It is a pleasure to again be presenting this year’s AICD Essential Director Update, this time with my colleague, David Thodey AO FAICD.
My topics today are:
- Firstly, a brief regulatory update,
- D and O insurance: what are the current trends and available options for directors?
- The much discussed issue of sexual harassment in the workplace.
- The ongoing issue of diversity in the boardroom and beyond.
- Community and stakeholder expectations of directors: how do these fit within a director's "best interest duty" under the Corporations Act?
- Government boards: how are they different and what are their unique challenges?
- In respect of the Not for Profit sectors, what are some of the ongoing challenges?
1. REGULATORY UPDATE
With the return of strict and extended lockdown measures, in early August, legislation was enacted extending until 31 March 2022, the ability for companies to:
- hold virtual AGMs, in which shareholders or members are able to exercise their rights to speak, regardless of any constitution requirement for in-person AGMs;
- distribute meeting related materials to shareholders and members electronically; and
- execute documents electronically.
On 8 September, ASIC formally exercised its new permanent emergency power, extending the time public companies have to hold their AGMs, meaning:
- all public companies, with balance dates between 21 February and 7 July 2021, have an additional two months; and
- public companies limited by guarantee, with balance dates between 24 January and 7 April 2021, have an additional four months, to hold their AGM.
Treasury has been consulting on further permanent reform in these areas. The exposure draft of proposed legislation originally allowed organisations to hold virtual or hybrid meetings. Proposals by companies such as Qantas, Brambles and Bendigo and Adelaide Bank to amend their constitutions to permit virtual AGMs were met with significant shareholder resistance and those plans were abandoned. The legislation now being considered permits companies to hold hybrid meetings on an ongoing basis. Having just attended two AGMs for boards I sit on, both entirely virtual for Covid-related reasons, I can see the attraction of this. For neither meeting did we receive a single question either in writing or verbally by virtual attendees.
The new reforms have permanently re-introduced one important change in respect of director liability for listed company directors, for which the AICD had been advocating for some time. Corporations and their officers will now only be liable for breaches of continuous disclosure laws where material information is “negligently, recklessly or intentionally” withheld from the market. There is no change to the nature of the information that needs to be disclosed. The reforms bring Australia closer in position to that of the US and UK and will potentially deter opportunistic class actions.
2. D&O INSURANCE
According to Marsh, D&O premiums are up by more than 200% for some ASX200 companies over the previous reporting period and average D&O spending is up by 170%. Deductibles are also trending higher (with some as high as $250 million), as are lower limits on total sums insured. This is pointing to some companies considering whether to manage at least some risk internally, by doing without D&O insurance in part (such as Side C cover, which offers protection against shareholder claims) or agreeing to higher deductibles and/or lower amounts insured.
Brokers have sometimes suggested that, on D&O renewal, boards get back to basics and ask themselves why they are taking D&O insurance. What do they want the policy to protect against in the company’s specific circumstances?
To assist directors, the AICD has recently released a new tool that looks at the current D&O insurance landscape in Australia and what directors should consider when reviewing a policy.
Addressing elements of concern in relation to class actions, the Commonwealth government has recently introduced legislation into parliament, the effect of which, if passed, would ensure that class action members receive a minimum 70% return of gross proceeds from litigated disputes. There is, unsurprisingly, opposition to the legislation from litigation funders and class action plaintiff lawyers. This seems to have some way to run and is something for boards and directors to watch, particularly in light of the recent decision of the Victorian Supreme Court in the Banksia Securities case.
Just as for commercial boards, according to Marsh, D&O premiums for NFPs are up by 70-100% on the previous reporting period, despite there being no evidence that claims against NFPs have increased.
3. SEXUAL HARASSMENT
At last year’s EDU, I touched on this topic in the context of the AMP board’s approach to the allegations of sexual harassment against a senior executive by a female colleague in 2017. That discussion was centred on the board’s responsibility for the oversight of organisational culture and ethical conduct and also focused on the shifting standards around stakeholder expectations. This year, sexual harassment is a major topic in its own right and deservedly so.
In Western Australia, the State Parliament is running an inquiry into sexual harassment against women in the FIFO mining industry. There have been some disturbing accounts by victims and some admissions on behalf of employers of the need to address the issue. Companies and boards should give serious attention to the Inquiry’s findings which are due to be tabled in April next year.
