Essential Director Update:17

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2017 topics

The 2017 Essential Director Update covered recent governance, business and regulatory changes and explored the issues facing directors and business leaders in the year ahead.

What can directors do to manage reputation?

The latest Reputation Dividend Reports reveal that corporate reputation has never been more valuable – corporate reputation accounted for 39 per cent of shareholder value across the 350 largest listed companies in the UK and 20.7 per cent of all shareholder value across the US S&P 500. Boards play a crucial role in managing reputation risk, primarily through:

  • Setting the ‘tone from the top’ – together with senior management, directors need to model, and make clear, their expectations on behaviour and compliance;
  • Appointing the right CEO – the CEO needs to live the values of the corporation, and be held accountable for this through appropriate KPIs;
  • Overseeing risk management – it is a key board responsibility to oversee the development, implementation and periodic review of an effective risk management framework (RMF). With social media risks being of particular relevance to reputation management, the RMF should include effective social media policies, training and monitoring. It is also crucial for the RMF to include crisis management planning; and
  • Whistleblowing processes and encouraging a ‘speak up’ culture – it is important for boards to be made aware of material issues in a timely manner so that they can respond accordingly.

How important do you see the issue of inequality in Australia to be and what do you think we, as company directors, should do about it?

Income inequality is an important issue, but the statistics in Australia (measured by the Gini coefficient) show that income inequality in Australia has not worsened over the last decade. And, income in Australia is spread more evenly than in many other countries, particularly the US - Australia’s metrics on income inequality are broadly in line with global averages. That said, the maintenance of low interest rates risks making wealth (not income) inequality worse, by driving up asset prices, including houses. There is evidence in the official data that wealth inequality in Australia has worsened since the global crisis of 2008-09, although not materially. There is not much that directors can do directly to address income inequality, except where possible equate employee wage gains with productivity improvements. Unfortunately, productivity growth has been poor, which partly explains why wages growth here is at historical lows. Australia’s personal income tax system is very progressive by global standards, so there are public policy measures in place to help deal with income inequality.

Do you believe virtual AGMs will be good or bad for shareholders?

Given the significant costs and very low attendance rates associated with physical AGMs, the utilisation of technology by companies to facilitate virtual and hybrid AGMs provides an opportunity for companies to improve shareholder engagement and lower costs. Virtual AGMs can allow shareholders to join a meeting remotely potentially enabling larger numbers of shareholders to participate, and companies can save on costs associated with traditional AGMs, including room hire and printing expenses. However, purely virtual AGMs also remove the opportunity for face-to-face engagement, potentially diminishing engagement or the perception of engagement, something that many directors value and consider an important accountability mechanism.

Given this, when directors are considering whether a virtual AGM will be good or bad for shareholders, there are a number of practical considerations that need to be resolved, including the adequacy of available technology, the risks and implications of a technological failure, the degree to which shareholders are amenable to a departure from the traditional format, the legal and regulatory requirements associated with AGMs, and the need to continue to facilitate questions and discussion. To the extent these challenges remain unresolved, it may be more practicable in the short term for directors to investigate the viability of hybrid AGMs or direct voting, or to change the format of physical AGMs to better foster shareholder engagement.

Does the AICD have a view on Corporations and Industry Bodies involving themselves in social issues?

The AICD supports corporations undertaking corporate social responsibility engagement relevant to their organisation and its stakeholders. Decisions regarding taking a stance on particular social issues are, in our view, a matter for individual boards having regard to their duties to act in good faith and in the best interests of their organisations in their circumstances. These duties provide flexibility to allow directors to consider relevant stakeholder interests and issues in promoting the interests of their corporations.

Cyber Risk - what do you think that can be done to increase board and individual awareness to the risk and being proactive as opposed to reactive? There seems to be a general head in the sand “it won’t happen to me” mentality.

The AICD’s latest Director Sentiment Index revealed that cybercrime is one of the ‘top 5’ issues ‘keeping directors awake at night’. Only one year ago this issue ranked below the ‘top 10’. The AICD recognises the challenges for boards in overseeing this complex issue. To support directors, the AICD has partnered with Data61 to develop a new cyber governance curriculum for directors (available here). ASIC, the corporate regulator, has also launched initiatives to increase board awareness of organisational cyber resilience (available here).

