All articles in Volume 13 Issue 16

Priorities for change

Results

In the last issue of The Boardroom Report we asked members to give us their views on the issues that should drive a national reform agenda. Our poll of members revealed a number of views that will help us form the positions that we will take to a national reform summit that we are attending on August 26.The summit has been jointly convened by The Australian Financial Review and The Australian newspapers.

The Australian Institute of Company Directors will be among 80 organisations in attendance: others include the Australian Council of Trade Unions, the Australian Council of Social Service, the Business Council of Australia and the Australian Youth Affairs Council.

Our poll found that AICD members believe that partisan politics, short-termism and lack of political leadership are the biggest impediments to better public policy outcomes in Australia.

Our bi-annual Director Sentiment Index had previously told us the directors believe infrastructure investment is too low and we now know from our latest poll that telecommunications, urban transport and regional roads and rail are the areas that directors believe require the most funding. Indeed, the poll tells us that directors are adamant that an agreed pipeline of infrastructure projects is a priority for the nation.

The poll results again indicate a strong desire for tax reform – it was ranked as the number one priority for boosting productivity growth. Simplification of the tax system and social equity were identified as the two primary factors that should drive broad reform of the tax system.

We will keep members informed of the outcomes of the national reform summit, and any subsequent developments in this space to which the AICD contributes.


The shrinking life expectancy of companies

A Boston Consulting Group (BCG) study of 35,000 listed companies in the US has shown the average life span of companies has "significantly decreased" from just over 55 years to less than 35 years.

The study looked at companies failing as a result of insolvency, liquidation, merger or acquisition and other causes, which BCG states are unintended and associated with management failure. It found that almost one tenth of listed companies in the US fail each year. This is an astonishing five-year exit risk of 32 per cent compared to 5 per cent in 1965.

While the Australian experience may or may not be similar, the US experience may provide some guidance for both listed and unlisted companies. The US study found the "mortality risk" occurred relatively equally across industries and across sizes and ages of businesses. That means all companies have similar risk.

The BCG study compares the pattern of failures to the cycle experienced by forest and eco systems. This cycle, known as the Holling Cycle was also used by Dr Robert Kay in his recent study about good governance.

BCG also contends that the dramatic fall in the life of companies is due to the booms of the 80s and 90s in which a large number of companies were listed – some failed and some survived. The survivors then disrupted the established businesses, whose survivors then acquired smaller players.

The study found that rapid falls in revenue resulted in more exits, but that this was closely followed by rapid growth. Not surprising though was that lower overall EBIT was generated by younger companies that exited.

BCG states a key to company survival is to renew governance models and "this means setting up the company's board structure and decision mechanisms with a view to endurance". They suggest four key governance principles to follow:

  • Cohesion – A clear and common mission. Plan for succession.
  • Prudence – Avoid severe risks. Focus on the long term rather than immediate total shareholder return.
  • Adaptiveness – Ensure the culture is inquisitive, supports experimentation and diversity of perspectives.
  • Embeddedness – Get the business socially embedded. Make it sustainable, transparent and connected.
Read the full study: Die Another Day: What Leaders Can Do About the Shrinking Life Expectancy of Corporations

Commissioner stretches for flexible APS

Australian Public Service (APS) Commissioner, John Lloyd has set out a range of workplace issues to be examined by the APS Commission. He says a more flexible employment framework for the Australian Public Service is "vital" to deliver a high-performing public service.

The Commission is currently looking at ways of speeding up recruitment processes, easing the rules governing non-ongoing employment, looking into underperformance and considering the rules relating to termination of employment. So far, the government has set a target to reduce the cost of unnecessary or inefficient regulation imposed on individuals, business and community organisations by at least $1 billion a year.

Commissioner Lloyd said when regulation becomes excessive it impedes productivity and innovation. Therefore, it should be removed or reduced. "Steps are also being taken to reduce the red tape that the APS imposes on itself. We are reviewing what we impose and devising action to reduce it. Integral to our success will be the adoption of a new mindset to shift the way we approach our policy development and regulation setting. Regulation should not be a default option; it should be the last option."

For the APS to attract the "best and brightest" candidates to its ranks, recruitment times needed to be cut. "To do this we require contemporary recruitment processes which are effective in attracting and selecting good people. Too many recruitment processes take 12 weeks or more and the best people aren't going to wait 12 weeks."