The prevalence and pervasiveness of the issue in Australia’s workplaces is highlighted in the Federal Sex Discrimination Commissioner, Kate Jenkins’ Respect@Work report, which was delivered to the then Attorney-General, Christian Porter, in January 2020. One year later, Brittany Higgins’ distressing allegations of sexual assault in her workplace, Parliament House in Canberra, prompted the Federal Government to turn its collective minds to the Respect@Work report and to consider its 55 recommendations.
Sexual harassment in the workplace has been unlawful since the introduction of the Sex Discrimination Act 1984 and is also covered by work health and safety laws. Despite this, it remains a significant issue in many workplaces. According to Deloitte Access Economics who undertook financial modelling detailed in the Respect@Work report, the total financial cost of workplace sexual harassment to the Australian economy is conservatively estimated at $3.8 billion, including $2.6 billion in lost productivity.
The Respect@Work Report discusses in detail the complexities surrounding the issue and the possible reasons for lack of progress in addressing it.
In September, legislation passed both Houses of Parliament and gave effect to six of the report’s recommendations, including making explicit that sexual harassment in connection with a person’s employment can be a valid reason for dismissal and extending protection to unpaid workers, such as volunteers and interns.
The Respect@Work report highlighted that, too often, when a claim arises, employers have prioritised corporate reputation and legal and financial liability. In last year’s EDU, I spoke briefly of the use of non-disclosure agreements in the context of sexual harassment and other similar claims. The obvious risk of the use of NDAs is that, as a systemic issue, undesirable, unacceptable and even illegal behaviour gets swept under the carpet. It can result in broader and/or cultural issues not being addressed and makes decision makers complicit in the behaviour. By today’s standards, companies might consider whether there is a greater potential risk to corporate reputation where proven cases of sexual harassment are concealed and subsequently “leaked”. Without compromising a victim’s desire for privacy, perhaps companies and their boards might re-consider whether it is appropriate to seek non-disclosure or “silence” from a victim in exchange for a financial settlement. It’s also worth noting that, often, the negotiation and finalisation of NDAs are undertaken by management, with little or no visibility at board level.
This is the point at which unacceptable conduct, such as sexual harassment, meets organisational culture and values and corporate reputation.
Directors play an important role in addressing workplace sexual harassment and, in response to the Respect@Work report, the AICD has developed and commissioned some high quality resources which are available to members on the AICD website, including a Directors’ Guide and a paper, Sexual Harassment in the Workplace, authored by Clayton Utz.
4. DIVERSITY IN THE BOARDROOM AND BEYOND
Perhaps unsurprisingly, the Respect@Work report noted that, overwhelmingly, the AHRC heard that gender inequality was the key power disparity that drives sexual harassment. It also heard that other forms of discrimination and disadvantage that create power imbalances in the workplace and in society, can also drive sexual harassment. A question for boards and directors is, if inequality and discrimination are key drivers of the incidence of sexual harassment, what other negative behavioural and cultural impacts do they have on an organisation?
In good news, there has been sustained progress in appointing women to listed company boards. As at 31 August 2021, women comprise 33.7% of ASX200 boards and 32.1% of ASX300 boards. In June 2020, research released by Bankwest Curtin Economics Centre and the Workplace Gender Equality Agency found that appointing more women on their boards and in leadership roles helps to drive company performance. The report found an increase of 10 percentage points or more, in female representation on the boards of Australian ASX listed companies led to a 4.9% increase in company value.
A University of Queensland Business School report, released in August this year, suggested that, despite or perhaps partly due to, the success of women being appointed to boards, the pipeline of women in senior leadership roles is shrinking. Senior leaders and boards would do well to consider this in the long term interests of their organisations in maintaining gender diversity. The two greatest barriers identified in the report were, firstly, Australia’s current early childhood education and care system, in terms of affordability, access and quality of care, and secondly, ongoing and persistent gender role stereotypes. This issue was also highlighted in Chief Executive Women’s Senior Executive Census 2021, released in September.
So, if the body of evidence demonstrates gender diversity on boards and in senior leadership enhances company performance, what might other forms of diversity deliver?
Highlighting the growing focus on other forms of diversity as a path to recruiting from a broader pool of talent to boards and to their companies, The London Business School Leadership Institute and SQW published a report in July this year, commencing a discussion and review of the impact of ethnic diversity of board membership. It found that building and maintaining diversity requires a proactive approach and a long-term effort and that there is still a long way to go to obtain full access to the diverse talent available.
So, what are some of the questions boards can be asking itself in relation to diversity?
- Is achieving greater diversity on our board and in our company important and, of so, do we genuinely understand why?
