All articles in Volume 13 Issue 17

Play the long-term game in Asia

There is a lack of understanding about the long-term nature of doing business in Asia, according to a prominent Australian director.

At a recent Australian Institute of Company Directors and PwC roundtable discussion on investing in Asia, one of the challenges raised was the negative and critical appraisals of Australian companies and their Asian initiatives by the Australian press.

A participant at the roundtable discussion, professional non-executive director (NED) John Thorn FAICD, believes the shortcomings of the press is due to a misconception regarding the long-term nature involved in maintaining a regional Asian strategy.

Thorn, a NED of Salmat and Amcor, and past NED of National Australia Bank and Caltex Australia, said investing in any emerging markets is a long-term game, with many markets in Asia having five-year plans as a minimum to the direction they wish to go.

“This has been the case for some time. If corporates wish to be in various parts of Asia and stay there in a serious way for 20 years plus, they’ve got to be there now. One issue that hinders this is economic returns; which can be made more readily in a developed country within the same time-frame.”

Markets in emerging countries have periods of significant growth and slow-downs, Thorn commented.

“Companies need to be there for the long term. What the markets want is ‘results now’ rather than developing a substantial presence. There is a conflict here, in other words, short-term results versus a strong long-term strategy.”

He adds the media is quick to criticise any shortcomings in a presence that is going to take many years to establish, rather than many months.

“The media in general takes a negative view on most things; to get them to change will not be easy. Bad news sells better than good news. How we move away from this culture will really depend on good leadership. When we get good leadership in the media, corporates or political environment, we get better outcomes. We have some good examples of large corporates going offshore, such as ANZ Bank which is making its presence felt.”

Thorn says it is essential for corporate Australia to go offshore to get growth. “We have a tiny country with 22 million people. Often our leaders think we are a very large part of the world, when in fact we are less than two per cent. However, we have an abundance of expertise, skills, and innovation within a limited market. It is critical for these skills to be taken offshore so companies can grow.”

Cyber-risk key concern for NFPs

The findings from a US study into the concerns of not-for-profit (NFP) organisations have found strategic planning and oversight coupled with cyber-security risk is a key concern for many NFPs in the coming year.

The 2014–2015 NACD Nonprofit Governance Survey presents a wide variety of current, relevant data on governance trends and practices at NFP organisations, with responses from 750 directors.

Respondents were asked to select issues from a list of 21 as their board’s leading priorities for the year. “Strategic planning and oversight” was the most frequently selected priority issue by NFPs.

Another big issue was cyber-security risk with sizable portions of respondents saying they were “not satisfied” with the quality or quantity of information their board received from management regarding such critical issues as strategy and non-financial risk.

Forty-two per cent of respondents feel that their boards have “little knowledge” regarding cyber-security risks. This compares with 32 per cent of respondents from private companies and 19 per cent of respondents from public companies.

Forty-three per cent of respondents said they were dissatisfied with the quality of information, and 59 per cent said they were dissatisfied with the quantity of information their boards receive.

Nancy Milne OAM FAICD, a Sydney-based director, says cyber security and risk differs from board to board and this is also likely to be the case between different countries. “My experience has been that we have received good information. This was due to a solid focus on governance. This is the benefit of applying that governance discipline to a not-for-profit.

“One of the real issues we face here in Australia is the measurement of outcome for NFPs. At a recent AICD seminar, we discussed precisely this point. It’s really an important issue in terms of working out whether objectives are achieved. This comes back to the issue of strategy and oversight as mentioned earlier.

“Being able to measure and focus on outcome seems to be the most important issue and this is tied in with funding. I would imagine we have far more government funding of NFPs than in the US. This could be a differentiator between what we have learned in the commercial and private sectors about governance and applying this appropriately in the NFP sector to enhance results.”

For more information, see 2014–2015 NACD Nonprofit Governance Survey


APRA update on board requirements

The Australian Prudential Regulation Authority (APRA) has issued an update on its review of requirements for boards of authorised deposit-taking institutions (ADIs), which include banks, building societies and credit unions, as well as general insurers and life companies.

The review, announced on 7 October 2014, was undertaken to clarify APRA’s requirements of boards and management under its prudential standards and supporting guidance materials.

