ASIC is expecting directors to monitor and disclose all risks of financial difficulty during this period of high risk of insolvency, Shipton told AICD members in a recorded interview.
“On an ongoing basis, we’re expecting directors to monitor the financial position of their entities, and particularly monitor the risk of financial difficulty,” he said.
ASIC expects that directors will look to ensure that companies or relevant entities fully disclose the details of any government assistance and other financial support in their financial reports. “That's, we think, a really important input and matter. That should be stated and recognised and detailed in financial statements.”
Directors also need to be mindful that all loan and debt deferrals that may be in place will ultimately need to be repaid. “Whether or not that then provides a trigger in relation to that financial difficulty test or payment of debts … is going to be an ongoing challenge for directors and business leaders in this country moving forward. Because the relief measures will come off,” he added.
In this climate, ASIC will use regulatory authority enforcement tools where the public interest in the evidence suggests it is warranted. “But right now, we're seeing this as a supervisory exercise, and an engagement exercise with corporate Australia. Because we know it's tough.”
Directors should check the Frequently Asked Questions area of the ASIC website around financial reporting and audit requirements related to COVID-19, he said.
Recent court wins
Shipton also said litigation would continue as an ASIC enforcement measure and pointed to recent successes in this area.
“We've had, I think, some really good successes in recent times,” he said, referring to the $57.5 million record fine imposed by the Federal Court after action brought by ASIC against the National Australia Bank (NAB) over misleading and deceptive conduct for fees charged to superannuation fund members for no services provided.
“We've had our first successful action against the fees for no service issue that has been around for years… I know other regulators have significantly larger penalties, but in our work, this is a significantly large penalty and I think has a significant amount of deterrence effect.”
Other events had highlighted in recent times that ASIC can use litigation very effectively as a protective or preventative measure by going to the courts for injunctions and other actions, Shipton said.
ASIC had recently successfully used the courts to intervene and protect investors in the Mayfair 101 property group action. “That's a really good example of where court-based interventions are effective in intervening to stop, prevent or minimise real and demonstrable harm to real people.”
ASIC has accused director James Mawhinney of misleading investors in Mayfair 101, which has raised at least $140m from the public. ASIC obtained interim orders in the Federal Court of Australia against companies in the Mayfair 101 group and their director, James Peter Mawhinney, including the appointment of provisional liquidators.
ASIC Corporate Governance Task Force
Asked in his video presentation by AICD managing director Angus Armour about the progress of the ASIC Corporate Governance Task Force, Shipton also replied that the work of the taskforce had now been made permanent.
“We’ve taken what were originally pilot projects or ad hoc projects and now made them permanent,” says Shipton. “And we have formed a supervision group inside our organisation, which takes in the task force team.”
This ongoing supervisory team works closely with a continuous monitoring supervisory team, which works with the large financial institutions. “We think we have an effective standing resource that will look at, in a supervisory sense, the challenges that are facing corporate Australia and of course that is intimately connected to the challenges that Australian directors face.
The aim is to “…improve risk management practices and attention by business leaders and directors, so that they're minimising harms to consumers, minimising harms to the corporate system itself, and the financial system itself”.
Other key benefits of the taskforce have been to deliver useful feedback to companies with ASIC benchmarking practices and comparison cases.
“The benchmarking allows everybody in corporate Australia to better understand the relative relativity of not just practices and procedures in companies, by way of governance or risk remuneration, but also the relative position of maturity of those practices and procedures,” he said.
ASIC has shifted the focus not just from risk frameworks but on to practical implementation. “There needs to be greater attention, focusing and frameworks around non-financial risks.”
Business leaders and directors need to pay special attention to culture this year and beyond, on an ongoing permanent basis, warned Shipton. “Right now, during the pandemic, we've got extraordinary challenges with remote working environments and fragmentation of the workforce. So how is that impacting culture?”
Leaders and directors need to personally steward culture. “Culture needs to be led. It's really important that directors and business leaders act as stewards of a culture,” said Shipton. “And if you don't focus on it, it will go in directions that you don't want to go into and could actually be dangerous.”
“I'm working on our (ASIC) culture as well,” he said. “I'm working on this full time.” ASIC has been surveying staff every fortnight or so to monitor culture. What is proving most useful is direct feedback from staff, where they provide comments in the survey in their own words.
“In many respects, it's one way of engagement and feedback in the absence of being back in the office.”
Challenges for listed directors
Graham Bradley AM FAICD spoke on developments affecting large and listed companies and the lessons for directors. COVID-19 had brought many challenges for directors, including managing loss of revenue in some organisations, said Bradley who is non-executive chair of HSBC Bank Australia, EnergyAustralia Holdings, GrainCorp and Virgin Australia International Holdings.
