All articles in Volume 13 Issue 19

Directors reflect on PM Turnbull’s new ministry

Parliament House

Following the announcement of the new Federal Ministry, Australian directors reflect on how the changes will impact their sector.

Chairman of Youth Projects, Melanie Raymond, said that while Malcolm Turnbull hasn’t said much about the NFP sector specifically, a growing economy with more opportunities for all, not just some, will benefit the NFP sector.

“So far, his focus has been on national economic policy, investment and jobs. However, the appointment of more women to the ministry at least acknowledges the issue of leadership and diversity, which is so important to the sector," said Raymond.

"The NFP sector can assume the abolition of the ACNC is now dead and buried and there are no further regulatory moves on the horizon. Any NFP delivering government funded human services will still be anxious about the new treasurer whose track record on social justice is seen as poor,” she said. 

John Stanhope, chairman of Australia Post, believes Turnbull will be very focused on attracting and developing good professional directors in the government sector and an improvement in the number of women on government boards.

Dr. Marlene Kanga, board member at Innovation Australia said it was pleasing to hear Turnbull say: “There has never been a better time to be an Australian” and that the new government is looking towards the future with great optimism.

"It is clear that the Prime Minister and new ministry are also going to focus on innovation and the need for new industries to grow the economy and create new jobs," she said.

“Government boards like Innovation Australia, which provides oversight over the largest program for government support of industry R&D, have an important role in ensuring successful delivery as well as feedback on the uptake and impact of these government policies on business. This leadership role is now increasingly important with the Government’s focus on innovation to drive the economy forward,” she said.

Peter L. O’Brien, managing director at Russell Reynolds Associates, said there is a sense from the newly installed Prime Minister that the direction for his government will be about driving diversity of thinking as a major theme to set the path for Australia’s longer term future.

“There is no doubt, given the changes made to his new Ministry, that Turnbull aims to ensure there is urgent priority given to thinking about Australia’s longer term future and positioning it on the world stage to be relevant but also competitive. This is a positive sign for SMEs as this is where most of the innovation and entrepreneurial leadership will come from to inspire diversity of thinking and therefore the change required to set a new platform for Australia’s future.”

McKinsey warns on profits

An unprecedented run of global corporate profit growth may be ending, and three decades of gains could be undone in a single decade, warns the McKinsey Global Institute. It predicts the global corporate profit pool could shrink from almost 10 per cent of world GDP to less than 8 per cent by 2025, a level last seen in 1980.

“There are indications of a very significant change in the nature of global competition and the economic environment,” McKinsey says in Playing to Win: The New Global Competition for Corporate Profits, released in September. Two forces will weigh on global corporate profits: rapid growth in emerging-market companies and the rise of technology companies that disrupt business models.

McKinsey says emerging-market companies, which account for 40 per cent of global corporate revenue, are expanding aggressively overseas through mergers and acquisitions, engaging in fierce price competition, and prioritising revenue growth over short-term profits.

Tech-enabled firms are another unpredictable source of competition. The largest ones have built digital platforms and networks that provide never-before-seen scale in users and customers, revenue and profits – and can drive marginal costs to almost zero.

“As profit growth slows, there will be more companies fighting for a smaller slice of the pie,” McKinsey says. “Incumbent industry leaders cannot focus simply on defending their current market niche. Firms with vision, optimism and agility can realise enormous opportunities, if they are willing to disrupt their own operations before a competitor does it for them.”

McKinsey’s view reinforces the need for boards to test business models and challenge the assumptions behind them like never before. Boards must understand how corporate strategy could be disrupted by a new wave of competition from emerging-market companies, and from technology disrupters that are crushing longstanding business models.

McKinsey suggests four key responses to this threat:

  • First, focus on offence: go after growth markets, spot disruption before it hits, and learn about emerging markets.
  • Second, ensure the organisation is lean and agile: focus on asset-light operations, avoid strategic inertia and plan ahead for resilience.
  • Third, focus on intangibles. Ensure your organisation owns the new weapons: software, data, algorithms, brands, and research and development. And that it fights for the best talent, either by developing people organically or acquiring talent through M&A.
  • Finally, play the long game: find investors with long horizons and create incentives for long-term value creation over short-term gains. That will help respond to new competitors that prioritise sales and scale over profit margins.

For more information, see Playing to Win: The New Global Competition for Corporate Profits.

Red tape cuts to fundraising regulations

Changes to the Charitable Fundraising Regulation 2015, which came into force on 1 September, will help cut red tape for charitable organisations. These changes will repeal the existing 2008 regulation.

