All articles in Volume 13 Issue 21

Nothing to fear from more independent directors

Boost independence on the boards of superannuation funds

Proposed laws to boost independence on the boards of superannuation funds are "absolutely a step in the right direction" to improve governance practice in this critical industry, the Australian Institute of Company Directors (AICD) told a Senate hearing last week.

"The AICD maintains our support for the Government's legislation to require greater independence on superannuation fund boards," said John Brogden, Managing Director and CEO of the AICD.

While the AICD backs the draft legislation, Brogden said the definition of independence in the Bill was "overly prescriptive" and wants the definition to be consistent with other APRA-regulated entities.

"Governance models should be the same across all APRA-regulated entities, including industry superannuation funds."

The Superannuation Legislation Amendment (Trustee Governance) Bill 2015 has the support of a number of industry superannuation funds, consumer advocates, and from the Australian Prudential Regulation Authority (APRA).

CHOICE, National Seniors Australia, the Association of Superannuation Funds of Australia, the Australian Chamber of Commerce and Industry, the Business Council of Australia, Chartered Accountants and Council of Small Business Australia also support the proposed legislation.

While mandating that one-third of the board be independent, the draft legislation also includes a requirement that if a board do not have a majority of independent directors, it must disclose "if not, why not". It also provides for a three-year transition period for funds to meet the new requirements. This allows flexibility for funds that are unable to the meet independence criteria immediately.

"The investment returns of a superannuation fund are not a litmus test for effective governance. Good governance provides for the long-term stability, sustainability and profitability of an entity" said Brogden.

Increasing the number of independent directors on superannuation fund boards should give investors the confidence that their assets are not just safely managed today but will generate a steady, reliable income stream when they retire. 

The final report from the Senate Economics Legislation Committee hearing is expected to be released on 9 November 2015.

Almost 200 charities to be revoked

The Australian Charities and Not-for-profits Commission (ACNC) has issued a warning that it will revoke the registration of close to 200 charities it believes are no longer operating.

Despite on-going warnings and multiple attempts, the ACNC has not been able to reach these charities during its nearly three years of operation. Letters have been returned unopened, emails have bounced and phone numbers have been disconnected.

An additional 8,000 charities are also at risk of revocation if they did not submit overdue reporting, according to the ACNC.

Directors of charities are being urged to ensure that they check that their organisations do not fall into this category before 11 November 2015.

"Directors have a responsibility to ensure that the charity is complying with the legislation" said Phil Butler GAICD, NFP sector leader at the Australian Institute of Company Directors.

He added that "the ACNC are there as a 'light-touch' regulator and will provide all the assistance possible to assist that organisations are complying. However at the end of the day, they must act if charities are deliberately not complying"

Butler's advice is simple – "check the ACNC website to make sure your charity isn't listed, and if it is make contact with the ACNC urgently."

Susan Pascoe AM FAICD, ACNC commissioner, said revocation was necessary in order to maintain the integrity of the charity register, Australia's first searchable, online database of Australia's registered charities.

"We are continuously reviewing the data on the charity register, which is available free of charge, to ensure the public have access to accurate and up-to-date information. Members of the public expect that only charities that are active and compliant with their obligations remain registered with the ACNC," said Pascoe. "The ACNC takes a firm but fair approach to compliance, but will not tolerate persistent failure to meet obligations. To maintain registration with the ACNC, charities with overdue 2014 Annual Information Statements should submit their outstanding reports as soon as possible."

"The ACNC takes a firm but fair approach to compliance, but will not tolerate persistent failure to meet obligations. To maintain registration with the ACNC, charities with overdue 2014 Annual Information Statements should submit their outstanding reports as soon as possible."

Grace Fava MAICD, founder and CEO of Autism Advisory and Support Service said, as a not-for-profit charity, they have a responsibility to meet their ACNC obligations.

"We have an obligation to be transparent with any monies that is entrusted to us, via donations or grants. This money is for the purpose of assisting those in need. We also have an obligation to remain transparent and provide all the necessary documentation to the ACNC and other funding bodies or stakeholders."

Executive pay in US under pressure

Executive compensation in the US is changing in response to shareholder demands, according to the National Association of Corporate Directors' 2015–2016 Public Company Governance Survey.

The survey compiles benchmarking data on governance trends and practices from more than 1,000 public company corporate directors and governance professionals. It offers new analysis on engaging with activists, shareholders, and cyber-security oversight practices.

Survey respondents were asked: what are the most common public-company board responses to shareholder pressure? For the second year in a row, the most common board responses to shareholder demands were the expansion of compensation explanations in the proxy statement (36 per cent), the revision of executive compensation plans (28 per cent), the alteration or implementation of dividends and stock buybacks (18 per cent) and revised director compensation (13 per cent).

John Egan FAICD from Egan Associates, a company specialising in remuneration and governance, says remuneration issues of concern are also common from proxy advisers and institutions in Australia.

