Essential director update14 website

The Essential Director Update:14

Presented by Alan Cameron AO FAICD

Twitter: #ausdirector

The Essential Director Update:14Complimentary member only seminar


Agenda

• Financial System Inquiry• Governance landscape

– ASX CGC changes– IT matters

• Legal and regulatory matters– ASIC update– Continuous disclosure / insider trading– Directors' duties — business judgment rule

• Sector specific– Family companies — video– NFPs — future of the ACNC– State Owned Companies

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Financial System Inquiry Page 7

• David Murray AO

• Important for banks, superannuation, etc.

• Interim Report

• Impact on ASIC?

• Discussion of APRA’s approach to board responsibilities

– ensure means taking all reasonable steps and making all appropriate

enquiries to determine whether matter has been properly addressed

– Plus clarifying expectations under 3 lines of defence

– And adding concept of "materiality" to risk management declaration

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ASX CGC Principles 3rd edition Page 10

• ‘If not, why not’ — and influential beyond listed companies • Checking on new directors — Rec 1.2• Disclose skills matrix — but only in outline• Dealing with risk

– Rec 7.1 permits different approaches — unlike APRA– Internal audit

• Independent director changes • Family members

– Must consider tenure as possible factor• 10 years only mentioned in commentary

• Majority of independents still recommended– Despite Professor Swan's research– Read the Recommendations in full!– ‘if not why not’ — and most do not 4


Board performance

Dysfunctional directors (Charan article, HBR Blog Network Jan 14)– Identifying them

• Few useful skills and a lack of relevant experience?

• Often unprepared?

• Failing to grasp the firm's central idea and business strategy?

• Asking distracting or inappropriate questions

• Bringing few ideas or leads on business development

– Dealing with them

• Establish norms on boardroom behaviour

• Make the line clear between leading, and staying out of the way

• Seek confidential feedback from other directors and executives

• Private coaching by chairman5


Board diversity Page 13

• Rec 1.5 permits reporting under WGEA guidelines

• ASX report — 98% of ASX200 have a diversity policy, and 86% set measurable goals

• ASX200 boards — AICD Report 2010 to 2013– 22% of new appointments, up from 5.0%

– Women now 17.6% of directors, up from 8.3%

– Boards without a woman fell from 87 to 42

– Cf FTSE 100, now over 20%, and unlike US, where change is ‘glacial’

• 140 government scholarships for women to do CDC

• BlackRock report — Pru Bennett, July 2014– Improvement in diversity at exec level lags boards

– Disclosure is (sometimes) perfunctory

– Increased attention from stakeholders – proxy advisers, funds

• Canadian research — adding even a single woman leads to better governance practices; no correlation with financial performance 6


Innovation / social media

• Crowd sourced funding– Crowd sourcing used for NFPs– And research– Now, CAMAC report on equity funding, May 2014

• Data breaches can damage more than just reputation (AFR, 27 June 2014)– Target in the US

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IT Trends Page 17

• Beware the combination of ageing IT infrastructure and a static business model

• Science, Technology, Engineering and Mathematics (STEM) skills can help boards pre-empt disruptive market opportunities

• Mobile devices, ease and reduced cost of internet access has time shifted some customer transaction peaks. Tablets predicted to outsell PC’s in 2015

• Digital currency (Bitcoin)• New payment methods including digital mail boxes• Downsizing of government, and business process outsourcing

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ASIC Update Page 23

• Funding cuts — staff reductions– Despite growing remit– Possible sale of registry operation

• ASIC Report on Penalties for corporate wrongdoing• Dealing with whistleblowers

– An APRA failure years earlier , re HIH– Now, an ASIC failure re CBA– Chairman calling for more whistleblowers following budget

cuts

• Deregulatory initiatives– Special Report– Government decision to abolish CAMAC not an example 9


Senate Committee report

• Highly critical of ASIC

– ‘Confidence in ASIC's ability to monitor CBA implementation of compensation process severely undermined – a Royal Commission is warranted

– ‘ASIC needs to be a far more proactive regulator ready to act promptly but fairly — and a harsh critic of its own performance

– ‘Needs to encourage whistleblowers to come forward

– ‘and to work effectively with industry and professional bodies

– ‘Enforcement one of its most important functions — ASIC needs to be respected and feared — a clear and unmistakeable message backed up and continually reinforced by actions, that it has necessary tools and resources and ready to use them to uphold standards of conduct and market integrity’

• CPA Australia criticism

– Alex Malley — ‘the best dump (the chairman had heard) in 18 years’ 10


Continuous disclosure Page 24

• Newcrest Mining

– June this year, ASIC action — penalty of $1.2 million

• A court decision, not an infringement notice

• ASIC Report 393 Handling Confidential Information

• David Jones

– June 2012 ‘offer’ disclosed, but evaporated

– January this year — approach made in October 2013 revealed

– Complicated by director trading at the time

• 2 directors cleared by ASIC

• But they resigned — as did the chairman

– New trading policy unveiled; board changes (the ‘band of sisters’ — Jane Harvey, Philippa Stone and Melinda Conrad)

– Eventually taken over in July 2014

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Insider tradingPage 26

• ‘25% of public company deals involve insider trading’

• US study, but what is it actually saying?