Looking to overseas counterparts, Lloyd said Canada's systems and processes were more developed. The Canadian Public Service's arrangements for recruitment were subject to significant reforms in the Public Service Modernization Act (2003).

"A key goal of the Canadian reform was to create a more flexible staffing framework and to make their public service more attractive to the best and brightest employees. We are taking steps to improve the APS framework and attract talented people. The merit principle is a good example where we may identify improvements. It is important that we adhere to merit and ensure the brightest and most capable are hired. However in practice our efforts to comply with merit have made us too risk averse and focused on the process rather than the outcome," he said.

Finally, he added that it is important that public servants at all levels appreciate the impact their advice may have on the private sector. "Exchanges are being pursued which provide senior public servants with opportunities to work in the private sector on secondment. New learning tools are also being developed that are intended to give participants an insight into the regulations that need to be navigated to set up and run a business."

Further information on the government's agenda can be found at: cuttingredtape.gov.au


ACNC calls on public for help

Despite the numerous call-outs and warnings for charities to adhere to legal obligations, the Australian Charities and Not-for-profits Commission (ACNC) says more charities will risk being revoked.

The national charity regulator is turning to the public to help contact over 300 missing Australian charities that are at risk of losing their status. The ACNC has made multiple attempts over a two and a half year period to contact the charities, with hundreds of letters returning unopened, emails bouncing back and disconnected phone numbers.

ACNC Commissioner, Susan Pascoe, said the charities had missed out on important notifications, increasing the risk that they will have their charity status revoked for not meeting their reporting obligations two years in a row. She is encouraging the public to check the ACNC website to see if any charities they are associated with are listed. "Many of these charities are likely still operating," she added.

The ACNC has a duty to the public to make it clear when charities are not doing the right thing. The "red mark" for those charities that are six months overdue in their reporting helps the public identify charities that are not meeting their obligations. "To date, we have revoked or removed over 9,000 charities from the Charity Register, largely because they were no longer operating or had not met their reporting obligations for two consecutive years," said Pascoe. "If we are not able to contact these charities, we will move to revoke their charity status."

For a charity to preserve its charity status with the ACNC and maintain an accurate listing on the ACNC Charity Register, they have an ongoing annual requirement to lodge statements within six months of the end of the 1 July – 30 June financial year. All registered charities have an obligation to notify the ACNC of changes to contact details. These changes must be notified within 28 days for large and medium size charities and 60 days for smaller ones. Registered charities that fail to lodge their Annual Information Statement (AIS) within the correct timeframe will now have their listing noted by a "red mark" of non-compliance.

If a charity does not submit an AIS for two consecutive years, the ACNC will progress towards revoking the charities registration. This will also result in the Australian Taxation Office removing their entitlement to Commonwealth charity tax concessions.

The list of registered charities the ACNC is trying to contact can be viewed at: acnc.gov.au/whereareyou

What digital really means

Everyone wants to "go" digital. The first step is to truly understand what that is. CEOs often comment to marketers and strategists "if it's not digital, I'm not interested" as a way of demonstrating their digital commitment. Boards often receive information about the organisation's digital strategies and digital risks as if it is a standalone business segment.

But what does "digital" really mean? Some directors will comment that it is about technology, while others will say it's about communication with customers and a few will understand it's a completely new way of doing business.

A McKinsey article titled What does digital really mean? states that digital is actually a "way of doing things" and really has three attributes: "creating value at new frontiers of business world, creating value in the processes that execute a vision of customer experiences, and building foundational capabilities that support the entire structure."

In a related study, a McKinsey analysis of 150 companies around the world developed a metric of the company's digital maturity, which it calls its Digital Quotient (DQ). The analysis shows a wide range of performance, which may be explained by a lack of real understanding of what "digital" is. McKinsey states there are four lessons:

  • Companies must be clear about their digital strategy – is the business a potential large-scale disrupter, a fast follower, or an innovator. Is digital at the centre of the organisation?
  • Invest at scale in relevant digital capabilities. Have the IT platforms been implemented to allow rapid upscaling, quick implementation, diversification, automation, customer interaction? Can this be done cost effectively?
  • Technical capabilities are critical, as is the culture that encourages this. Is the culture pointed towards speed of execution and adaptability? Can it cope and facilitate new improvements in processes, or "test and learn" projects? Can the culture be genuinely seen as agile? Is the appetite for digital risk defined and communicated, or does a risk-averse culture kill innovation?
  • The organisational structure, talent, funding and KPIs must be aligned with the digital strategy – directors need to be digitally aware and inquisitive, and to encourage development of mid-level talent. KPIs need to reflect the digital world – fast, online, real-time and directors do need to develop their own key KPIs for digital.

