ABOVE BOARD
Summer Edition

The Cost of Compliance

Apart from the fact that I have a view that too much emphasis on compliance doesn’t focus Directors minds on the performance of their company, the cost of compliance is an issue in itself. In recent years companies have had to undertake quite large expenditure on compliance and, apart from keeping the regulators happy, does not yet appear to have delivered significant sustainable business benefits. A lot of companies have a kind of compliance “blind spot” which prevents them from seeing beyond their immediate need i.e. complying with regulation, to a much wider opportunity of using the investment in compliance to deliver strategic benefits. I think it’s important for every Board to try to implement practices to achieve performance improvements from compliance, with the intention of reducing operating costs and the cost of capital and improving customer service and retention. Quite often risk and compliance projects are run as individual initiatives within a company potentially missing opportunities for strategic and corporate wide benefits. Too often the performance of risk and compliance projects is measured by assessing whether the project was completed on time and in budget and meets the required compliance standards. This takes away the emphasis on whether the investment in compliance delivers real benefits to the business beyond this. On top of this it’s possible that intensive processes might enable an organisation to be compliant at a point in time but can often make it less likely the compliance remains in the medium to long term within the company. It may be useful for your Board to consider trying to calculate the full cost of compliance for your organisation and look for ways for such costs to add benefits to the business. The cost of compliance should not be a diversion of company resources from much needed objectives such as business improvement and marketing initiatives. Other research that I have seen does indicate that companies that are robust with their compliance are also generally high performing organisations anyway.

A Risky Business

Recently I came across an excellent article in the “Good Governance” magazine published by Boardworks International. It talks about the unspoken risks that Directors face. These are not the obvious legal and financial risks of which we are all aware but rather the other latent risks that Directors may face.

These include:

• The risk that the Board is dominated by a clique or faction.
• The risk of having to make major decisions with insufficient or inadequate information.
• The risk of having to make decisions based on the views of a small number of advisors or management pushing a particular point.
• The risk of making decisions only to face stakeholder criticism.
• The risk of wasting valuable time when individual members on the Board do not demonstrate good governance standards.
• The risk of feeling useless (i.e. not being able to or not knowing how to make a difference on the Board).

No doubt you can think of other unspoken risks in your experience as a Director, and I would suggest that the obvious solution is to make sure that they are "spoken about".

Continuous Disclosure

For Directors on the Boards of publicly listed companies, it’s important that they understand their continuous disclosure obligations. This includes the requirement to notify their interests or changes in their personal interests to the market under both the Listing Rules and the Corporations Act. Since the introduction of CLERP 9, the Solbec case highlights how serious ASIC is in pursuing such compliance. This resulted in a $33,000 penalty as well as further potential legal action by the shareholders of that company.

A Director is personally responsible for notifying their interest or any change in their interest within five business days under the Listing Rules and within fourteen days under the Act. If you sit on a public company Board, you can see details under Guidance Note 22 at www.asic.gov.au. if you would like to be absolutely clear about your obligations.

Not-For-Profit Sector

As you may know Directors Australia does a lot of work in the not-for-profit sector for Boards and it is pleasing to see a genuine effort by such Directors and management to continue to improve their corporate governance standards. If your NFP is a company limited by guarantee, the Directors have the same duties of responsibilities as any other Board regulated by ASIC. We recommend, however, that the committee members of Incorporated Associations should also follow such practice even though they are not subject to the Corporations Act directly. Some of the encouraging trends that we have noted in recent years for NFP organisations include the following:

• Directors are getting a much higher standard of induction when they join an NFP Board and far more formal training during their time on that Board.
• More and more NFP Boards are undertaking Board Performance Reviews at least every two years if not on an annual basis.
• Directors increasingly are being paid for their time on NFP Boards which has changed their mindset away from the volunteer mentality so prevalent in the past. Such remuneration may be only modest in a lot of cases but it does recognise the importance of their role.
• We have observed that NFP Boards are getting smaller, whereas in the past they were often as large as ten or fifteen people, they are now more often a Board of seven or eight people and sometimes even less.
• There is increasing emphasis now on succession planning and formal recruitment not only for the Chairman and other Board members, but for the CEO as well. This has included a trend to include more women on the Boards of NFP organisations.
• NFP Directors have indicated that their workload is becoming larger and Board meetings longer than they were in the past which means more emphasis on good corporate governance.
• There is certainly a greater awareness of the legal duties and liabilities of Directors of NFP organisations and more interest in making sure they do the job with the utmost duty and care.
• Boards are increasingly undertaking activities that commercial Boards have been doing for years. This includes robust strategic planning and risk management reviews.
• The other change that we’ve noted is that Boards are increasingly taking more control of their NFP organisations, whereas in the past it was often the CEO that really ran the organisation without little direction or control from their Board.

Given that the NFP sector is one of the largest components of our national economy, it’s important that these trends continue to provide good governance on behalf of all stakeholders in the NFP sector.

Equal Employment Opportunity

My thanks to Lisa Honeychurch from ClarkeKann Lawyers for the latest reminder regarding EEO. Firstly EEO training must be conducted on at least an annual basis and employers must ensure that all staff attend such training. The Board must ensure that managers understand and actively enforce EEO policies and that any complaint made by an employee is fully investigated. Finally, the Board must ensure that comprehensive policies are in place in their business covering all EEO matters. These include:

• Sexual harassment
• Discrimination
• Bullying
• Complaint procedures

Lisa highlighted a recent NSW case where an employee was awarded $20,000 in relation to a sexual harassment claim. Not only was that a significant cost to the company, but it obviously damaged their reputation as an employer of choice. If you would like more information, you can contact Lisa at l.honeychurch@clarkekann.com.au, and I’m sure she will be happy to assist.

Book Review

Bob Tricker is one of my favourite authors in the corporate governance area. He was the author of that well known publication “The Fish Rots From The Head”. His latest book is titled “Essential Director”. It contains hundreds of excellent tips that explain the essentials of corporate governance and the functions and responsibilities of Directors. It’s only about $30 and quite easy to read and I would recommend it. Further good summer reading is in the new book “Why Entrepreneurs Should Eat Bananas”. It’s a 167 page paperback and it looks at how you can ensure that you combine business growth at a work like balance that you’re happy with. It’s full of good ideas on boosting your company’s revenue and customer satisfaction while enjoying a more balanced lifestyle.

I hope you enjoy the summer edition of “Above Board”, and if we can assist you with any matters in relation to your Board of Directors, please feel free to contact us.

Until next time,
Warren Tapp

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