ABOVE BOARD AUTUMN EDITION

DIRECTORS & OFFICERS INSURANCE – Are you covered?

The insurance industry is constantly changing and along with it the product offering. In recent times there has been an increased demand for companies to consider Directors and Officers cover and ensuring that they include some of the latest extensions available. It seems however, a lot of D & O policies can fall short of the desired cover. In most standard policies cover is only provided for the Directors and Officers of the entity, leaving no cover for the entity itself. When considering that if an action is taken against the Director and the company jointly, the individual will more than likely have the defence cost covered, but the entity itself may not. An exception to this may be association liability insurance. The financial burden thus presented with the entity is then passed on to the Directors. Equally, defending a claim can be costly and thus it’s necessary to source a policy to provide defence cost advancement rather than just company reimbursement. Whilst it’s important to ensure all defence costs advanced by the company in respect to its Directors and Officers are covered, not all businesses are in the financial position to fund the defence at the time of claim. New policies have now been introduced that now provide full advancement of costs and entity cover as well. A lot of these new policies have also gone a stage further by now providing cover for Employment Practices, Fidelity, Investigation Costs, and also Crisis Loss Cover, thus providing a broader cover and greater protection. We think it’s important for any Director to consider a D & O policy and make sure they review it as a Board to see that it covers the scope of their requirements. I would also suggest that they consider the amount of cover they have against the current claims experience as well as the amount of excess that they will carry, and their personal contribution to the premium for such policies.

UNIONS AND SHAREHOLDERS

While unions have been unsuccessful to date in having union-based shareholder resolutions tabled, a new study in the last year suggests that unions will now align themselves with other shareholder activists to start putting pressure on public listed Boards. The study entitled “From the Picket Line to the Boardroom: Union Shareholder Activism in Australia”. It appears that in the United States labour shareholder activism has been strong and Australian unions would be seeking to align their interests in the same way with institutional investors in this country. Of course the scrapping of the 100 Member Rule will make any stakeholder group such as unions find it a bit more difficult to achieve the level of influence they would like as shareholders. On that note, other reforms that are coming through will require proxy holders to vote in accordance with instructions as well as facilitate electronic circulation of resolutions and member statements. There will be no change in the threshold requirements to propose members’ resolutions or statements.

CLASS ACTIONS

ASIC has now outlined its position toward Class Actions by shareholders. It appears that they have cautiously welcomed the emergence of the shareholder Class Action in Australia as a self-help mechanism. This allows shareholders to seek damages for loss incurred at the hands of Directors and advisors who negligently or dishonestly cause loss to those shareholders. As you may know, there has already been one case in Australia in the last 12 months where shareholders successfully took action against their Directors resulting in millions of dollars being paid by those Board members. Statutory derivative actions (Class actions) have been popular in the United States for years, and ASIC seems to be comfortable that they will be a useful mechanism for shareholders to gain relief in the future.

DUE DILIGENCE

A recent report indicates that the Court history of a Director is apparently a significant factor in whether a business is likely to succeed or fail. Based on figures released by Dun & Bradstreet, it seems that if a Director has had a previous Court action against them it can greatly multiply the likelihood of the failure of the entire company. For this reason it is recommended that companies do a thorough check on Directors they are considering appointing, just as those people should also do sufficient due diligence on companies they are being asked to join. It seems that if a Director has had a Court action against them then the entire business is five times more likely to fail. If a Director has been on the Board of a company that has failed, the risk of their venture failing will double.

Company insolvencies number about 6,000 each year in Australia with the bulk of course being private companies in that number. Other adverse events including Court actions, collections and creditor petitions to wind up are also strong indicators as to whether the company is likely to fail or not. Make sure you do your homework!

