one or more of the indicators of impairment and consider whether it is appropriate to perform an impairment of assets.

In certain instances the accounting standards require annual impairment testing even if there are no indicators of impairment.

The guidance can be found here.


A global diversity perspective

Deloitte has released its latest edition of Women in the boardroom - A global perspective, which is a report on board gender diversity. This comprehensive report outlines the efforts of 49 countries to increase the number of women occupying board seats.

Key findings in the study are that representation of women on corporate boards continues to increase, but the number of women-led boards still remains low globally. Overall, women now hold 12 per cent of seats worldwide with only 4 per cent chairing boards. Regionally, the most progressive countries for gender diversity on boards are in Europe while the Americas and Asia Pacific regions are displaying slower progress.

However, global comparisons mask the differences in the efforts of individual countries to address the gender imbalance on boards. For example, Denmark, while having the sixth highest board participation of women in Europe couldn't show an example of a single female chair in the study.

Australia’s performance was encouraging with the percentage of women on ASX 200 boards increasing to 20.4 per cent (from 8 per cent in 2009). The Australian Institute of Company Directors recently re-invigorated this progress by announcing their promotion of a target of 30 per cent of women on ASX200 boards by 2018.

Women now comprise 30 per cent of all new ASX 200 board appointments. Overall, the Australian board composition by women in the study showed that 15.1 per cent held board positions and 5.6 per cent acted in the role of chair. The top industries with the highest percentage of female directors were the financial and consumer business sectors with 19 per cent and 18 per cent respectively.

Deloitte has also released an interactive network diagram which can be filtered by country and industry segment. The Women on Corporate Boards Pilot is an interactive network visualisation linking companies across the globe based on non-executive directors that serve on the boards of common companies. This visualisation incorporates several metrics in order to show the connectedness of companies with higher percentages of women on their board.

View the full report and interactive network diagram here.


Rules matter

Innovation is more effective with constraints, despite arguments to the contrary, according to a report by McKinsey & Company.

In a recent report titled The simple rules of disciplined innovation, author Donald Sull argues that sophisticated innovators find constraints “spur and guide innovation” – a view that seems somewhat counterintuitive given that much discussion regarding innovation talks about free-flowing ideas and a lack of barriers.

Arguing against this theory, the author suggests that a total lack of rules is thought to overwhelm innovators, causing activities to become uncoordinated. Instead, the author suggests a set of simple rules that he says will eliminate chaos but won’t necessarily guarantee success, however they should increase the chance of success.

Citing manufacturing company Corning as an example, the article shows the firm looked to past successes with breakthrough products such as the television tube and optical fibre to distil four simple rules for innovating. These were:

    1. Addressing markets in excess of USD 500 million.
    2. Leveraging expertise in materials science.
    3. Being a critical component in a complex system.
    4. Having patent and IP protection.

Another notable example mentioned is Lego, a company well known for the successful turnaround of its business through innovation. Lego utilises a simple rule for product development in which designers must re-use a certain number of existing pieces when designing a new product. This helps to balance innovation with the practical need for control of manufacturing costs.

The author contends there are “four characteristics of effective simple rules” for innovation.

These are:

  • Cap the number of rules – in defining the few, important rules, it essentially results in codifying “the essence of the company’s strategy”.
  • Make the rules apply to a well-defined activity – such as the selection of new projects.
  • Tailor the rules to the business’ culture and strategy.
  • Rules are for guidance only.

However, the author stresses a word of caution for rule four, and that is that rules should be “guidelines not algorithms”.

Read the full article here.


To tender or not

There is a general sense, according to Professor David Hensher, that society is better off if contracts are put out to tender. Is this still the case if the incumbent is satisfying requirements?

Hensher, a professor of management and founding director of the Institute of Transport and Logistics Studies at the University of Sydney says his research into tendering demonstrates that transaction and transition costs of tenders far outweigh the cost of negotiation with incumbent providers.

While tenders remain expected practice, what do those evaluating tender responses need to consider?

Questions to ask:

1. What hidden costs might be incurred from putting services out to tender? Be aware that suppliers may build the cost of their tender response preparation into their contract estimates.

2. Is the bid too aggressive? Tenderers may undercut their competitors with low prices to get in the door, but be underqualified to deliver the required services if they win the contract.

3. What are the risks and costs associated with the transition from an existing operator to a new operator?

4. What real costs might be missing in tender disclosures? What other costs may need to be added in to achieve the goal of tender transparency? Henscher suggests a 10 per cent mark-up be factored into the assessment of offer prices.

5. How much should be set aside as a contingency on top of tender bids, in case the preferred supplier falls short of delivering the service required?

Professor Hensher’s opinion piece To tender or not: how transparent is the process? is available on the University of Sydney’s website.


Copyright Agency's new CEO

Adam Suckling has been appointed as chief executive officer (CEO) of Australian rights management and licensing organisation, the 
Copyright Agency.

Suckling is currently News Corp Australia’s director of policy, corporate affairs and community relations.

In his most recent role at News Corp Australia, he has overseen the company’s policy advocacy, along with other rights holders, for changes to the Copyright Act to enable rights holders to more effectively address theft of their content.

He replaces outgoing CEO Murray St Leger who is returning to the UK after two and a half years running the company.

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Woolworths CEO and managing director, Grant O’Brien MAICD, has announced he is stepping down from the retail giant. O’Brien has been CEO since October 2011.

A global executive search process including external and internal candidates will be conducted by the Woolworths board to appoint a new CEO. O’Brien will continue to serve as CEO and managing director during this period.

To ensure an orderly transition, the company has entered into a transition and separation deed with O’Brien, which will provide certainty and timing flexibility for the company and O’Brien during the transition period.

In addition, the Woolworths board confirmed that it has already commenced a search for a new non-executive director following the recent retirement of Ian Macfarlane AC. 


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