- Do we collectively possess the diversity “literacy” skills that would enable us to answer this question and progress a diversity agenda? By that, I mean, are we just “counting” or are we really “valuing” diversity?
- Do we have a genuinely inclusive culture that would underpin the success of greater diversity? Without a genuinely open and inclusive environment, the benefits diversity can deliver are knocking on a closed door.
COMMUNITY AND STAKEHOLDER ENGAGEMENT
It is now widely accepted that directors do not need to pursue only the short-term interests of shareholders to discharge their fiduciary duties. The duty is a more complex one that allows for consideration of stakeholders and reputation, to advance the interests of the corporation. This includes giving due consideration to the impacts on community and stakeholders, as part of fulfilling such duties. Last year, we considered the examples of Rio Tinto and Juukan Gorge and AMP. Both were case studies of a failure to properly take into account stakeholder interests and concerns and both resulted in considerable damage to corporate reputation. In the intervening period, both companies have lost both their chairman and CEO.
The very different nature of each of the issues in the Rio Tinto and AMP case studies highlights how diverse the issues which impact stakeholders can be. In April this year, the AICD released an important resource for directors, Elevating Stakeholder Voices to the Board: a Guide to Effective Governance which sets out an effective framework to guide discussions and consideration, regardless of size and sector of the organisation. It recognises the broad nature of the issues which may from time to time require consideration. The Guide sets out five key principles for effective stakeholder engagement.
- Identifying and mapping various stakeholders and their interests as they relate to the company and its purpose.
- Consideration of how a company will engage with its various stakeholders. Is a formal stakeholder governance framework required?
- Establishing what communications and reporting boards should receive from management regarding engagement and relationships with stakeholders. Does the board need to participate in any of these activities?
- Clarity around decision-making procedures, taking into account stakeholder interests and views and if and how decisions will be communicated.
- Review and evaluation of the effectiveness of the organisation’s stakeholder governance.
5. GOVERNMENT BOARDS
I thought it might be worth mentioning government boards as a topic this year in view of some high profile episodes during the year, including in relation to Australia Post, NSW iCare and the ABC, which is no stranger to the limelight when it comes to the role of its board. I don’t propose to delve into the detail of these instances but, rather, highlight some issues for consideration.
- By and large, directors agree to government board appointments as a way to contribute for public benefit. Sometimes directors can be surprised at how challenging their board role can be, particularly in times of heightened political tension.
- The process of appointments to boards is not always undertaken on a skills and experience basis and this can impact the effectiveness of the board.
- Government boards serve one and sometimes more than one shareholder minister, which may result in some complexity. Long-term directors on government boards have reported an increase in politicisation and there are many examples of where entire boards have been spilled and replaced.
- Government boards are usually subject to a governing Act which sets out the role, powers etc of the board. Directors should be very familiar with the relevant legislation under which their board operates.
- Directors should develop a strong understanding of the public sector and the political dynamics in play. Independence is not always a valued quality.
- Many government boards are subject to a high level of public scrutiny and, while they should always be accountable, this can sometimes have a negative consequence to personal and professional reputations.
- Proposed appointment to a government board requires very careful consideration of potential conflicts of interest.
- By the nature of government boards, stakeholder engagement often takes a very different flavour to other organisations.
6. ONGOING CHALLENGES IN NOT FOR PROFIT SECTORS
The NFP sectors continue to be challenged by the pandemic. AICD's 2020 NFP study noted that almost 80% of organisations have changed significantly the way they operate. The study also noted significant deterioration in NFPs’ financial health over the last 5 years which was exacerbated by COVID-19. The second major wave of the pandemic has continued to challenge NFPs and their boards in much the same way as last year, notwithstanding various support packages provided by the state and federal governments. The pandemic has continued to have a devastating impact on many sectors, including the performing arts, organisations who rely on event-based fundraising and those who normally rely on non-government funding streams. Services to the vulnerable have met with heightened demand, with limitations on the ability to deliver due, in part, to stretched resourcing, such as the reduced availability of volunteers. However, I’d like to highlight the work of Sydney’s Wayside Chapel during the pandemic wave last year as a great example of success. Despite having to confront challenges of the type just mentioned, it managed to lift its funds raised from its supporters and the public. This can occur when you have a clear purpose and mission which resonate with your supporter base and you are seen as a trusted community provider who delivers.
Drawing on a report published earlier this year by Social Ventures Australia, Directors of NFP boards may wish to consider the following to build resilience and future sustainability:
- What is the organisation’s funding mix?
- Do we undertake a regular analysis to understand the vulnerabilities?