Following a period of consultation, APRA has provided a summary and response to key issues raised by submissions. According to the summary, submissions set out the need for:
  • reduced ambiguity regarding the separation of board and management responsibilities, particularly in relation to the frequent use of the phrase ‘the board and senior management’ across prudential standards when describing responsibilities;
  • a smaller and more consistent set of terms to be used across all prudential standards, for example in relation to the board’s requirements to receive reports or information;
  • greater reliance on Prudential Standard CPS 220 Risk Management (CPS 220) in outlining the board’s responsibilities with respect to risk, rather than different requirements across each prudential standard relating to specific types of risk;
  • greater clarity of the board’s ability to delegate certain responsibilities under prudential standards to management or a committee.
In their update, APRA state that it will now undertake a review of the prudential framework overtime and make amendments to prudential standards as opportunities arise taking into account the recommendations made in the submissions it has received. It anticipates that “planned reviews will result in a reasonable proportion of the ADI, general insurance and life insurance prudential standards (that contain relevant board requirements) being reviewed over the next three years or so”.

For more information, see APRA’s letter to ADI’s and insurers regarding a review of board requirements.

Institutional investors and growth

Institutional investors should act to curb corporate short-termism, according to influential US think tank, the Brookings Institution.

Brookings recently published an article by Robert C. Pozen, a senior lecturer at Harvard, MIT Sloan and senior fellow at Brookings, about the role institutional investors can play in curbing corporate short-termism.

In the US, activist investments and interventions, particularly by hedge funds, are growing more commonplace and the outcome of these events is often that executives focus more on quarterly earnings than sustainable growth. Although large institutional investors are the majority owners of publicly traded companies, they rarely participate in proxy fights initiated by players with a smaller investment position.

Pozen speculates that the institutional investors’ main reasons for staying on the sidelines may be their reticence to use resources and management time to fight a proxy battle, or in the case of index-oriented funds such as Index Mutual Fund and Exchange Traded Fund (which hold about 30 per cent of US stock under management), a potential shortage of analysts with in-depth individual stock expertise to evaluate the activist’s proposal. He comments on the dangers of inaction by the institutional investors and cites a recent letter by Laurence Fink, chief executive officer of BlackRock, where he warned US companies may be harming long-term value creation by capitulating to pressure from activist hedge funds to increase dividends and stock buybacks.

The solution to this issue, Pozen contends, is for securities regulators and other relevant parties to “encourage” institutional investors to take a “decisive role” in determining the outcome of an activist raid on a company in which they are the major shareholder. To this end, he asserts the institutional investor should evaluate the proposal carefully and model its impact on the medium-term growth of the company. This would need to take into account the type of company, its industry segment and its expectations of financial return.

If the outcome of the evaluation is that the proposal is not complementary to the promotion of sustainable growth of the company then the institutional investor must participate vigorously in the activist’s intervention to protect the company position. Similarly, he supports institutional investors rejecting executive remuneration plans if they promote short-term results.

Given the low growth and softening trading results of companies around the globe and here in Australia, Pozen’s article shows that there is a role for institutional investors to be more active in protecting corporate value in the companies in which they have significant investment.

For more information, read the full article ‘The role of institutional investors in curbing corporate short-termism’.

Unlocking $49.2bn for SMEs

Australian small businesses can unlock an additional $49.2 billion in output over the next ten years by making better use of existing technology. PwC has released a report to help small to medium businesses unlock billions of dollars in economic growth by using mobile and internet technologies.

Powered by PwC’s Geospatial Economic Model (GEM), the report also revealed 53 per cent of the potential economic benefits can be made by Australia’s rural and regional areas. GEM allows businesses to explore where potential economic gains are located, down to every state/ territory and federal electorate.

In each state/ territory, small businesses have the potential to help grow the economy. The economy of each state and territory is underpinned by different economic drivers and as a result, each has opportunities to contribute differently.

The potential digital benefits are spread across the nation, with Northern Territory (NT) businesses standing to gain the most. On average, each NT small business stands to create over $90,000 of additional economic value.t. Small businesses in Western Australia follow, with over $85,000, then Queensland with over $70,000.

Small and medium businesses across a wide range of industries and stand to benefit. For example, small businesses in the agricultural, forestry and fishing sector could create 17 per cent more value by making better use of existing technology.

The model provides four key areas where small businesses can act upon to achieve gains.

  1. Business strategy and management. Internet and mobile technologies can help to better understand customers and competitors, and lower the cost and risks of trying new things. For example, businesses like Pozzible, Indiegogo, Kickstarter, and RocketHub make innovation easier by connecting individuals who pool money, technical expertise, and other resources to support projects and launch business ventures.
  2. Supply chains. Internet and mobile technologies enable small businesses to significantly improve their supply chains, particularly by allowing faster access to a range of suppliers and employees, using search management tools.
  3. Marketing, sales and distribution channels. Internet and mobile technologies enable small businesses to significantly increase their customer reach and boost sales by maintaining an online presence.
  4. Customer experience. Internet and mobile technologies allow businesses to re-evaluate how products are produced and/or delivered. For example, the use of project tools such as Google Docs, Asana and SmartSheets help to coordinate work more effectively. Google Hangouts, Yammer, Skype and Slack provide inexpensive, instant communication between employees, or with customers.

