All articles in Volume 13 Issue 3

Test your knowledge

18 Feb

A financial reporting quiz designed to help directors assess their financial reporting knowledge has been released by the Australian Securities and Investments Commission (ASIC).

It consists of 10 multiple-choice questions, focusing on the more technical elements of financial reporting rather than broad knowledge.

The topics chosen address the knowledge required by a director in approving a financial report of an Australian incorporated company and cover areas that commonly apply to a broad range of directors.

The quiz was created in response to the findings from a survey on director financial literacy conducted by the Financial Reporting Council in 2012, which revealed that, on average, directors only considered their technical accounting knowledge to be “fair”.

This, coupled with court decisions on the financial reporting expectations of directors, has led ASIC and the professional bodies to focus on this area.

The quiz aims to provide directors with a self-awareness of general competence relating to financial reporting requirements, education in respect of each specific question and links to additional resources and/or training to maintain or improve competence.

To find out more and access the quiz, click here.

Protecting minority investors

The opportunities to engage and information that privately held companies extend to shareholders who are strangers are rarely extended to those who are relatives. 

But it is naïve to think that a healthy, long-term relationship can be maintained when family membersof a company are not given the protections that would be afforded to strangers. 

In an article for US-based Private Company Director magazine, Chicago-based lawyer Henry C. Krasnow weighed up the treatment of majority and minority investors, specifically family investors, and found the imbalance in protections could prove detrimental to private business. 

Krasnow says that prospective outside investors insist upon three protections when investing in a company:

  • Veto power over critical decisions.
  • An annual budget, annual meetings and quarterly financial reports.
  • The ability to exit.

He argues such protections create an environment that requires the majority to focus on the welfare of the business and discourages the temptation for majority owners to focus on their own well-being.

However, the majority owners’ reluctance to provide minority owners with these protections and the use of illogical emotional arguments to avoid the logic of their value might be a sign of resentment of their family member co-owners, he says.

“Such protections would be even better for family members whose judgement may be skewed by long-simmering family issues,” he says.

Krasnow adds that in a healthy business, details on budgets and financial statements should be available to all shareholders and failure to do so could lead to bitter family disputes. 

“Such disputes can take years to resolve, cost hundreds of thousands of dollars in legal fees and threaten the destruction of the business,” he says.

The full article can be found here.

Making reporting easier

The Australian Accounting Standards Board (AASB) and the International Accounting Standards Board (IASB) have announced they are working collaboratively on a range of initiatives to address concerns about information overload in financial statements.

As part of the effort, the AASB has issued amendments to AASB 101 Presentation of financial statements to clarify that entities should not be disclosing immaterial information and that the presentation of information in notes can and should be tailored to provide investors and other users with the clearest story of an entity’s financial performance and financial position.

The amendments are part of a series of projects being undertaken by the IASB, collectively referred to as the Disclosure initiative. The AASB is contributing to all of the IASB’s work on this initiative and is also taking steps to improve financial reporting disclosures in Australia. These improvements have included the recent publication of the AASB paper To disclose or not to disclose: materiality is the question.

The AASB will also undertake a post implementation review of its reduced disclosure requirements regime that can be applied by entities that do not have public accountability.  This review is scheduled to commence later this year.

The amendments made to AASB 101 are contained in the amending standard AASB 2015-2 Amendments to Australian accounting standards ─ disclosure initiative: amendments to AASB 101.  These amendments will be effective for annual reporting periods beginning on or after 1 January 2016. Earlier application of the amendments is permitted.

The amendments can be found here.

Engaging shareholders

The key to improving shareholder engagement and market value could lie in the information that companies are not revealing in their annual reports, it has been claimed.

According to an article from the Harvard Business Review entitled What’s missing from annual reports, providing metrics that give leading indicators of future performance could help build strong relationships with key stakeholders as well as track how well the organisation is meeting their needs.

Instead, many annual reports are simply supplying financials that many shareholders can quickly dissect, when they should be providing a more holistic view of the company.

“We want assurance that our investments are secure, of course, but more than that, we want to know the health of the companies we’re investing in,” writes Dr Graham Kenny FAICD, managing director of Sydney-based consultancy, Strategic Factors.

Referring to the push toward greater disclosure in several countries such as the US, UK and South Africa, Kenny says annual reports should show what the company is doing for and getting from each group of key stakeholders.

He adds that numbers about customers are equally important such as information on margins and how the company is measuring customer satisfaction on issues such as service, product range and prices.

A similar approach can be taken with employees, he says, with data provided on productivity and employee retention numbers as well as employee satisfaction figures. This is a practice adopted by Whole Foods Market in the US which provides data on voluntary turnover of full-time staff.

“In industries such as mining, employee safety is now reported in detail, through an injury frequency rate. Companies are making some progress in their reporting, but we’re still missing those comprehensive scorecards,” Kenny concludes.

To read the full article, click here.

Measuring safety

Companies that have a higher proportion of remuneration weighted towards safety measures and provide better disclosure on their safety performance tend to have lower injury frequencies, according to Credit Suisse.

