The Essential Director Update_Alan Cameron

The Essential Director Update:13

Alan Cameron, AO


Agenda

• Social media, and IT governance

• ASX Corporate Governance Council Principles

• Bribery and Corruption

• Sporting bodies

• Updates

• In the spotlight..

• Questions - minutes and meetings?

2


Social media p8

• Seafolly v Madden

• Fosters and Diageo

• Linfox v Stutsel

3


Social media p10

• ASIC advice for listed companies

– Monitor well known social media feeds on a regular basis

– And use social media to inform investors

– But only after sending price sensitive material to ASX first

– Unlike the US SEC

4


Social media – some quirks?

• Mike Smith of ANZ links in to social media and

gives it a 'like' – but in global influencer

program!

– LinkedIn "hot", raising $1bn..

• SMH report, August 2013 – Facebook linked to a

decline in wellbeing – “could be spreading

unhappiness through society.” 5


Are you LinkedIn?

• Lucy Kellaway in AFR, 20 August 2013

– Of all the things about LinkedIn that I do not

understand, this craze of “endorsing” one another’s

“skills” is the most baffling.

– Since last September an orgy of endorsing has been

going on. As of the end of July the number had reached

2 billion. Every week 50 million more are being handed

out.6


IT Governance p11

• IT now a critical issue for boards

– Managing IT projects

– NBN

– BYOD

– Cyber security –

• Mandatory data breach notification - p6, from March

2014

• Physical security measures around notebooks, tablets

and phones 7


ASX Corporate Governance Principles p15

– Use of websites

– Risk management

– Disclose economic, environmental and social sustainability risks.

– Commentary on acting ethically and responsibly

• Employment of people with disability

– Criteria for a director to be considered “independent” amended:

• service on the board for more than 9 years as an indicator that a director may not be independent..

– Clawback policy and diversity issues8


Dominant CEOs in Australia

• All gone? – possibly not

• Leucadia National Corporation criticism of Andrew Forrest

– Forrest's personality dominated the board; the other directors more inclined to follow his lead as to appropriate amount of equity, debt, leverage and the rate at which to expand, as opposed to our more conservative view.

– Herb Elliott - "A false claim. Odd occasions when board had different view to Andrew – he always, after strong discussion, accepted board advice."

– Ian Burston – "Twiggy always spoke his mind very eloquently and pursued the point relentlessly - .. domination.. is really just a personal view " 9


This, is a dominant CEO - Steve Jobs

– Thursday of first week back as CEO, convened board meeting to get board to lower exercise price of staff stock options. Directors balked, asked for time to do legal and financial study.

– He said, "you don't do this, I'm not here on Monday." Next day, they agreed .

– Jobs had won, but still said board had to resign, except for the chair

– Board aghast, but could not afford for him to storm off, but nor was remaining a director very enticing.

– So board acquiesced, all but chair agreed to leave, asking only for one more to stay – "to assist the optics".

– Jobs said later "they were an awful board, a terrible board.."

10


Bribery and corruption p16

• Tough new laws in the UK and elsewhere

– UK and US laws often apply to non UK and non US companies

• Australia

– Criminal Code (Cwth) – bribery of foreign official carries 10 years, fines up to $1.7m for individuals, $17m for companies

– Facilitation payments - still allowed in Australia

• requires record keeping

• defence [was] likely to be abolished

– Bad report by OECD last year; AFP has signalled more enforcement 11


Recent press or other reports..

• BHP Billiton, Rio, Redflex, AWB, Glaxo Smith Kline and JP Morgan Chase in China, Leighton

• BHP Billiton – update

• Consequences may not be "legal", but financial and reputational - World Bank sanctions on Sinclair Knight Merz, GHD

12


Importance of "corporate culture "

• Criminal Code (Cwth)

• Companies can commit criminal offences if they expressly, tacitly or impliedly authorise or permit the offence

• Shown by proving – – board did it, or – a high managerial agent did – or – corporate culture directed, encouraged, tolerated or led to

non compliance, or – company failed to create or maintain a corporate culture

that required compliance with the law

• An attitude, policy, rule, course of conduct or practice existing within the company generally or in the part where the activity occurs

13


Parent company responsibility?

• Reserve Bank, re its subsidiary Note Printing Australia and 50% owned affiliate, Securency (sub judice)

• Independent report concluded

• Bank processes for oversight and reporting, broadly consistent with usual practice at the time.

• With the benefit of hindsight, could have been more oversight, which may have detected alleged illegal payments earlier, but the Bank's oversight at the time was not inappropriate.