“As a director of a subsidiary of Virgin Australia, I have experienced my first voluntary administration,” said Bradley. “As a director of Ensemble Theatre, I have worked with management to implement redundancies, stand-downs, and applications for government relief and the challenge of rescheduling theatrical performances that were booked 18 months ahead. As a director of Tennis Australia, I have participated in ever-changing scenario analysis to determine how to preserve the organisation’s financial soundness in the face of possible inability to stage our main revenue-generating event, the Australian Open, next January. Every director I know has faced similar issues.”
He said the “standout lessons” had been the importance of board and management working together as a team, and directors’ “considerably more intense engagement” in short-term operational management.
“This crisis has demonstrated the great advantage of Australian directors’ willingness to engage during a crisis and it is a strength of corporate governance in this country,” he said.
Managing financial exposure had been crucial, and Bradley listed key to-do items for boards in 2021, including:
- Focus close attention on cash and cashflow and receive more frequent reports. “Recall the One.Tel case, where the court indicated that prudent directors of a company with severe insolvency issues should, at a minimum, receive weekly cashflow statements, not monthly.”
- Take a good look at debt repayment trends. “Is there an increase in delinquency and aged debtors, and is the credit quality of debtors adequate to ensure collection?”
- Monitor the company’s payments to suppliers to ensure that management is not delaying payment to creditors excessively to preserve cash, a technique that may hide emerging insolvency risk.
- View spikes in revenue with caution, such as those experienced by some retailing companies during periods of panic buying, lest these “sugar hits” fade or reverse rapidly, leaving unsustainable costs and inventories in place.
- Bring a degree of scepticism to management forecasts lest they be overly-optimistic about the recovery of business flows.
- Test carrying values of assets, make impairments where necessary, and look to the adequacy of provisioning, for example bad debt provisioning.
- Review carefully ongoing and proposed capital commitments lest these overstretch company solvency, financing lines and resources.
Despite the COVID crisis it seems that around the world, the expectations of director performance continue to mount year by year,” said Bradley. He added that D&O insurance quotes had increased by between 200 and 400 per cent, noting the legal liability regime on company directors is “uniquely burdensome”.
Look-ahead questions for directors include:
- Did our corporate culture serve us well in this crisis?
- Can we embed and maintain newly found innovation and agility, which companies have displayed in coping with the crisis?
- Given the need for directors to engage more intensely in managing company operations during the crisis, did our directors understand operations well enough to contribute constructively to this challenge?
- Do we need to change the operating business model radically? For some boards, this will be crystal-clear — changed consumer preferences will force changed business models.
- Is our management still looking at its feet and do we directors need to raise their sights to the horizon, and the opportunities and challenges of the post-COVID period over the next five years?
- Is our company ready for next black swan event?
Reset and rethink for 2021
Lisa Chung AM FAICD nominated two challenges for directors in 2021 — the reset and the need for “legacy thinking”. “It’s been a momentous year by any measure and the events we have witnessed are triggering the biggest reset opportunity in a generation,” she said. “How ready is your board for what’s next? Do you have the right skills on your board and executive to take advantage of the changed world? Are you a maker or a taker?”
When it comes to “legacy thinking”, she said directors should think carefully about how they conduct themselves as leaders, especially in times of crisis. “Our responses to these times of crisis will be remembered by our staff, customers and other stakeholders and will shape behaviours and culture in many ways into the future. What do we want our legacy to be?”
Chung outlined issues for directors across six themes.
- Workplace health and safety
- Board oversight of culture
- Reputation and stakeholder engagement
- Innovation and creativity
- Post-pandemic workplace
- Financial challenges for NFPs
Chung pointed to research showing that in most sectors, workplaces transitioned very quickly to working from home where that was viable. A Gartner survey of 127 US company leaders, for instance, showed 82 per cent said that post COVID-19 they intended to permit remote working some of the time; and 47 per cent said they intended to allow employees to continue to work remotely full-time.
Chung said boards and management can no longer rely on the often-erroneous assumption that because a team member is at their assigned desk in the office, they are being productive.
Presenteeism is out and managers will have to determine what outcomes and results they are seeking from their team, how these will be assessed and measured, and communicate this clearly,” she said. “Some businesses are rethinking the workplace for its highest and best use, that is, to prioritise activities from which they can derive the greatest value from the cost of the space and, in that process, reduce their space requirements and premises costs. An example might be better designed collaboration spaces, which attract team members to come together to work on specific projects or issues. The spaces become a compelling place to gather or visit for a purpose, rather than a place to ‘live’. There may also be meeting or working hubs, where colleagues have the opportunity to meet, work and interact informally.”
Essential Director Update 2020 – Video Presentations & Webinar Recording
Lisa Chung AM FAICD video
Graham Bradley AM FAICD video
James Shipton video
Access webinar recording for your region