ABOVE BOARD
Spring Edition

SIMPLER REPORTING

Federal Parliament has recently passed the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007. This Act is a response from the government to a number of recommendations to improve the effectiveness of Corporate Governance in Australia. A lot of these won’t affect you unless you are a publicly listed company but it’s worth knowing about them. I’ve summarised the four main highlights for you:

1. A company can now distribute their Annual Report online without having to post them to each shareholder if the latter agrees to receive it in this form. It seems that the annual cost for major companies was nearly $10.00 a shareholder to do this for any one year.
2. A process of undertaking rights issues for listed companies and listed trusts has now been made simpler. However, there will be reduced defences for any Director unless the new simple process is followed closely.
3. Changes have been made to remuneration reporting starting this financial year. This includes companies reporting on their approach to executives hedging their incentive remuneration. Already a number of companies have amended their securities trading policies to restrict executives entering into their at risk equity awards.
4. One area that may be of interest to Directors of smaller companies is that the thresholds have been increased regarding the definition of small or large proprietary companies. From now on, a proprietary limited company will be defined as being large (and therefore requiring their accounts to be audited if it satisfies two of the following tests):

1. Revenue of $25 million
2. Assets of $12.5 million
3. 50 employees or more

The new thresholds will result in more than a thousand fewer proprietary limited companies being required to prepare and lodge annual reports with ASIC.

PHOENIX COMPANIES

Phoenix activity is typically associated with Directors who transfer assets of a company into a new company of which they are also a Director. This is often the case where the former company is already insolvent or about to be put into liquidation with no assets to pay creditors. Estimated annual losses to the Australian economy as a result of Phoenix activities was $1.3 billion last year.

Specific remedies against Directors who engage in Phoenix activity include substantial civil and criminal penalties as well as disqualification and access to their personal assets. It also includes the prevention and recovery of asset transfers. ASIC has now commenced a surveillance initiative to ensure that banned Directors are not involved in managing companies, but if they are, will be subject to further criminal proceedings. The message from ASIC for Directors involved in Phoenix activities is that they will fine you and prosecute you with the full force of the law.

BOARD EVALUATION

We have been particularly busy in the last few months in undertaking Board Performance Reviews or Evaluations. A recent survey has found that more and more Boards are undertaking this process each year, or at least every two years, in order to improve their effectiveness on behalf of shareholders or members. Please feel free to contact us if you are considering a Board Performance Review or Evaluation in the near future. Here are some tips to keep in mind even if you do it yourself:

1. Remember that the process is not about ranking individual Directors or highlighting their shortcomings, but instead improving the effectiveness of the Board.
2. It is important that the working relationships around the Board table are strong enough to underpin the evaluation with an atmosphere of trust and frankness.
3. Some Chairmen have low feedback skills and it’s important that the Chairman knows how to lead the process and provide feedback to each Director.
4. Don’t just rely on a series of questionnaires as part of the process. While they are important, it’s the qualitative information that is just as important. Get 360° feedback. It is important that the Company Secretary and other senior executives working closely with the Board should be asked for their opinions and they should be considered openly and honestly.
5. Keep the process simple. The aim of such an evaluation is to make sure that problems are placed on the table and addressed. The objective is to improve the performance of the Board with follow-up action. Don’t just tick off the review as another job done.
6. Consider adopting the idea of asking a Director each month to provide a 10 minute feedback on the Board meeting just held, in order to add regular suggestions on improving the effectiveness of the Board.

If it’s good enough for a Board to undertake a review of the CEO, then it should be good enough to undertake a review of the Board’s own performance. I think the main value that external facilitators such as us add to the process is that it ensures openness and honesty, as well as objectivity and recommendations for further and follow-up.

TIME FOR A NEW DIRECTOR?

As you may know, Directors Australia is often asked to provide a shortlist of potential Non Executive Directors for appointment to Boards. We have noticed that this is increasingly the case with small to medium size companies who have decided to appoint their first external Director. Here are some questions that business owners may consider in appointing a Non Executive Director to their company for the first time:

1. Do they have the time and commitment to be a Director on your Board?
2. What type of technical or industry skills or experience will they add to the Board?
3. Are they a good analytical thinker who can add value to the strategic and financial management to the company?
4. What sort of interpersonal skills do they have to ensure that they fit within the “team”

The following may be some of the reasons why you will consider adding new Directors to your Board:

1. You are making a transition from a family owned business to a professional company with other stakeholders involved.
2. The company has now grown significantly and needs a new level of skills around the Board table.
3. The family company is facing succession issues from the founders to the next generation or current staff. An outside Director can assist in resolving some of the issues that may arise.
4. The company has reached a plateau and needs other skills at Board level to go to the next level of growth. Such skills may include strategy or marketing or accounting or law for example.
5. The company is interested in pursuing a public listing in the future. Directors with experience with IPOs can assist this process.
6. You’ve realized that you now need an independent Chairman to improve the overall governance standards and manage the personalities around your Board table.

Interestingly, Non Executive Directors for small to medium enterprises are paid far less than they would probably earn as external consultants to the business. This is despite the fact that they have the same liability as any other Company Director under the Corporations Act. We are happy to assist if you need any confidential advice regarding restructuring or growing your Board.

BOARD/CEO RELATIONSHIP

In my view this is the most critical relationship in the overall governance structure for any company. If there is a dysfunctional relationship, neither the Board nor CEO will achieve the company’s objectives on behalf shareholders or members. At the end of the day, the Board depends on the CEO to make things happen but with the freedom to do it their way. The following are some tips on making sure it is a strong relationship between the Board and CEO:

1. Ensure that the CEO and Chairman communicate regularly.
2. Let the CEO participate fully at Board meetings, in providing strategic advice or comments on issues the Board should know about.
3. Clarify the role of the Board v the role of the CEO, in writing if necessary.
4. Put in writing the expectations the Board has of the CEO in a general sense, and the expectations the CEO has of the Board. Share these documents between all parties.
5. The Board needs to make clear what its reporting and information requirements are from the CEO.
6. Have a robust and open performance review process for the CEO.
7. Let the CEO participate in feedback as part of any Board Performance Review.

These few suggestions will go a long way to ensuring that the Board and CEO relationship is a strong and healthy one for the good of the company.

BOOK REVIEW

There is an excellent new paperback out recently on a topic that is of growing interest to all Directors. “Corporate Governance and Sustainability: Challenges in Theory and Practice”. It’s by Susan Benn and Dexter Dumphy, and retails for $55.00. It’s 260 pages in length and covers a range of areas to assist Boards in building sustainability in their companies. This includes the challenges faced by Boards from the complex array of stakeholders in the Australian environment. It’s easy to read and well recommended.

I just love this little quote: “In the business world, the Board knows a little bit about a few things, management knows something about everything, a technician knows everything about something – and the switchboard operator knows everything”.

Enjoy the beautiful Spring weather! Until next time …….

Warren Tapp

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