• Governor of RBA – with the wisdom of hindsight, older and more scarred as we now are, … there should have been more scepticism and questioning of management earlier

14


Diversity• Improvements among top 200, (now 15.6%, and

22% in top 20)or "Glacial progress" (only 16% of new appointments this year are women) –

• ASX CGC proposals

– can report “Gender Equality Indicators” under the Workplace Gender Equality Act 2012

– disclose definition of “senior executive”

– measurable objectives re-defined to include appropriate and meaningful benchmarks that are measured and monitored

– relocated from principle 3 (ethical and responsible decision-making) to principle 1 (lay solid foundations for management and oversight)

• 47 of Top 200 boards, still have no women. 15


Remuneration issues

• Say on pay more common throughout the world

• Is the two strikes rule working ? First cycle last year

– 108 companies had first strike in 2011; only 9 had second

strikes in 2012

– Of those, three faced a spill. One board resigned; the other

two survived the spill

• Major changes in behaviour among listed companies

such as Fairfax, Rio, Qantas, ComBank, and Perpetual

• Flawed in principle; works in practice..

16


• High Court restored original findings; NSW Court of Appeal imposed penalties, less than before.

• Court of Appeal added– Need for formality in decision making, trumps

collegiality

• "I think we are all agreed on that"

– Consent to holding meetings by technology, must be renewed at every change

Board approving statements –James Hardie p25

Directors' responsibilities

17


Directors' responsibilities continued

• Oversight of payments to directors p25

– Recent reports re Macquarie Generation, a NSW SOC

• Fixing corporate errors, Weinstock v Beck p27

– Director acted as such for 30 years, but not validly in office

• High Court restored earlier order remedying the

breach.

• Validation provision to be given a full or wide reading.

• Expensive, and uncertain, remedy -so check the fine

print.

18


Personal liability reform p29

• Piecemeal reforms around Australia, as listed

– Qld– 3800 offences by directors to be reduced to 260

– Some removal of reverse onus of proof provisions

• Replaced by liability as an accessory, if the director aided or

abetted the breach of law by the company

• Recent manslaughter prosecution of employer in NSW –

appears not to be "industrial manslaughter", but under usual

criminal law

• SA Industrial Magistrate critical of coverage of penalties for

safety prosecution, by insurance – "undermines sentencing

powers". Hillman v Ferro Con [2013] SAIRC 22.19


And some backward steps…

• Cwth Migration Act amendments for liability of directors of companies employing "unlawful non-citizens" and "lawful non-citizens"

• Directors personally liable if they knew or were negligent as to whether contraventions would occur; could influence conduct; and failed to take reasonable steps to prevent contraventions

20


Superannuation and tax - new provisions p30

• Personal liability for company's unpaid SGC

• Administration or liquidation won't discharge

director liability for unpaid PAYG tax or SGC

liabilities

• Directors are being found liable for company not

remitting PAYG amounts withheld

– Action against former MP Belinda Neal, re Central Coast

Mariners unpaid tax; she cross claimed against other

directors, but case now settled. 21


• New Guidance (GN8)

– Abridged version for directors

– “Immediately", means "promptly and without delay"

– Use of trading halts

• Must the board approve announcements? GN says

– The courts acknowledge that it is appropriate for some particularly significant .. announcements to be considered and approved by the board before release (but) not legally necessary in all cases..

– Have delegations in place, plus a disclosure committee

Continuous Disclosure p31

Listed Companies -

22


• Report by Maurice Newman, AC

– ASIC investigating

• 17 recommendations, including

– Release external presentations to ASX

– Broadcast events

– Investor relations blackout period

– Chair to meet investment community

– Investor relations to report to board periodically

• "Stifling communication may not be in spirit or letter of the law, but may be the prudent approach"

the Newman Report

Newcrest Mining

23


Listed companies – other matters p 32

• Previous government's proposed remuneration amendments, deferred

– Clawback arrangements, on an "if not why not" basis, therefore deferred

– Now included in ASX CGC proposals

• ASIC guidance on Operating and Financial Review

– RG 247, on interpreting s299A of Corps Act

– Applies to listed entities

• ASX Fit and proper test for directors

– Not retrospective.. 24


Insider trading p35

• "Go to gaol, go directly to gaol"

– ASIC v Khoo – 23 months, to serve 14

– Note successful appeal in R v Fysh

• held not to be insider trading

– But, John Gay of Gunns, fined, no gaol time

• Still insider trading even if information was false

– Mansfield v R, High Court decision

25


Charities and NFPs p36

• ACNC now operating – but for how long?– Registration voluntary (and automatic for charities receiving tax

benefits)– No tax concessions unless registered.– Present focus is on charities, not other NFPs

• Governance standards– Compliance mandated by regulation– See two Standards quoted on p 38– Most charities already comply – see Myths on ACNC website– AICD guidance for NFPs on its website

• Abbott government policy to abolish ACNC– Replace with centre of excellence focused on innovation, education

and best practice– "Nowhere has the mischief which requires this new monolithic

regulatory structure, or that justifies the sweeping powers of the ACNC, been identified" - Kevin Andrews 26


Sporting organisations p41

• Who would be a director of a sporting body!– Essendon Football Club

– Cf NRL clubs - Cronulla Sharks, Newcastle, Wests Tigers, Manly, Melbourne Storm (several years ago)

• Sports Governance Principles issued by Australian Sports Commission

– Were "if not why not" – now mandatory

• Re-organisation of Cricket Australia – Review by Argus and Crawford, to create single national

body

– Working well so far (sic)

27


Switkowski report on Essendon Football Club–

• Rec 8) Bad news must be passed up the line quickly. – Sometimes, organizations seem to have holding depots

where issues await a fix while being shielded from upper management and the board. This is poor practice.