"Shareholder concerns include poor communication, along with poor explanation of incentive payments, inappropriate performance hurdles in relation to long-term incentives and short-time lines, that is, vesting progressively after one, two and three years."

Other concerns expressed have related to the use of fair value for the purpose of increasing awards under long-term incentive plans without disclosing the award implications of that practice, including in their description of the relative weighting of fixed remuneration, annual incentives and long-term incentives.

Egan added: "The questions we are being asked to address from clients in preparing responses and Q&As for AGMs relate to why annual incentive payments are close to 100 per cent of the maximum and well above target, given recent share price performance," he says.

"This reflects, in one sense, a disconnect between the foundation for the determination of annual incentive payments and investor returns."

He said annual incentive payments primarily reflect profit growth and the achievement of operational and strategic initiatives that have not sheltered the company from the recent share market volatility, or particular industry sentiment where share prices may have fallen up to 25 per cent.

Egan points out that another challenge boards face is a lack of explanation in relation to annual incentive payments. Shareholders are advised of the value of an award under the annual incentive program, yet are given no explanation as to how it was determined and what the performance criteria were.

For more information, visit the NACD's website.

Duties of directors in related-party transactions

Related-party transactions have long been a feature of corporate life in Australia. Almost by definition, those transactions involve conflicts of interest because the related party is usually in a position to influence whether the benefit should be conferred, and on what terms.

According to Jonathan Milner, partner, and Amelia Smith, senior associate at Arnold Bloch Leibler, it is therefore not surprising, that related-party transactions are heavily regulated by provisions in both the Corporations Act and the ASX Listing Rules. These are designed to limit a conflicted director's influence on a company's decision to enter into a transaction and on the transaction itself.

Given the high levels of regulation, even experienced company directors may therefore assume that related-party transactions can be undertaken in a relatively "risk-free" way provided the company complies with the statutory regime and puts in place appropriate protocols to protect the company from the influence of the conflicted director.

However, this assumption is misplaced, write Milner and Smith. They argue that there are a string of cases that suggests that even when a conflicted director discloses his or her interest in the transaction and the company complies with the statutory regime, the conflicted director may still owe a residual duty at general law to act in the company's best interests in the transaction as opposed to his own.

The difficulty for directors is self-evident, says Milner and Smith. On one hand, the statutory regime is designed to ensure that a conflicted director has no influence on the company's decision-making. On the other hand, the director's general law duties may require him to act proactively in the company's interests where those interests are, by definition, irreconcilable with his or her own.

In reality, the only risk-free approach is for a director to avoid related-party transactions altogether, they say. In the meantime, however, a "conflicted" director participating in a related-party transaction should at the very least:

  1. Disclose the director's interest in the transaction in writing to the board.
  2. Satisfy him or herself that the company has retained competent independent professional advisers.
  3. Ensure that the company has in place detailed related-party protocols that reflect the requirements in the statutory regime.
  4. Ensure that the director and the executives reporting to the director are not involved in the negotiation of the transaction on the company's behalf.
  5. Not advocate in favour of the transaction internally, participate in deliberations on the merits of the transaction or vote on the transaction.
  6. Ensure that the transaction will be assessed by the company's related party committee before being recommended to the board.

Scaling digital disruption

Commentary from McKinsey & Co has outlined the ways that companies can implement changes to effectively carry out their digital initiatives by scaling their digital experiments "from workflows to the workforce."

The article outlines four models for scaling digital disruption. They are:

  1. The organisational pivot ¬– Speed is critical to disruption, yet legacy structures can block a company's ability to execute rapidly. By changing the organisational structure to prioritize digital programs, senior leadership can rapidly increase the pace of change.
  2. The reverse takeover – Some organisations have found early success by ring-fencing their digital operation, whether it is built from the ground up or acquired, so it can operate independently, unbound by legacy models or processes.
  3. The spinoff – It is not always practical to fold a legacy business into a digital division, particularly if the digital business is focused on a distinctly different part of the value chain or if it's simply not yet mature enough to absorb a bigger operation.
  4. The piggyback – Organisations can also scale digital initiatives by partnering with faster-moving innovators that have large, established digital platforms.

For healthy digital innovation, including disruptive innovation, cyber security must be considered from the outset, said Dr Sally Ernst of the Australian Cyber Security Network. She says it is important boards should ask the following questions of their digital innovators:

  • Are you aware cyber security is a strategic imperative in our business?
  • How can your innovation process provide shared benefit to our existing resources, including cyber security?
  • How can our existing resources be leveraged to reduce the sunk cost of your innovation process, including cyber security?

She adds that corporate innovators with good answers to these questions can gain board-sponsored access to corporate resources at a lower marginal cost against their venture or business unit profit and loss, with a structure that effectively underpins their strategy.

"This approach allows digital innovators to think big, start small and consider the 'whole', leveraging that exists by sharing the benefits, communicating, and collaboratively executing towards the objective. It also helps grow our digital economy, while making it safer."