In order to set the right environment to enable digital success, boards should be able to easily point to these lessons as being clearly in evident in their own organisations and around the board table. These lessons are described as a high-level road map and should help "leaders steer organisations effectively as they make the transition to becoming more fully digital enterprises".

The full articles can be found here:


Do women on boards reduce fraud?

Greater numbers of women directors on boards reduces the incidence of fraud in organisations, according to a research study from the ANU College of Business.

Research findings published in the Australian Journal of Management looked at fraud data compiled by KPMG between 2004 and 2008 and then drew a sample of 128 publicly listed companies in Australia to reveal the findings.

Discussing the findings, one of the researchers, Dr Allesandra Capezio, stated that while the data may appear to be a little outdated, she firmly believed that more recent data would show a similar or even stronger connection.

The linkage between more female directors and less fraud may be observable but some may comment that does not necessarily mean causality is established. The researchers were well aware of this and undertook statistical analyses to confirm that a real linkage was evidenced.

Given the fact that less fraud is established, the bigger question may well be why does this occur? Capezio suggests that "women on boards create a dynamic in which the woman experiences a performance pressure to outperform her peers, and that this out-performance means that women become very strong monitors".

However, further research would need to be undertaken to confirm these reasons.


ASIC poised to recover costs

Last month, the Australian Securities and Investments Commission (ASIC) announced it intends to recover the costs of its investigations into people who are successfully prosecuted as a result of its actions.

Generally, ASIC pays the expenses of investigations it conducts, however, under s91 of the Australian Securities and Investments Commission Act 2001, ASIC may make an order to recover investigation expenses and costs where that investigation has led to a successful prosecution or civil proceeding against a person.

ASIC's new approach, along with other factors it will consider before using its power, has been detailed in Information Sheet 204 Recovery of investigation expenses and costs. This will come into effect for investigations beginning 29 July 2015. Some investigations commenced before this date may also be considered.

ASIC said it would consider all the circumstances of a case in deciding whether to make an order to recover investigation expenses and costs. Some of these include, exceptional hardship of the individual, degree of culpability and co-operation and likely effect on the victims.

When considering an order against an individual to recover costs and associated expenses with their investigation, ASIC said that persons would be notified prior to any sentence hearing or hearing on penalty or other relief. A reasonable period of time will be considered to any proposed order and to an individual who makes written submissions to ASIC with regards to whether the order should be made, as well as the amount and implications of the order.

If a person does not comply with an order that ASIC has made within the time specified in the order, as a rule, action will be take to recover any amount unpaid. A penalty of $8,500 or imprisonment for one year, or both, could also be applicable. An order to recover the expenses or costs of an investigation is enforceable in court as a debt due to ASIC.

Read the information sheet on Recovery of investigation expenses and costs.


Former minister joins Glentworth

Information and data management firm Glentworth has appointed former cabinet minister Simon Finn and communications and engagement specialist Amanda Newbery to its board of directors.

The appointments form part of the consulting firm's national growth strategy, with founder Neil Glentworth taking up the executive chairman role earlier this year.

Finn brings public policy and business knowledge to the Glentworth board, having been appointed Minister for Government Services, Building Industry and Information and Communication Technology in February 2011. He also served as a Queensland Government MP from 2004 to 2012.

Newbury is founder and managing director of Articulous Communications and has been a weekly panelist on ABC Radio's Hidden Persuaders program for eight years.

US-Australian drug development company, Novogen Limited has announced the appointment of Iain Ross to the board. Ross is a former director of Novogen Limited. He will re-join the board with immediate effect and take on the role of acting chief executive until a permanent appointment is made.

Ross is currently chairman of Premier Veterinary Group, a non-executive director of Amarantus Bioscience Holdings and a non-executive director for ASX-listed companies Anatara Lifesciences Ltd, Benitec Biopharma Ltd and Tissue Therapies Ltd. Previously, he has led and participated in five IPOs on the London and Australian Stock Exchanges and two up-listings to NASDAQ, and has direct experience of M&A transactions in Europe, the US and Pacific Rim.


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