ABOVE BOARD
Winter Edition 2008

Directors Liability

Currently under review by the Federal Government is the issue of personal liability for corporate fault. Submissions that have been made to Government support legislative reform designed to achieve uniformity across Federal, State and Territory laws which impose personal liability on company officers for corporate fault. However, such submissions oppose derivative liability in principle as it is based on an underlying assumption that Directors are at fault merely because a corporate breach has occurred. Despite this, derivative liability is a device that is increasingly being used by Government in areas such as occupational health and safety and environmental legislations. An argument being put to Government is that a more relevant test to determining liability for a Director is whether that person is being involved through action or inaction in the actual corporate breach. The Government needs to take into account the belief that company officers should be afforded the same presumption of innocence as any other member of the community. There is a view that ASIC have not adequately or accurately addressed the question of whether the burden of liability for Directors has gone too far. Furthermore, there is thought that it's having a negative impact on Board recruitment. The Minister for Superannuation and Corporate Law, Nick Sherry has indicated he will clarify the standards required of Directors so that decisions can be made in the interest of shareholders in fast moving and complex situations. The Minister has indicated that they are prepared to reform national and state laws relating to Directors liability. There is no doubt these need to be rationalised so that this results in a consistent statement of the duty of Directors, and hopefully extends the business judgement rule to ease the burden of personal liability on Directors in Australia. The Government should recognise the role of Directors acting reasonably in the interest of shareholders while currently there is no provision for protection for those who fail to do so, as a result of a corporate breach rather than a personal action.

Directors Remuneration

On a positive note, there appears to be recognition that Directors levels of remuneration need to improve dramatically in recognition of the increasing work load and liability attached. Directors can expect ongoing involvement from shareholder advisory groups in their company's executive and Board remuneration practices in the future. The overall objective is to seek greater economic alignment between executives and shareholders with the possibility of adopting mandatory minimum shareholding requirements for executives. A further outcome of these trends will be the emergence of non-executive Director fee structures this year which will reflect global trends. I would expect to see an increase in NED fees as well as variations to fee structures to take into account travel requirements, virtual meetings and increasing work loads during instances of significant organisational transactions. Another emerging trend appears to be a willingness by members of not-for-profit organisations to provide some level of remuneration for the Directors of their not-for-profit companies rather than be unpaid volunteers.

Compliance vs Strategy

We have seen changes emerging out of the US following the wave of reform that's occurred in corporate governance following some of the spectacular corporate failures there. I suspect we may see the same issue emerging in Australia following the recent round of corporate failures in this country. Boards are now finding they have a solid job of compliance oversight when it comes to meeting all the new corporate governance rules. However, it appears to have weakened the Board's value as a thoughtful strategic partner to management. In the US, laws appear to be evolving from a small band of insiders to a broad based body of non-tech business overseers. While this may improve checklist legal governance compliance, it could be the expense of Directors being able to give a street smart reality check to strategic moves the company should make. Strong monitoring is all very well if it doesn't add value for shareholders and not foresee bad business decisions down the track.

Mid Cap Companies

A recent mid cap corporate governance report by BDO Kendalls reveals that more than 40% of Australia's listed company in the mid caps sector have inadequate corporate governance standards. Just 2 out of 150 companies surveyed have achieved best practice standards. The report indicated that it hopes that companies have either not lost their nerve for corporate governance reforms or have not become a little more complacent at a time of share market volatility. A lot of the companies were found to have inadequate documentation such as disclosure of related party transactions or rigorous policies on risk management. The report also indicated that independence has emerged as an overarching theme in a report from the survey. A large number of companies were found not to have a code of conduct or a risk management policy or a share trading policy, or auditors who were not truly independent.

Risk Management

We all know that the last few months have seen a rush of losses or collapses of companies and shareholder value. This should again remind Boards about the importance of robust risk management and enterprise wide risk management in particular. Some of the root causes in recent company downturns have ranged from operational risk, strategic risk in the business model or leveraged exposure to credit or market risk. Problems arise when risks are taken that are not consistent with potential rewards or not understood, underestimated or not controlled effectively. In my view, there are two sides to the coin about risk. Most Boards spend most of the time trying to manage uneconomic downside risk, but they should also focus on pursuing economically valuable upside risk opportunities. Boards need to spend more time reviewing risk management and seeking expert advice where necessary.

Book Review

As you probably know, Professor Bob Garratt was in Australia recently and hopefully you were able to attend one of his excellent sessions. He's produced another book with a different theme. It's called "Developing Strategic Thought". It's an excellent book for Boards that want to be better at strategic thinking, and it retails for $30.

If you are a rugby fan, like I am, you'll enjoy the new book by John O'Neill.

"It's Only A Game – A Life In Sport". It talks of the success he had in building up rugby union in Australia and then soccer before returning to ARU. It's a great read and retails for $45.

For those of you on Boards in the not-for-profit sector, you may want to get hold of either of these publications. "The Governance of Public and Non-Profit Organisations" by Chris Cornforth. It's a 136 page paperback but is a bit pricey at $80.

"Non-Profit Organisations – Challenges and Collaboration" This is by a collection of authors and is a good read on this topic. Retailing for $50.

Feel free to contact me if we can assist with any matters in relation to corporate governance or your Board. Anyone can subscribe for free to this newsletter on our website at www.directorsaustralia.com

Enjoy the winter months!

Until next time
Warren Tapp

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