– US prosecutors' winning streak has ended

• Tipping on the run

– Alleged against William Hull, tips passed while jogging in Domain

• Not just listed shares

– Forex derivatives allegations against trader and ABS employee

– Case ‘cracked through LinkedIn’

– Alleged profits of $7m restrained by court order

– ‘Whistleblower’ at forex dealer sacked, now alleging victimisation

• John Gay of Gunn's — no civil recovery, and cleared to direct (2, specific) companies

• Stuart Fysh — convicted at trial, acquitted and released on appeal

– Criticism of ASIC disclosure practices re: enforcement actions 12


Actions against directors Page 27, 28

• ASIC v Justin North

– ‘Celebrity chef banned by ASIC’ — SMH

– Cf Jan Cameron (Kathmandu founder) paying almost $14m to settle insolvent trading claim re Retail Adventures

• Prime Retirement and Aged Care Property Trust

– Civil penalty case about duty of directors of managed investment scheme to prefer the interests of investors

– Directors found liable, penalty hearing under way; class action coming

– 2 Directors claimed they abstained by remaining silent

– Competing sets of Minutes, based on drafts, both in the book!

• Civil action against Astra Resources and its directors

– Alleged fundraising without prospectus 13


Actions against directors continued

• David Zohar, of Aluminex Resources, jailed for 14 months for providing false information to the ASX

• Sonray director Russell Johnson jailed 6.5 years for fraud and theft — 3500 clients $46m out of pocket

• Tony Maher, formerly Paul Gresham, of Trio Capital jailed 25 months for false statements about valuations of investments, which led to his business receiving more than $500,000 in payments

• Not just ASIC — ACCC action on alleged egg cartel — includes directors as well as Australian Egg Corporation Limited itself

• Note Allco case [2014] NSWSC 1251

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• Current rule, never successfully pleaded – but why not?

• AICD proposalDirectors acting honestly, for a proper purpose and with the degree of care and diligence that the director rationally believes to be reasonable in all the circumstances, will not be liable under any provision of the Corporations Act or the ASIC Act, or at common law or in equity, applying to the director in his or her capacity as a director

• The Austin alternative

– Covers criminal or civil liability, penalties of all kinds

– Requires prosecutor to prove the business judgment was made where the director was dishonest, had an undisclosed material personal interest, and was one no reasonable person in that position could have made

– Intended to apply to all legislation, federal, state and territory,

– And to operate as a rule of interpretation

Competing versions at 10 paces

The Business Judgment Rule

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Bribery Page 29

• No announcement yet re facilitation payment defence

• Leighton allegations continue in press

• Note Printing Australia case apparently continues – Difficult to know, or talk about

• Prison term in Canada for agreeing to offer bribe to Air India officials and minister — no money actually paid

• High level departures at Wal-Mart

• What can directors do? – HSF advice, in AFR 18 July 2014 — consider company's risk profile; if

operating in 'at risk' areas, find out about company's procedures and policies; ensure they are implemented; look out for red flags; if you see one, ACT

– Carter Newell — insist on zero tolerance16


Prospectus case – Timbercorp Page 31

• Directors found not liable for alleged misleading statements in PDS– High Court refused leave to appeal

• Vic Court of Appeal Reasons– Judge did not conclude directors actually knew of any risk requiring

disclosure (but not disclosed); a lot of evidence no-one knew the risk including auditors, bankers, market analysts and ratings agencies

– If it were necessary, directors had a due diligence defence– No criticism of directors' conduct or evidence — had performed their

duties in good faith and with a genuine desire to comply– ‘Not persuaded plaintiff read any of the PDS in any detail — simply

did not have the time to do so.’

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Remuneration Page 38

• Two strikes continues – 40 companies have had 2 strikes, 18 in 2013 and 22 in 2012

– Spill resolution carried only twice in 2013

– Only one, Cash Converters, in Top200

– No director has yet been unseated

• Termination payments to CEOs down by close to 70 per cent in the past five years.

median termination payout $1.3 million in 2013, down from $3.5 million in 2008.

• Pay of ASX 100 CEOs has lagged inflation and wages growth since FY09.Average total statutory pay for CEOs, of $4.84 million, 63 times average weekly earnings – but now at lowest level in a decade. [2007 peak was 94 times.]

• Retirement allowances– Cummings Engineering [2014] NSWSC 250

• A directors' duty case

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Small and family companies Page 41

• Interview with Catherine Harris

• Baxt article in May Company Director regarding single

director companies

• Arogen case — [2013] NSWSC 1197 — mother successfully

sued for order that she was the sole director, rather than her

son

• Esperance Cattle Company v Granite Hill [2014] WASC 279

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Not-for-profits Page 42

• Government committed to abolition of ACNC– ‘Nowhere has the mischief which requires this new

monolithic regulatory structure, or that justifies the sweeping powers of the ACNC, been identified’

• But replacement arrangements not yet agreed, and are a condition of abolition– See Options Paper, July 2014– Doubts about effectiveness of US style disclosure regime

• Recent cases?– Still waiting on Bread Research Institute case

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Miscellany Page 43, 44

• State Owned Companies– NSW Review complete — but not yet public

• Superannuation fund governance discussion paper Nov 13– Definition of independence?– Appropriate proportion of independents? – Independent chairman?

• REST board — judicial advice to resolve conflict issue • Sporting bodies

– Women on every NRL club board?– Balmain Tigers — joint venture governance impasse

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Forecast agenda from last year Review of financial system likely to be underway ASX CGC Principles × Bid rigging — appeal in Norcast v Bradken [SETTLED ] Prospectus issues Overseas bribery cases Family companies × Not-for-profit cases (NOT YET) Diversity and remuneration State Owned Corporations Sporting bodies

– 80% plus is not bad.. 22


Eric BeecherAlmost every time a company falls or stumbles, industry experts saw the fall coming before the board. The board is often the last to know that its company has serious problems.

George EliotBlessed is the man who having nothing to say abstains from giving wordy evidence of the fact

To wind up

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