All articles in Volume 13 Issue 23

Innovation statement delivers win: Brogden

John Brogden

Innovation means taking risks, and the proposed laws make it easier for companies to take them, writes John Brogden, Managing Director & CEO, AICD, in the Australian Financial Review.

Malcolm Turnbull's innovation statement will begin a transformation of the Australian economy by allowing companies and directors to take the necessary risks to innovate. The potential of these changes – subject to getting the legislation right – cannot be underestimated.

Monday's statement changes the game on insolvency laws. It isn't the US Chapter 11 law – and we are grateful to avoid its complexity and cost. Instead these changes will allow large numbers of viable Australian companies to trade through difficult times. They will save rather than destroy billions in wealth and tens of thousands of jobs.

Business has been calling for these laws for years. They will encourage greater risk-taking by directors. Their greatest achievement will be to reverse the purpose of our insolvency laws from solely protecting creditors to encouraging business recovery.

The reforms create a "safe harbour" for directors which allow them to bring in advisers early to assist businesses in financial distress to work out their difficulties. At present, companies have few options other than calling in administrators or their lenders calling in receivers.

Another important measure allows companies who have put themselves into voluntary administration to preserve key contractual arrangements that will allow them to continue to trade. This allows such companies to remain viable while restructuring. In essence it keeps the core of the business viable during voluntary administration rather than becoming a carcass for creditors. These measures also apply to companies in the safe harbour period.

These reforms will help change our business culture. We need to embrace the risk of failure in order to allow innovation to succeed. This means recognising that in pursuing new ideas and opportunities, some businesses will fail.

Stifled innovation

Existing insolvency laws frustrate innovation. They have the perverse outcome of forcing directors to focus on their own interests ahead of the interests of the organisation when the risk of insolvency is real. Surely, this was never intended to be the case.

There are a number of significant pressures that create a risk-averse corporate culture in Australia, including a complex regulatory environment that too often forces directors to focus on regulation instead of the performance of their organisations. Such an environment is a disincentive for directors to make decisions that would encourage innovation and entrepreneurialism.

If directors only made decisions on the basis of 100 per cent guaranteed success, board meetings would be short and infrequent. Directors take risks all the time. Some risks fail, despite the fact they are based on the best information available and honest judgement.

Our markets punish failure. They encourage short-term, result-oriented decisions and actively punish long-term actions requiring patient capital and extended timeframes.

This helps create a situation in which boards are unwilling to take well-judged risks and are instead religiously governed by detailed planning and counterproductive group-think that eliminates any opportunities to innovate.

The biannual Director Sentiment Index conducted by the Australian Institute of Company Directors consistently proves this is the case. The index results for the second half of 2015, released on November 11, found almost 75 per cent of directors believe that there is a risk-averse decision-making culture on Australian boards. And 85 per cent claim the risk of personal liability has caused them to take an overly cautious approach in their decision-making at some point.

A properly designed safe harbour could help overcome these pressures and encourage directors and their companies to seek turnaround advice earlier, avoiding voluntary administration. Other developed countries already offer similar mechanisms, so it's entirely reasonable to suggest that the concept could be implemented in Australia.

The form of a workable safe harbour for directors is still open to discussion, but there are several elements which are key to its design. First, it must apply to all companies as innovation and the economic benefits it generates are by no means limited to start-up companies or digital disruptors.

Second, it is must be an uncomplicated mechanism that is not wrapped up in technicalities which makes it practical application almost impossible. Finally, an effective safe harbour might also have to extend to any advisers consulted by directors.

Malcolm Turnbull's innovation plan can be a game changer for business in Australia if the law and our risk culture allow calculated risks and a willingness to wear failure as an element of success.

This article appeared in the Australian Financial Review on 8 December 2015 (subscription may be required).


AGM system reaches “tipping point”

Over a third of directors consider the annual general meeting (AGM) system in Australia to be dysfunctional, according to the latest results from the Director Sentiment Index (DSI).

The bi-annual survey, conducted by the Australian Institute of Company Directors (AICD), shows that for the first time, a larger proportion of directors consider the AGM system to be dysfunctional (35 per cent) rather than working well (32 per cent).

The biggest shift in sentiment about AGMs has occurred over the last two years.

The results suggest that debate about the efficacy of the AGM might have reached a “tipping point”, potentially requiring technological change and legislative reform.