For more information, see PWC’s Summary Report of Small Business: Digital Growth.


Return of zero-base budgeting

Directors of a certain age may recognise the return of an old friend – zero-based budgeting (ZBB), which was a novel concept in the 1970s.

According to a McKinsey & Co article, the tool, which has declined in popularity over the last half century, has resurfaced as “a repeatable process to rigorously review every dollar in the annual budget, manage monthly financial performance, and build a culture of cost management.

“What makes ZBB unique is not the budgeting methodology; it is the mindset shift that upends managers’ default assumptions”, McKinsey says.

The basis of ZBB is to review and budget each and every element, starting with a zero base (hence the name). This means not basing next year on the current year, but inspecting each and every element and determining whether it is the best use of resources.

According to McKinsey, there are five factors to building a cost culture for superior ZBB. They are:

  1. Deeper visibility into cost drivers – for effective ZBB, what actually drives costs, and importantly who owns them?
  2. Dual-ownership governance model – both the profit and loss owner and the functional cost centre must be responsible for the cost.
  3. Rigorous processes for planning and monitoring – monitoring by both owners is vital.
  4. Aligned incentives – ensures compensation is aligned cost-management objectives.
  5. Mind-set – managers need to buy in to the basis of ZBB and that each and every cost needs to be thought about in a new way.

The McKinsey article is explicitly concerned with ZBB as a cost-budgeting tool; however, it is implicit that each cost is reviewed in the light of the return it generates for the business. ZBB “can eliminate unproductive costs (often as much as 10 to 25 per cent of selling, general and administrative expense in six months), allowing owners to reallocate capital to growth, through marketing, sales, and M&A”.

The authors comment that it is a favoured technique for private-equity firms and is often the methodology used in start-ups through necessity rather than design.

Increasingly directors may use the ZBB mind-set of asking “is this the best use of our funds?” or “is this expenditure yielding the return we expect?” and be able to receive a granular explanation of exactly how it does, and who is responsible for achieving the result.

For more information, see ‘The return of zero-base budgeting’.

Perpetual awards $6.2m to NFPs

Investment firm Perpetual has announced the recipients of its new IMPACT Philanthropy Partnership program.

The inaugural grant model has selected eight charities to receive various sums from a $6.2 million allocation, funded by Perpetual’s philanthropy clients. These charities were selected from applications that demonstrated their “excellence in the areas of governance, leadership, capability and outcomes over the past three years” said Perpetual’s national manager of philanthropy, Caitriona Fay.

The objective of the grants is to create long-lasting community impact and will fund various programs and services, ranging from a youth education model to the development of a data management platform. The total amount of funds distributed to charities by Perpetual on behalf of their philanthropy clients this year is currently in excess of $85 million.

The 2015 recipients of the IMPACT Philanthropy Partnership grants are:

Organisation

Project/service

Grant amount

Berry Street Victoria

The Berry Street Education Model

$765,430

Big hART

Future proofing Big hART: Generating certainty through sustainable self-funding

$784,000

Justice Connect

Expanding not-for-profit law

$960,000

National Stroke Foundation

Enable me: Using adaptive technology to empower people who have had a stroke

$1,000,000

Prostate Cancer Foundation of Australia

Development of “ProstateApp” for android devices

$100,000

The Smith Family

Enterprise information platform

$979,000 

So They Can

Tanzania, Babati District, Education and Economic Empowerment Project

$752,460

Walter and Eliza Hall Institute of Medical Research

Australia’s first genome engineering facility

$900,000

For more information, see information for interested donors and applications for 2016 grants .


Cairns steps in as Woolworths chair

Former Lion Nathan chief Gordon Cairns yesterday joined Woolworths as chairman and a non-executive director (NED).

Outgoing chairman and NED, Ralph Waters, retired from the Woolworths board on the same day (as of midnight 1 September).

Cairns is currently chairman of Origin Energy and Quick Service Restaurant Group. He is a director of Macquarie Group and Macquarie Bank and a NED at World Education Australia.

He was previously chairman at David Jones and Rebel Group as well as a director of The Centre for Independent Studies and a director of Westpac Banking Corporation.

Dominik Kucera, executive director and chief financial officer (CFO) at Capitol Health, has stepped down with immediate effect. Kucera has worked at the company since July 2008.

Peter Lewis has been appointed CFO in addition to his role as chief operating officer. He has also been appointed to the board as an executive director. Kucera has agreed to provide transition assistance to the group until mid-October.

Capitol Health is in the process of selecting an independent non-executive director.


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