Among the new amendments to the regulations is a change to increase the audit threshold for licenced fundraisers from $100,000 to $250,000 per year.

Minor amendments were also made to the Charitable Fundraising Authority Conditions, which were approved by the Minister for Innovation and Better Regulation on 31 July 2015. These conditions will now apply to new fundraising authorities issued by NSW Fair Trading from 1 September 2015.

Some of the proposed changes under the charitable fundraising aim to meet the following broad objectives:

  • To provide protection against the risk of fraudulent activity in charitable fundraising.
  • To promote integrity safeguards and accountability standards.
  • To ensure the interests of intended beneficiaries are protected.

A complete report is available to help not-for-profit organisations prepare for the changes on issues such as: maintenance of proper books of account and records, record systems for items used in fundraising appeals, receipting requirements, rations of expenses to receipts and fundraising through direct marketing.

For more information see:

Proposed funding model for ASIC

Interested parties have been invited to comment on the proposed industry funding model for the Australian Securities and Investments Commission (ASIC). All submissions must be made by Friday 9 October 2015 and can be lodged electronically or by post. Electronic lodgement is preferred.

The announcement follows the release of the final report of the Financial System Inquiry (FSI) by the Federal Government on 7 December 2014, which explored the “transparency, accountability and capabilities of Australia’s financial regulators”.

In regards to ASIC, the FSE recommended that the Government adopt an industry-funding model. While most understand the importance and effect of a well-funded corporate regulator but there are differing opinions as to how an industry model should operate. As such the Government is seeking various stakeholder contributions.

In addition, the Government considers that an industry funding model for ASIC would:

  • Ensure that the costs of the regulatory activities undertaken by ASIC are borne by those creating the need for regulation (rather than all taxpayers).
  • Establish price signals to drive economic efficiencies in the way resources are allocated in ASIC.
  • Improve ASIC’s transparency and accountability.

The reasoning behind the proposal is that ASIC is not seen to have transparent pricing and that industry and consumers do not have a clear understanding of the costs of ASIC supervision.

Generally the policy of cost recovery is preferred where a user of the service is identifiable. However, this is not the case in areas such as policy development and law enforcement. Under an industry funding model for ASIC, the Government would not seek to cost recover some of ASIC’s budget funding.

Currently, only around 15 per cent of ASIC’s costs are recovered through levies and fees on industry. For example, market operators and participants pay quarterly fees to offset the costs of market supervision; entities regulated by APRA pay annual levies to offset the costs of certain regulatory activities; and all regulated sectors pay fees for specific ASIC services.

The government is also currently undertaking a tender process for ASIC’s registry business which is understood to be highly profitable, and has stated this is not included in the consultation paper consideration.

Submissions on the consultation paper will assist the Government's consideration of whether to accept the Inquiry's recommendation.

For more information, see Proposed industry funding model for the Australian Securities and Investments Commission.

Climate change and Australia's financial system

Malcolm Turnbull’s recent ascension as Prime Minister has renewed calls by climate change activists to make climate policy central to modernising the Australian economy.

“Failure to catch up with other nations risks leaving our pollution intensive economy outdated and vulnerable to global investment trends,” said John O’Connor, CEO of The Climate Institute (TCI).

O'Connor's comments followTCI's recently published discussion paper on the potential risks posed by climate change to the stability of the Australian financial system. Some key points for Australian directors to consider include:

  • Exposure of Australian banks - Australia’s big four banks are exposed to climate risk due, in part, to significant loans to companies with carbon-intensive assets, such as those in the energy, natural resources and transport sectors.
  • Exposure of superannuation funds and changes in investor behaviour - A number of global investors, insurers and market indices providers have begun incorporating climate change into their decision making by screening or excluding fossil fuel investments.

Exposure of Australia’s economy - Uncertainty around Australia’s climate change policy may result in macroeconomic shifts, which could affect Australia’s financial stability and sovereign debt position, given Australia’s interconnectedness with foreign capital markets.

There is a growing body of research suggesting that companies and pension funds that score higher across environmental, social and governance (ESG) metrics have better long-term financial performance.

In the lead up to the United Nations Framework Convention on Climate Change in Paris in December 2015, there may be increasing pressure on companies, particularly on financial institutions, to provide greater disclosure of their ESG inputs, including greenhouse gas emissions.

What does this mean for directors and boardrooms?

Mark Carney, chairman of the G20’s Financial Stability Board, describes the issue of climate change as a “tragedy of horizons”; that is, a failure of governments and businesses to incorporate long-term considerations into their decision making.