According to an Intelligence Report from Computershare, in 2013 and 2014, less than 0.2 per cent of shareholders physically attended AGMs. From 2009 to 2012, attendance at AGMs fell by 10 per cent per year, with the most significant decline being observed in companies outside the S&P/ASX 300.

So, what are some reasons for the shift in thinking?

Some have said that this decline in AGM attendance may be due to shareholders being able to access publicly available information well in advance of AGMs, making physical attendance less necessary. Other commentators point to a shift in voting behaviour of shareholders, such as the increased use of proxy voting or the ability to vote online.

Technology continues to assist the facilitation of AGMs, with some companies offering live webcasts and recording of AGMs, including partnering with technology companies to provide live streaming and app-based voting.

For many, AGMs still hold strategic significance, particularly for large shareholders or institutional investors that wish to make their votes more transparent.

Becoming digitally engaged

Megan Boston, managing director of Omni Market Tide, developers of app-based investor relations says, “Every listed company, every organisation, every voting body, will one day engage their stakeholders using mobile device technologies. This will cause disruptive change to governance processes and shareholder engagement practices.”

What does the future of AGMs look like?

In 2012, the Corporations and Markets Advisory Committee (CAMAC) released a discussion paper The AGM and Shareholder Engagement to consult on the future of the AGM in light of low annual meeting attendance rates and decreased shareholder engagement.

The AICD provided a submission to CAMAC’s inquiry, which noted that 58.7 per cent of members surveyed identified the use of technology to broadcast meetings as the main area of the AGM that could be improved.

CAMAC was scheduled to report its final recommendations on AGMs in 2014; however, the report was shelved when the Government abolished CAMAC as an independent body and merged its functions with Treasury.

“Digital technology can change the way AGMs are run. The Government should seriously consider revisiting CAMAC’s work on AGM’s and ensure our laws reflect the way companies and their shareholders operate in practice, both now and in the future,” said Professor Rob Elliott FAICD, executive director, AICD Governance Leadership Centre.

A recent report by Ernst & Young provides some views about the future of AGMs, including hybrid physical-online meetings and completely virtual AGMs.

For more information, visit the Governance Leadership Centre.


Understanding illegal phoenix activity

What is a phoenix company?

Phoenix companies “rise from the ashes” with a new corporate structure that derives its assets and directors from an old entity, leaving behind the debts of the old entity and giving the new entity a clean slate.

With the Australian Taxation Office (ATO) taking a tougher stance on illegal phoenix operatives, directors can take steps to ensure they are not engaged in illegal phoenix activities, as penalties can range from fines to prison terms.

Frank Lo Pilato, managing partner of the Canberra office of accounting firm RSM Australia, offers the following tips to avoid engaging in fraudulent phoenix activity:

  1. Any sale of assets should be supported by formal valuations, as directors should ensure the vendor company receives fair value for the sale of its assets. If this does not occur, there is a strong chance that a subsequent liquidator will seek to set aside the sale, and it also carries the risk that directors may be personally exposed for any loss incurred by the vendor company.

  2. Directors should be mindful of their actions in carrying out their duties. It is an offence under the Corporations Act for directors to enter into transactions that give, either themselves or their related companies a benefit. Directors should be mindful of their actions in permitting a company to enter into any transaction of this nature.

  3. The key is that if there are insufficient assets to meet all liabilities, directors should seek professional advice early to determine whether there are alternatives available to liquidation. One alternative is a deed of company arrangement, which can allow an orderly restructure of affairs, while providing some breathing space from creditors while the restructure takes place.

The Australian Securities and Investments Commission (ASIC) has identified the three key signs of a phoenix company.

  1. The company has failed and cannot pay its debts.
  2. The company intentionally denies unsecured creditors equal assets to the company’s assets to meet and pay debts.
  3. Soon after the initial company failure, a new company commences, which may use some or all of the assets of the former business, and is controlled by people related to either the management or directors of the previous company.

$8bn cost of CEO churn

The exodus of CEOs is costing shareholders more than $8 billion a year according to the PwC's Strategy& Annual CEO Succession Study. What this suggests is a pressing need for Australian boards to institutionalise the CEO succession planning process and take active steps to increase CEO tenure.

The 15th annual study, found leading Australian companies had 42 CEO turnovers in 2014 – almost 35 per cent, or one in five more CEO turnover events relative to leading global enterprises.

According to Varya Davidson, partner at PwC’s Strategy& and co-author of the study, there are a couple of key reasons as to why Australia is churning through CEOs faster than global peers.

