ABOVE BOARD
Autumn Edition
Government Launches Governance Review
The Minister for Superannuation and Corporate Law, Nick Sherry has indicated that the new Federal Government will begin a process of examining the areas of sanctions for Directors as well as personal liabilities and corporate offences. He has indicated that any changes to Corporate Governance Policy must be simple, principle-based and create certainty for Directors. He has indicated that the specific concern is that our corporate regime is causing Directors to be overly cautious when making decisions, particularly in fast moving and complex business situations. The project will look beyond the Corporation’s Act to examine issues such as the emerging trend for other legislation to impose person liability on company officers for any corporate fault. The Government believes they should now minimise these provisions and improve consistency in this area. He’s indicated that sanctions should be credible, flexible and transparent e.g. if misconduct is addressed at an early stage through a regime of penalties, criminal sanctions may be avoided later in the process.
I’m sure all Directors will welcome this review by the new Government as it has been about ten years since the last major reforms in this area. I can’t help but agree with the Minister that the pendulum has swung too far one way in respect to Director liability and can have an adverse effect on decision making in the corporate world. I look forward to the outcomes of the review which hopefully will result in more balanced approach. He has not indicated the time frame for this review so we will have to watch this space.
Not-for-Profits Score Well
As you probably know, the Governance score cards for a lot of not-for-profit Boards has been poor in a large number of cases. I’ve often held the view that this results primarily from the Board consisting of well-meaning volunteers with busy lives concerned with the community outcomes of the organisation rather than good governance. Therefore, it’s pleasing to see that recent research from Deakin University indicates that the majority of small to medium Arts organisations in Victoria had very positive results. The researchers found that these Boards were strategic in approach, were financially responsible and did not interfere with management. There appeared to be a clear understanding of the difference between governance, management and artistic direction.
Directors are selected according to the skills mix needed, and both financial and non-financial risks are assessed regularly. However, like most not-for-profit organisations, these Arts Boards still continue to battle to recruit people of sufficient calibre. The problem of scarce resources doesn’t allow a lot of training for such Directors to ensure that they fulfil a legal and compliance requirements. Unlike commercial Boards, the majority of these Arts Boards had an almost even mix of male and female representation. Most indicated they joined their Board to give something back to the Arts, and their least common response was to enhance career opportunities. It seems these 82 Arts organisations could pass on a lot of lessons to other not-for-profit organisations in improving their governance standards. I continue to recommend to not-for-profit Boards the excellent book by David Fishel on Good Governance in the Not-For-Profit Sector. It’s available from most book stores.
Gene Pool Shrinking
The Australian Chairman of KPMG, Mr Michael Andrew has warned that action needs to be taken to halt Australia’s Company Director talent pool from shrinking. He said a lot of highly skilled executives are avoiding Board appointments because of the increase in Director liability and the risk they face. A problem, also, is the increased regulatory scrutiny and compliance demands and at a poor risk/reward trade-off. Mr Andrew says the structure of Directors remuneration needs to be more carefully thought out to take into account their growing workload and the risks they face. He believes companies will need to look beyond the traditional sources of experienced Directors and be prepared to take on people who can be trained in that role. He also felt that internal company executives should be encouraged to take on external Board positions which will help them better understand the Board/executive dynamic. Michael Andrew’s also called for more vigorous defences in the Corporation Law for Directors who diligently carry out their duties to the best of the abilities. He thinks regulators also should try to understand the pressures limitations under which Directors work, as well as more informed debate so that shareholders and analysts better understand the role of Directors.