- What risks are there in relation to our grant funding?
- How agile are we?
- Do we have the skills and resources to maximise opportunities which arise in a crisis situation as well as for business as usual?
In July this year, Treasury released a consultation paper, seeking feedback on issues identified in the 2018 ACNC Review.
At present, the secrecy provisions set out in the ACNC Act prevent the ACNC from disclosing the context or rationale for its enforcement decisions. The consultation paper sought to understand stakeholder views around when the ACNC should disclose information about its regulatory activities to the public.
The AICD’s submission in response to the consultation paper expressed support for greater transparency on ACNC enforcement outcomes but did not support the proposal to disclose information relating to impending or current investigations (unless the registered entity consents), on the basis they could have a very detrimental impact on the registered entity’s access to natural justice and permanently damage its reputation. The AICD supports the ACNC releasing information on registration decisions, conditional on it being deidentified and the release of finalised information on completed investigations and any resulting compliance actions.
Of considerable concern to NFPs is the Government’s announcement in June of its intention to proceed with amendments to ACNC Governance Standard 3 regarding unlawful activities. The Government has revisited some of the changes originally proposed to the regulations and, as things currently stand, the following apply:
- The scope of offences captured is described as engaging in or promoting serious unlawful acts of trespass, vandalism, theft, assault and threatening behaviour. This has been amended so that charities are no longer at risk of deregistration for administrative errors.
- Charities must take reasonable steps to ensure their resources are not used to actively promote unlawful conduct.
- Notes have been added to clarify that the ACNC Commissioner may consult relevant law enforcement authorities to form a reasonable belief about compliance with the amended governance standard, and to provide examples about the matters that the reasonable internal control procedures may deal with.
Many NFPs, including the AICD, have continued to raise serious concerns with the proposed amendments for the following reasons:
- the changes may inhibit a charity’s willingness to speak out or advocate on an issue for fear of falling foul of the new regulations. The Fred Hollows Foundation, Oxfam, the Victorian Aboriginal Legal Service and Anglicare are among a group of charities who have petitioned the UN for support; and
the ACNC Commissioner still has a wide discretion to remove charities from the register based on a “reasonable belief” that a charity is “likely” to break the law, even if they have not committed an offence, nor intended to.
It will be interesting to watch where this goes, particularly in view of the recent Administrative Appeals Tribunal decision to reject the ACNC’s decision to turn down the application by Global Citizen for DGR status as a public benevolent institution because its activities include advocacy. Furthermore, the Senate Committee for the Scrutiny of Delegated Legislation has recommended that the changes proposed by the Government be disallowed and, in all, four disallowance motions in relation to the changes have been moved.
On 11 November, regulations came into effect relating to reporting thresholds, disclosure of aggregated remuneration of responsible persons and senior executives of large charities and the disclosure of material related party transactions . These all appear consistent with the recommendations of the ACNC review.
While the AICD continues to urge the Federal Government to find a solution to the red tape around fundraising, that satisfies the states and territories and supports the critical work of NFPs, this remains a work in progress. However, the Government has been working with a number of charities to develop a voluntary code to improve transparency of the use of charitable donations during natural disasters. With lessons from last year’s bushfire relief efforts, it is proposed the code will provide signatory charities with a framework for transparent reporting of disaster recovery fundraising and activities.
In a similar vein, 16 of Australia’s top international aid organisations, including UNHCR, Oxfam, Save the Children, World Vision, Plan International and Care, have banded together to form the Emergency Action Alliance, which will act as a single fundraising entity to large-scale disasters. It will be interesting to see if such an initiative drives more alliances between other similar purpose charities.
So, to conclude, here are some questions directors can take away:
- Should your company get ‘back to basics’ to review its current needs in the context of D & O Insurance?
- What level of skill, knowledge and awareness does your board have in relation to the prevalence of sexual harassment in your company and how to address it? What does its prevalence or otherwise say about your company’s culture more broadly?
- Do you and your board have knowledge of whether NDAs have been utilised in the settlement of claims with employees and, if so, the circumstances and reasons for their use?
- If diversity is an important driver of business success in your company, do your board and management possess the requisite diversity “literacy” skills to successfully progress a diversity agenda? Are you just counting
or do you genuinely value diversity?
- Does your company have a dynamic approach to stakeholder engagement that can stay current with a fast evolving landscape?
- For Not for Profits, do you invest enough in addressing strategic imperatives to ensure long term sustainability and resilience while responding to the day to day pressures of delivering on purpose?