“The first [reason] is a reflection of short-termism in the corporate community where boards are looking for ‘fix-it kind of people’ to come in and basically turn the company around in the short term. The view is that they will be there for a short time, make an impact and move on. The second [reason] is that CEOs in Australia face more personal media pressure than the rest of world.”

Davidson said the survey identified the three main types of succession events as either driven by mergers and acquisitions, forced and unplanned, or a planned succession.

“There are multiple reasons behind a planned turnover,” she says. “It can often be driven by an encumbered CEO, where, the CEO wants to retire, so the board and CEO have to manage this transition process together. Alternatively, if a succession is planned, it can be because of a mutually agreed ‘time is right’ decision or because the company is taking a new direction and therefore it will be valuable to have a new set of capabilities at the CEO level. When it is unplanned, however, mostly, it’s because boards lose confidence. For example, poor company performance or a major drop in share price.

"CEO succession has to be proactive and institutional not re-active and event-driven, because it is costing billions of dollars."


To help with smoother transitioning of CEOs, Australian boards must institutionalise the process, factoring the advantages of diversity and take formal steps to increase the CEO tenure, said Davidson.

“Boards themselves must proactively and visibly take ownership for succession and planning. For example, companies need an active pipeline of candidates, both internal and external. They need to be able to articulate clearly the capabilities and behaviours they are looking for in a new CEO. Then, through managing the process, articulate clear actions, owners and timelines.”

The biggest take away from this year’s annual study was the price tag of doing CEO succession badly. “This really was the key message. CEO succession has to be proactive and institutional not re-active and event-driven, because it is costing billions of dollars .”

For more information, read the 15th annual Australian CEO Succession Study.


Director Identity Number among final recommendations

Requirements for directors to obtain a Director Identity Number, reforms to Australia’s corporate insolvency regime and reduced restriction periods on bankrupts are among the key recommendations in the Productivity Commission’s latest report.

The report into Business Set-up, Transfer and Closure released on Monday 7 December, following a public inquiry into the barriers of setting up, transferring and closing businesses in Australia, closely echoes the sentiments heard in the Government’s Innovation Statement.

Key points include:

Director Identity Number

  • Directors are required to obtain an individual Director Identity Number (DIN) from the Australian Securities and Investments Commission to assist in enforcement activities, including those designed to detect and prevent illegal “phoenix” activity. (The Australian Institute of Company Directors conducted a survey with over 200 of its members, with 67 percent of respondents voting in favour of the measure.)

Insolvency

  • A “safe harbour” defence for directors of insolvent company to explore options for restructure, without liability for insolvent trading.
  • Simplified liquidation processes for businesses with few or no recoverable assets.
  • Option for formal company restructuring through voluntary administration should only be available when a company is capable of being a viable business in the future.

Bankruptcy

  • The default exclusion period and restrictions on bankrupts in relation to access to finance, employment and overseas travel should be reduced from three years to one year.

The report shows that there is an increased focus on listed entities to provide detailed disclosures about the company’s prospects for future financial periods.

The report indicates also that companies are cautious about providing profit guidance to the market and suggest that the reasons for this may include: increased investor scrutiny, regulatory oversight and potential litigation should the profit guidance prove to be incorrect.

For more information, read the Productivity Commission’s Business Set-up, Transfer and Closure report and the AICD’s submission to the draft report.


Transformation or disruption?

Ahead of the AICD’s inaugural Australian Governance Summit, Nigel Phair GAICD, offers practical advice for directors who are facing challenges brought by digital disruption.

Digital disruption will ultimately impact every aspect of commercial life.

Disruption is the transformation of a business or business process through innovative models that aren’t used in the market today. Combined with a digital component, such an approach may change business process, functions, or an entire organisation.

Directors and the organisations they govern face challenges brought by the increasing impact of disruptive technologies, shifting competitive landscapes and consumer behaviours. Organisations require leaders who can operate in a challenging, and rapidly evolving context. Such leaders in the digital age need to combine traditional leadership qualities (vision, commercial attention) with a technology-literate operational focus (customer-centricity, data-driven, adaptable and agile).

Companies have a choice: use digital technologies to expand rapidly in their current market (essentially disrupting themselves); or into adjacent or entirely new markets.

Digital disruption, powered by such technologies as cloud, mobile, data analytics and social media, can create a whole new customer interface. It’s also about modernising processes, overhauling entire supply chains, bringing more intelligence to marketing and sales strategies, making it easier for people and teams to collaborate, and rethinking talent recruitment and management.