Can the appropriate speaker make comments on auditors. And need to alternate. Hello, as a member of a board, is there a requirement or just good governance to encourage the business that we are board members to change the auditor from time to time Say every 5 years? Appreciate your comments

Boards should consider audit rotation as part of their risk management framework. Independent assurance is one of the ‘three lines of defence’ that boards rely on, and rotation of audit partners is a good governance practice that all boards should consider. Audit rotation is an audit independence requirement applicable to listed companies and prudentially regulated entities. The Corporations Act 2001 requires the auditor of a listed entity to stop playing a significant role in the audit of the company or scheme after a period of time, generally, more than five out of seven successive years. The rotation requirements do not apply to every person involved in the conduct of the audit or the audit firm itself, rather – the lead auditor, the review auditor or an individually appointed registered company auditor. In some circumstances directors may extend the eligibility period.

Stephen - are you concerned at the lack of productivity growth in the last decade in Australia and what are the main causes of this?

The lack of productivity growth in Australia is a real cause for concern, although this has been a global as well as a local phenomenon. Weak productivity contributes to lower potential growth for our economy (which is a product of population plus productivity growth) which, over time, means fewer jobs, lower investment and slower growth in incomes. Productivity has been poor for a number of reasons, including a lack of a long-lasting public policy reform agenda, too much focus on short termism, a lack of innovation, and an absence of investment in new technology. Productivity tends to be pro-cyclical, so should improve as growth in the economy improves, but adoption of a genuine reform agenda would help.

Stephen, we seem to celebrate the lowering of the AUD but isn’t this a proxy for reduced productivity compared to our global trading partners and the relative strength of our economy?

A lower value of AUD would aid the economy’s transition to faster, more sustainable growth in the wake of the mining investment boom, but it would be only part of the solution. A lower currency would make our exporters more competitive, but could push up the cost of many imports. Many factors drive currency values, including the relative economic performance and interest rates, and the level of commodity prices. Slow productivity growth means a lower currency carries a heavier burden than it should but, unfortunately, Australia lacks flexibility in other policy areas, including the level of interest rates, which are at record lows, and fiscal policy (the Budget). The fact that Australia remains one of only 10 countries world-wide that are triple-A rated by all three major ratings agencies makes it harder for AUD to fall, because many international investors prefer to invest in AAA-rated assets, which acts to support AUD.

Do you think multiple directorships is a governance issue for ASX? Some directors have so many gigs it is highly unlikely they can properly attend to their duties. How many is too many? How does this hinder the goal of genuine diversity.

Holding multiple board positions can improve governance due to the additional experience gained by directors through exposure to a number of industries, companies and boards. However, it is incumbent on directors to ensure they are not overcommitted and to allow scope for fluctuations in board time demands. The AICD recommends to its members that the number of directorships a person accepts should be limited only by that person's capacity to fulfil their responsibilities.

Some proxy advisory firms have voting policies on ‘overboarding’ that set numerical limits on board positions. In the AICD’s view, such limits are not appropriate. Whether a director is overcommitted requires a case-by-case analysis. The primary determinant of an individual director’s capacity and performance rests with the board. Ultimately though, shareholders can decide the matter through director elections. Disclosure of a director's board commitments should be available to shareholders at the time of elections to allow an informed discussion of both workload and the experience directors can bring to the board.

Are climate risk disclosures mandatory?

Climate risk disclosures are not mandatory per se. However, ASX-listed entities may be required to make climate-related disclosures in their operating and financial review (OFR), which forms part of the annual directors’ report. According to ASIC guidance, the OFR should include a discussion of environmental and other sustainability risks where those risks could affect the entity’s achievement of its financial performance or outcomes disclosed, taking into account the nature and business of the entity and its business. Also of relevance are the ASX Corporate Governance Council’s Principles and Recommendations. These recommendations require ASX-listed entities to disclose, on an ‘if not, why not’ basis, ‘whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.

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