– .. ask the question 'what's keeping you up at night?' and follow up and monitor action on concerns. Boards should not resile from detailed interrogation of operations, even when times are good.

• Rec 9) Policies and Procedures should be reviewed and updated as required. – All policies, codes of conduct etc ..require annual

endorsement by the board. 28


Superannuation entities p42

• New requirements under Stronger Super reforms– Covenants, or deemed covenants, to

• act honestly, exercise care, skill and diligence,

• act in best interests of beneficiaries,

• favour the beneficiaries in case of conflicts,

• ensure duties are met despite conflicts and are not adversely affected by them, and

• to comply with prudential standards re conflicts.

• Standards on Super Governance issued by Financial Services Council - retail super funds – Independence criteria

• Independent chair

• Majority independent directors

• Quorum requires independents to be a majority of those present and voting

• Directors should not hold multiple and competing positions on RSE boards

• Cooper review, re industry funds – one third should be independent

29


Family companies

• Weinstock v Beck – discussed earlier

• Kelly v Commissioner of Taxation [2013] FCAFC 88

– Must be an employee of trustee of family trust, to pay super

• Rinehart Family

• Bob Jane family company dispute [2013] VSC 406

– Were payments gifts, or loans?

– Be clear at the time, check the minutes, and the accounts, and be consistent!

• Mandie family (The Australian, 26 September)

– Alleged refusal to accept family member was a director

– And complaints about how board meetings were held 30


Updates - 1

• ABC Learning

– Last year, only successful action was disciplinary, against

auditor

– Now, former CFO accused of "authorising false or misleading

information"

• Class actions

– GPT settles for $75m., claim for misleading conduct and

breach of continuous disclosure obligations.

– Great Southern case before Vic Supreme Court

31


• ASIC v Ingleby

– ASIC appealed reduced penalty on former CFO of AWB

– Vic Court of Appeal has restored original penalty

• Bridgecorp decision in NZ

– Gave priority to secured creditors over proceeds of D&O policy; overturned on

appeal

– Also rejected by NSW Court of Appeal in Chubb v Moore.

• LATE NEWS - William Buck (Perth)

– Oppression suit among members of an accounting firm

– order for winding up

– "commercial lunacy" - Kenneth Martin J

– NB – firm to continue to operate

Updates - 2

32


APRA's expectations of boards

• Supervisors of financial firms around the world are increasing their level of engagement with boards.

• Themes include

– Professionalism of the board

– Risk governance – risk appetite statement; authority of risk management function; independent assessment

– Flow of information to the board

– Values and risk culture

– Executive remuneration arrangements

• Requirement for separate risk committee

33


In the spotlight..• ASIC

– Senate committee inquiry re Com Bank planners

– Criticism following court loss in Opes Prime, perceived failure to act on overseas bribery, insider trading "failures" (Gay, Fysh)

– "Offspring of Wallis" inquiry

• State Owned Corporations– NSW Review of legislation – Public Governance, Performance and Accountability Act

2013 (Commonwealth)– Macquarie Generation– NBN

34


Independent directors• Research said to show that companies with majority of

independent directors lost $70 bn in value compared with other listed companies

– "Their relative ignorance combined with lack of incentive to monitor, a fatal combination for company performance"

– independence from management, or from owners ?

• Directors behaving well

– Resignations on principle - Leighton Holdings; APN News and Media

– Not critical of those who stayed in each case

– Graham Cubbin – the independent director who demanded explanations re Cascade Coal 35


Minutes, and board meetings generally

• Read pro forma / draft minutes !– "the Board notes that it received the following papers..

Each director confirms that he/she has read the above materials and has made due enquiry of the relevant author if required."

– For whose benefit exactly?

• Emerging best practice– Minutes that are not too short, not too long

– Note important matters discussed

– Circulated to board within 7-10 days

– Consider a log of outstanding items, and an anniversary review of decisions taken the previous year

– Note comings and goings, or adjourn every hour or so 37


More on meetings..

• Electronic board papers

– Not a panacea!

• Keeping your board papers

– Not usually..

• Remote attendance

– Not a panacea either!

• Committees

– Attending committees you don't belong to..

• Reliance on others, in light of Centro

– You cannot rely on other people unquestioningly.. 38


Next year's agenda?

• Review of financial system likely to be underway• ASX CGC Principles• Bid rigging

– appeal in Norcast v Bradken

• Prospectus issues • Overseas bribery cases• Family companies• Not-for-profit cases• Diversity and remuneration• State Owned Corporations • Sporting bodies

39


Quote of the day..

Directors of public companies are not now appointed on the premise that a directorship is a sinecure in which reasonable competence is a desirable but not a necessary qualification and

… what is in general expected of directors will tend to become the measure of what is required of them.

• Justice Sir Douglas Menzies – 1959 (emphasis added)

40

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The Essential Director Update_Alan Cameron

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