A Strategic Asset
I’ve held the view for a long time that an effective Board is a strategic asset for the company and for its management rather than distraction and burden to the CEO. Recent research in Canada indicates that Boards are increasingly becoming more of a strategic asset to management. The research indicates that most Boards, at best, have only a moderate impact on corporate performance. Three years ago, only 21% of CEO’s view their Boards as a strategic asset, and this year the number has jumped to 41%. It indicates that Directors are becoming less involved in a strategic development, but simply overseeing the process and its implementation. 80% of the Directors surveyed stated that investors should have little or no influence in developing or evaluating the company strategy, operational plan or execution. This also extends to such sensitive topics as the CEO’s compensation and succession. The response seems to indicate that Boards are drawing a line about increasing shareholder activism. They’re telling investors ‘you can buy and sell the company shares, but you can’t tell us how to run the business’. May I suggest that as part of an ongoing performance review, your Board should step back from time to time and ask itself if it is a strategic asset for the company rather than a distraction or burden for the CEO. Does your CEO value the Board’s input and advice or try to do their job despite their Board?
State Law Reforms
Bruce Cowley is a member of AICD Law Committee and a partner with Minter Ellison, and has expressed the view the State Governments should reform laws imposing personal liabilities on Company Directors for corporate breaches and remove the reverse onus of proof. In Australia, there are over 500 State Laws affecting Directors and officers. As a lot of these are different between States and Territories, it makes it difficult for Directors operating nationally to know if they’re doing the right thing. A lot of the laws, particularly in Queensland and New South Wales, have reversed the usual onus of proof for Directors in criminal proceedings. That is, if the company commits an offence, its Directors and officers are automatically deemed liable as well. Mr Cowley said everyone else is permitted the presumption of innocence, but Directors are considered guilty before proven innocent. In 2006, CAMAC expressed the view that reverse onus of proof provisions are inherently objectionable and unfairly discriminate. However, while the Commonwealth responds positively to CAMAC recommendations, its hands are tied to some extend because the root of the problem is at State and Territory level. What we need is a uniform model law, but, that can only happen if one of the State’s takes leadership to get the ball rolling.
D & O Defence
A recent court ruling concerning a Directors indemnity for insolvent trading liability highlights again the importance of making sure you have effective D & O insurance cover. The New South Wales Supreme Court held that the company standard Director indemnity clause did not and could not cover a Directors personal liability for insolvent trading. The bottom line is that the Corporations Act prohibits a company from indemnifying its officers against liabilities owed to the company. Generally, it’s very hard to escape liability as a Director once the company has incurred the debt while insolvent, thus creating a strict liability provision. There is no doubt that the best option for Directors is to obtain adequate Directors and officers liability insurance cover. In my view, Directors should closely consider their policies each year that the company provides for them and take advice from their brokers and lawyers to ensure that it provides the level of protection they may require.
Building Better Boards
I thought you might be interested in a conference for not-for-profit Boards that’s coming up. “Building Better Boards” is the 4th National Conference in this series to be held in Sydney on 26th and 27th July. The panel of speakers includes the who’s who in governance for not-for-profit Boards and I’d recommend it to all Directors and CEO’s of not-for-profit organisations. Details are at (02) 9799 4370 or www.betterboards.com.au
Book Review
This time I thought I’d mention more than one book for your interest.
- All Above Board – Great Governance for the Government Sector. It’s by Julie Garland-McLellan and is 174 pages in hard cover and will be of interest to Directors on the Boards of a wide range of different types of organisations operating under various levels of government ownership. Price is $45.
- The First XI – written by Simon Heap - it’s in paperback over 371 pages. It provides insights in examples of the inner workings of eleven winning Australian organisations and it’s a well organised book, consisting of the nine core elements Australian businesses need to win. Price $35.
- Running Board Meetings – by Patrick Dunn - is now in its 3rd edition. It’s a hard cover of 164 pages and is a practical guide giving step by step advice on every aspect of how a Board meeting should be run. New Directors will find it particularly useful. Price $57.
- Chairman of The Board – by Brian Lechem is a 205 page hard cover. The book offers a wealth of advice for Chairmen in what is becoming an increasingly difficult and complex role. It’s probably a very valuable reference tool to people in that position. Price $60.
All of the books that I’ve reviewed are available through the AICD Publications section or via most good business book stores. Happy reading!
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Until next time,
Warren Tapp
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