These are the findings from an equity research note in which the investment bank examined the relationship between leadership focus on safety and injury frequency for ASX-listed companies exposed to safety risks. It also considered the extent to which safety forms part of chief executive officer (CEO) remuneration and the quality of disclosure on safety performance.

It found that managing safety is a key issue with all companies sampled explicitly acknowledging safety as a risk. It also found that somewhat unsurprisingly, the CEO and/or the chairman have made explicit commitments to avoiding injuries and fatalities in various forms in all of the annual reports of companies in the sample in each of the past three years.

In total, 82 per cent of companies have either created board committees that have explicit oversight of safety management and performance or explicitly included oversight of safety in the board charter of one of the traditional board committees (primarily the risk committee).

Due to the large proportion of companies which have included safety within the formal remit of one of the board committees, and the strong public commitment from CEOs and/or chairmen to strong safety performance, there is very little differentiation between the extent to which companies aspire to "zero harm" and actual safety performance, the report noted.

The research notes that Woodside Petroleum, infrastructure management company Downer EDI and BHP Billiton all have a strong leadership focus on safety, based on Credit Suisse’s safety focus composite score. In contrast, Treasury Wine Estates, building materials company Boral and manufacturer Adelaide Brighton have a below-average leadership safety focus, as measured by the same composite score.

Performing better

In today’s volatile, uncertain, complex, and ambiguous world, a well-executed strategy matters more than ever. But boards and management must now ensure they interact productively when defining and refining their companies strategies.

The latest Deloitte Director’s Alert – Through the eyes of the board: key governance issues for 2015, considers whether the concept of strategy is dead, or whether it is even more important in today’s fragile global economic environment.

It identifies a well-executed strategy as essential in helping a company to achieve superior financial performance over the long term. However, it also highlights the need for agility and flexibility in how companies adopt such a strategy given that the factors on which such decisions are made are based on external forces that are ever-changing.

But how often should an organisation revisit its strategy and the underlying assumptions on which it is based? The paper suggests the right timeline will depend on the “clock speed” of the industry in which the company operates, citing the technology industry as having a much faster “clock speed” than most. 

It is for this reason that it is essential for boards and management to work collaboratively on the success of a company’s strategy, the paper says. While management is responsible for setting, refining, and executing the strategy, the board’s role is to provide oversight and guidance to the direction of the strategy and to weigh its inherent risks.

The paper urges boards and management to interact productively when defining and refining strategy. It adds that in a productive relationship, the questions the board asks should be purposeful and legitimately probe and advance the strategy without grandstanding or attempting to “one up” management.

It also urges boards to connect regularly, visit the organisations’ business units, meet with management, and engage industry and subject-matter experts so they can better understand, assess, and challenge the strategic choices made by management and the assumptions that underlie those choices.

The full report can be found here

The year ahead

Remuneration, the possibility of taxation change reversal and increased shareholder and activist rights are set to dominate environmental, social and corporate governance (ESG) agendas in 2015.

According to a research note issued by Macquarie Wealth Management, a number of dominant themes in 2014 will lay the foundations for the year ahead. Chief among these is the growing presence of shareholder activists pushing for board seats and greater rights following non-board endorsed resolutions in 2014.

Of notable importance over the last year and into the next is improved communication among companies outside the S&P/ASX 100, with a decline in the strike rate suggesting an improvement in communication between boards and their shareholders on executive remuneration.

However, the Macquarie analysis shows that a third of companies received protest votes on resolutions at their annual general meetings last year, with 48 per cent of those relating to a remuneration-related issue, 42 per cent to director election and the remaining 10 per cent related to another issue. This suggests director and staff remuneration is likely to continue to dominate the landscape in 2015.

To read the research note click here.

Allen appointed to ASX board

Yasmin Allen
 FAICD has been appointed to the Australian Securities Exchange (ASX) board as a non-executive director.

Allen has more than 20 years’ experience in finance and investment banking, and has served in senior positions at Deutsche Bank, ANZ and HSBC Group. She is a director of Cochlear, Insurance Australia Group and Santos.

The appointment continues ASX’s board renewal program, which saw the appointments of Dominic Stevens in December 2013 and Damian Roche in August 2014. Allen will stand for election at ASX’s annual general meeting on 30 September 2015.

Inaugural Future Fund head, Paul Costello, has been appointed as the independent chairman of investment firm QIC’s global infrastructure investment committee.

Costello has previously been the inaugural managing director of the Future Fund and the first CEO of the New Zealand Superannuation Fund.

Commenting on his appointment, Costello said: “I’m pleased to be joining QIC at an especially exciting time for its global infrastructure capability. Governments around the world are recognising a greater role for private-sector participation in infrastructure and I look forward to helping QIC expand its infrastructure funds management offerings to clients. “

Boardroom Report disclaimer: The opinions in Boardroom Report do not necessarily represent the views of the publisher nor the publication. Every effort has been made to ensure accuracy, but no responsibility is accepted for errors. All rights reserved.