CEO SALARY – A TOUCHY SUBJECT

It’s happened in the States and I suspect it’s the same in Australia. In the recent annual meeting season, shareholders, media and even the Government in the United States are becoming quite vocal about what appears to be runaway pay conditions for Chief Executive Officers. Despite the new rules the corporate pay disclosure there is still concern with the packages being offered and provided to CEOs of corporations. The sort of questions shareholders are asking include:

1. What’s with all these executive perks under the bottom line
2. What are our executive severance liabilities?
3. What are the Board’s yardsticks in setting CEO pay and performance?
4. How do we know that such rewards will flow down to us as shareholders in improved profitability?

It seems that some of the incentives to headhunt CEOs, let alone the excessive severance deals (golden handcuffs and parachutes) are now resulting in Boards trying to rein in any excess. They are doing this by negotiating shorter term contracts for CEOs with automatic renewals, and clearly defined exit strategies for under-performance. I know most CEOs would say that they earn every penny they get, but it’s interesting to see the growing trend here, as in the USA, about concerns in relation to the total size of packages for some people.

DIRECTORS INDEMNITIES

As you may know, the government has been through a robust review of the Trade Practices Act and it seems that some proposed amendments may need changes to the terms of indemnities provided to Directors and Officers. At the moment, the Act prohibits a company from indemnifying a Director or Officer against the following:

• A liability over the company or related Body Corporate
• A liability over someone else, which did not arise out of conduct in good faith
• A liability for a pecuniary penalty or compensation order under the Act
• Legal costs of expenses when there is a finding of liability or guilt on a Director’s part, or where relief from liability is denied.

It seems that the amendments in the Trade Practices Act will prohibit a company from indemnifying its Directors and Officers against:

• A pecuniary penalty for a contravention of the Restrictive Trade Practices Provisions contained in Part 4 of the Act
• Legal costs incurred in defending such proceedings where the Director or Officer is found to have such a liability

It may be useful to review all of the indemnities provided for in your Constitution or in other legal documents for Directors or Officers to cope with any of these amendments in the revised Trade Practices Act. Your Company Secretary can probably assist you on this matter.

ASK A LOT OF QUESTIONS

In my experience one of the key ingredients that makes a difference between an average and highly effective Director, is that the latter is not afraid to ask a lot of useful questions. Make sure your Board has an environment where each Director feels comfortable in asking intelligently naïve questions of the CEO or other key people. If you ask shallow questions you may find you’ll get shallow answers. Think about developing your questioning skills and make sure you’re not digging too deep into operational or management matters, unless it’s of concern to you on behalf of the entire company. Try to ask questions without causing offence or starting any sense of people being defensive because of the way you’ve asked them. Consider any vague or generalized statements you receive in response to your questions and make sure you really understand the true facts that you’ve been seeking. Don’t forget that the CEO is really part of the Governance team and your questions directed to that person should be treated with the same level of respect that you would want from your fellow Directors. Your requirement to fulfil your duty to act with care and diligence means that you do need to prepare powerful questions for a Board meeting and work out which ones you can get answers to outside of the Board meeting without holding up the entire Board. Continue to develop your enquiry skills and that will contribute to a more effective Board in the future. Don’t let yourself be put off with jargon or complex explanations in response to your questions, but pursue the matter until you have a full understanding of the issue to your satisfaction. I suggest also the Chairman wants to make sure the Board doesn’t become another “Spanish Inquisition” that the CEO starts to resent. Ensure your Board has already achieved that fine balance between the two extremes.

BOOK REVIEWS

Rather than give you a review on one particular book for Directors, this time I thought I would give you a long list. It seems that some of the world’s most distinguished business thinkers were asked to choose their top books from among a range of titles they considered over the last few months. The following were their choices, and can be purchased in most good book stores or probably through the AICD.

• The End of Poverty: Economic Possibilities for our Time by Jeffrey Sachs
• A Life in Leadership: From D Day to Ground Zero by John Whitehead
• Conspiracy of Fools: A True Story by Kurt Eichenwald
• The World is Flat by Thomas Friedman
• Blue Ocean Strategy by W Chan Kim
• Profit Brand by Nick Wreden
• Creating the Good Life by James O’Toole

I hope you find them as interesting as some of the business thinkers that selected them for their top reading list.

Until next time ………………
Warren Tapp

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