A recent survey of global CEOs by PwC bears this out. In its survey, less than half of CEOs considered resource scarcity and climate change in the top three global megatrends that will transform their business over the next five years.

Similarly in the AICD’s latest Director Sentiment Index, only 11 per cent of Australian directors named climate change as one of the top three main economic challenges facing Australian business.

Several commentators, including former US Vice President Al Gore have urged directors to consider climate change in the context of their broader fiduciary duties. “Investors and companies have a fiduciary duty to include sustainability in decisions… failure to do so may constitute a breach of fiduciary duty by intentionally overlooking the possibility of maximising long-term risk-adjusted returns,” he recently stated.

For more information, visit the AICD’s Governance Leadership Centre.

Board effectiveness reviews: A burden or an opportunity?

In December 2014 and January 2015 Grant Thornton UK undertook a survey of the financial services sector’s views and attitudes towards reviews of their boards and governance effectiveness.

The survey looked at how financial services go about these reviews, what areas they focus on and what value they gain from the process.

It found that 64 per cent of respondents review board effectiveness each year, with 66 per cent using external facilitators for the review in the past four years. The most common method used to assess board effectiveness was “board discussion and debate” (63 per cent), followed by a questionnaire (50 per cent) and interviews of directors (40 per cent).

It was perceived by most respondents (79 per cent) that board reviews could add value and 76 per cent noted that the review had “prompted change in operation of the board or the business as a whole”.

The report discusses the basics of board effectiveness and provides a positive checklist for every director. It states that there are two key rules of board effectiveness:

  1. Get the basics right through critical focus and ruthlessness in fixing problems.
  2. Optimising board composition (size, skills, experience, expertise).

The report contends that while this review process may have begun as a result of regulatory pressure (following the UK Cadbury report in 1992 which set out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures), that boards are now aware of real, practical benefits. It is felt that a genuine interest and commitment to the process can result in higher levels of performance across the business.

For more information, see Board effectiveness reviews in the financial services sector: A regulatory burden or an opportunity?

Fine-tuning board papers for SMEs

At best, board papers are the primary source of vital information for directors; at worst, they can lead to information overload and cause critical issues to be overlooked. NRMA company director, Tim Trumper offers practical advice on effective board papers for SME directors.

Trumper said one of the classic mistakes people often make is that they think they need to document everything. “If you want to keep the directors engaged, then a crisp and clear paper of the issues, of what needs to be done, discussed or acted on, is not a bad guide to start with,” he says.

“The ability now to regurgitate information is so easy with cut and paste but this can create a huge document that is over-engineered and lacks the pointy, pithy and relevant information needed.”

There is a point where there is too much information and that the main issues can be overlooked. “Often there is so much verbiage, it doesn’t cut right through. It is important to focus on what is essential to know, what decisions need to be made and what other information should be brought into the discussion. Keep it frank and informed.”

He suggests the use of dashboards as a way to highlight main issues. “I’ve been in some meetings where board papers and dashboards are used to focus on the main issues. Signposts such as red, orange and green can be used in the documents to signify what has to be noted, what is urgent and what is just background material. This works well.”

The use of simple language is also encouraged. “Another risk is when there is so much information that the main issues or flagged issues are weighted the same as all the others. When you have board papers with 150 or more pages, then realistically how are you going to weight 150 pages?” Trumper says. “There will be times when this amount of pages can’t be avoided. However, there will be other times, when you can cover the business as usual, in a dashboard style. You can also add appendices such as; for your information there is XYZ article.”

Another good discipline is to review the board papers. “Review the board paper process regularly. Ask the directors, which parts of it are they extracting the most value of from? Have a frank exchange of what works.”

Peter Warne to chair Macquarie Group

Investment banker Peter Warne has been appointed non-executive chairman of the boards of Macquarie Group and Macquarie Bank effective 31 March 2016. Warne will replace outgoing chair, Kevin McCann.

Warne has extensive board experience and is chairman of ALE Property Group and OzForex Group. He is also a director of NSW Treasury Corporation, a member of the advisory board of the Australian Office of Financial Management and a patron of Macquarie University Foundation.

Listed education provider, Academies Australasia Group (AAG) has announced the resignation of non-executive director, Raphael Geminder. AAG is a 100-year old education company with 14 providers across NSW, Victoria, Queensland and Singapore.

The news follows AAG’s purchase of Spectra Training for $15.75 million in July 2014, a joint venture between Geminder and Gary Cobbledick. Geminder’s resignation is effective immediately.