Essential Director Update: 14 Presentation slides by Alan Cameron AO FAICD

1. The Essential Director Update:14
The Essential Director Update:14
Complimentary member only seminar
Presented by Alan Cameron AO FAICD
Twitter: #ausdirector

2. The Essential Director Update:14
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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3. The Essential Director Update:14
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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4. The Essential Director Update:14
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
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5. The Essential Director Update:14
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 chairman
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6. The Essential Director Update:14
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
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7. The Essential Director Update:14
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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8. The Essential Director Update:14
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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9. The Essential Director Update:14
ASIC UpdatePage 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
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10. The Essential Director Update:14
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’
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11. The Essential Director Update:14
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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12. The Essential Director Update:14
Insider trading Page 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
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13. The Essential Director Update:14
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
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14. The Essential Director Update:14
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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15. The Essential Director Update:14
The Business Judgment Rule
Competing versions at 10 paces
• Current rule, never successfully pleaded – but why not?
• AICD proposal
Directors 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
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16. The Essential Director Update:14
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 tolerance
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17. The Essential Director Update:14
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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18. The Essential Director Update:14
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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19. The Essential Director Update:14
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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20. The Essential Director Update:14
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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21. The Essential Director Update:14
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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22. The Essential Director Update:14
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..
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23. The Essential Director Update:14
To wind up
Eric Beecher
Almost 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 Eliot
Blessed is the man who having nothing to say abstains from giving
wordy evidence of the fact
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