"Corporate investors that shape and benefit from innovation, and that have a vested interest, can mitigate innovation risks and increase the likelihood of adoption. This investment vested-interest loop, when replicated internally to multiple stakeholders, customers, supply chains and market channels can then kick-start the change in consumption behaviour. It represents the early stage sponsorship and adoption that ultimately drives both radical and disruptive innovation success."

For more information read the article, How to scale your own digital disruption

Assessing corporate culture

There are a handful of factors that have the greatest influence in creating a healthy organisational culture. According to Yvonne Willich, organisational psychologist at advisory and investment firm, KordaMentha.

In an article published by the advisory and investment firm Willich explains that the foremost "cultural element" is that leaders "walk the talk" of the organisation's values. Other factors include financial incentives structure and the way that challenging and alternative opinion is received within the organisation.

"Healthy cultures welcome challenge and honesty. Unhealthy cultures suppress dissent," says Willich.

In order to accurately assess culture, internal staff surveys should address these factors, Willich says. However, surveys generate a lot of data without asking the crucial questions. If the CEO does not want to include all questions that scrutinise leadership, it would be a very courageous HR team who pushed for greater survey validity. The real picture may lie in what is unexplored and unreported, she says.

Ironically, Willich says, the reality is that an organisation's ability to assess its own culture correlates directly with how healthy its culture is. Organisations with a healthy culture and strong leadership will assess themselves with rigour and integrity. They have the resilience to accept their failings and address them.

Businesses with unhealthy cultures and leaders who have a personal agenda to preserve the status quo will do a very poor job. They want to be seen to do something while hiding the facts. They may comply with requirements but will present data that obscures or omits the truth.

Willich highlights an example where the board of an organisation has requested an independent review following suggestions of inappropriate and unethical behaviour within the organisation.

"The initial response of the CEO was to suggest that he would get the Big Four firm who audits the company to look at the issues and write a report for the board. The partner in the audit firm is conflicted by both his personal and professional relationship with the CEO. His report would be unlikely to implicate the CEO and other executives in any serious way," Willich explains.

While culture surveys can be good indicators of risk, there are five questions boards should be asking before signing off on one. According to the article, these are:

  • Have we conducted a confidential organisational survey recently?
  • Who checked that we asked all the right questions?
  • What did responses show were our main risk areas?/li>
  • What did responses show were our main risk areas?
  • How might our process be compromised by conflicting interests?

For more information, read the article Corporate Culture: The questions.

Hot global governance topics

The Australian Institute of Company Directors' Governance Leadership Centre (GLC) has asked several of our international colleagues to tell us what they see as the current "hot topics" in governance in their jurisdictions.

Internationally-based GLC Advisory Panel members, as well as policy experts from members of the Global Network of Director Institutes (GNDI) provided their feedback, which highlighted some interesting common threads.

In particular, the issue of environmental and social governance (ESG) reporting was a recurring topic.

Some interesting topics that were more regionally or jurisdictionally specific were also suggested, for example, political party funding in Mauritius and the New Companies Bill by the Companies Commission Malaysia.

“The responses we received from around the world are extremely useful for Australian governance practitioners and regulators. They provide a global context and show what issues Australia share with the world, but also what issues may be heading our way.” said Rob Elliott FAICD, executive director of the Governance Leadership Centre and Honorary Adjunct Professor, Macquarie Graduate School of Management.

Insights from Brazil, Malaysia, Singapore, US, Canada, Europe, Hong Kong, Mauritius, Singapore, UK and New Zealand were included in the feedback.

For more information, read Hot governance topics across the world.

Carracher joins Olympic committee

The president of Volleyball Australia Craig Carracher has been appointed to the executive of the Australian Olympic Committee (AOC) following the resignation of Russell Withers. He will replace Withers as a member of the AOC Finance Commission and the Audit and Risk Committee and join the board of the Australian Olympic Foundation (AOF) and the AOF Investment Advisory Committee.

Carracher has spent 20 years involved in Australian volleyball on and off the court and played on the Australian Pro Beach Volleyball Tour from 1989.

The businessman has also worked for leading law firms in the US, Australia and Asia, and was a corporate partner at Minter Ellison following senior roles with the Australian Securities and Investments Commission and the Supreme Court NSW.

Orica has appointed Angus Melbourne as group executive and president, Australia Pacific and Indonesia.

Melbourne joins Orica from Schlumberger, a global supplier of technology, project management and information solutions to the oil and gas industry, where he held a number of senior positions over a 25-year career.

During this time he spent four years as president at Schlumberger Artificial Lift, the business division responsible for providing engineering, manufacturing, sales, lease and service of fluid lifting technologies for the upstream petroleum and mining industries.

He also served as vice president at Schlumberger Reservoir Completions Technology which included responsibility for Schlumberger's explosives and perforating products research, development, and manufacturing.