Digital disruption is about:

  • Not being constrained by “legacy” software or systems.
  • Having a strategic vision backed by the ability to innovate.
  • Creating a culture of agility and speed to market (scale quickly or failing fast).
  • Having the right mix of technology expertise.

In many organisations technology has traditionally been focused on lowering costs and creating standardisation, however such an approach may be in direct conflict with the fast delivery of customer experiences. An IT strategy should be simple and focus on benefits to the business. Small pieces of work should then be prioritised, where ideas can be tested and either quickly discarded or given more resources.

The commercial battle that now matters most is for control of the digital customer interface. The organisations which can create the software interface which leads customers to the services they want will win. Big data can help solve this puzzle of what customers actually want (even if they don’t know it yet themselves).

The biggest risk is to do nothing. Mobile phones were once dominated by Motorola, then Nokia, then Blackberry. Kodak invented the digital camera technology, but failed to capitalise on it.General Motors – produced the first commercial electric car, but now finds itself trying to catch up with the Japanese built hybrids. Bookstores, the music industry and newspapers – all of which were the giants of their time, and now find themselves trying to avoid extinction.

Want to know more? Nigel Phair GAICD will be discussing technology and disruption in action at AICD’s Australian Governance Summit on 3-4 March 2016. Visit the website to register.

Independent directors a must for superannuation funds

The interests of unions and employer groups have been put ahead of superannuation fund members with the decision by Senate crossbenchers to oppose legislation that sought to ensure independence on the boards of superannuation funds.

“This decision rejects all tenets of good governance in the modern era. It defies common sense that unions and employer groups would deny their members the benefits of independence on their boards,” said John Brogden, Managing Director & Chief Executive Officer of the Australian Institute of Company Directors.

“Independent directors are widely recognised as a critical element of good corporate governance. The importance of independence is recognised in both the ASX Corporate Governance Council guidelines that apply to listed companies and the standards that the Australian Prudential Regulations Authority imposes on banks and insurers.

“The industry review of governance standards that is now proposed by Industry Super Australia and the Australian Institute of Superannuation Trustees would need to be built on the foundation of internationally-accepted principles of governance, which includes the importance of director independence.

“All parties must understand that current investment returns are not the sole litmus test for effective governance nor is it guaranteed that they will continue if current board structures are maintained.

“Good governance practices, including board independence, instead provide for the long-term stability, sustainability, transparency and profitability of an entity,” Brogden said.

For more information, read the AICD’s submission to Treasury on governance arrangements for APRA regulated superannuation funds.


UTS announces new Chancellor

Catherine Livingstone AO FAICD, current president of the Business Council of Australia (BCA), has been announced as the new Chancellor of University of Technology, Sydney (UTS).

Livingstone will not take up the position until 1 December 2016, and in the interim, Brian Wilson will act as Chancellor. Wilson is currently Deputy Chancellor and has been a member of UTS Council since 2006.

In addition to her role with BCA, Livingstone is chair of Telstra and has held board positions with Worley Parsons and Macquarie Bank. She is also a former CEO of Cochlear and was chair of CSIRO from 2001 to 2006.

Livingstone will succeed Professor Vicki Sara AO, who will retire following the Council meeting in February.


The Australian Ballet has announced the appointment of Craig Dunn as its new chair. Dunn will take over from Jim Cousins AO, who was appointed chair for a two-year term in May 2013. As part of this planned succession, Dunn has spent the past six months working alongside Cousins to familiarise himself with all facets of the company and the sector.

Currently on the board of Westpac Banking Corporation, Dunn brings more than 20 years of financial and business sector experience to the position. He is also chair of the new fintech hub Stone & Chalk, a member of ASIC’s external advisory panel and a director of the Australian Government’s financial literacy board. Dunn also served as CEO of AMP from 2008 to 2013.


Iluka Resources has announced changes to its board of directors.

Wayne Osborn FAICD has announced his intention to retire as a director of the company effective from the close of the 2016 annual general meeting scheduled for May 2016. Osborn currently serves as an independent non-executive director and chair of the people and performance committee.

Effective 19 February 2016, Dr Xiaoling Liu will join the board of Iluka as an independent non-executive director. Dr Liu is a former president and CEO of Rio Tinto Minerals based in the US and is currently a non-executive director of Newcrest Mining. Her previous non-executive roles include board member of the California Chamber of Commerce; vice president of the board of Australian Aluminium Council and a member of the University Council of Tasmania.