Australian Regulatory Compliance Review

ASX Corporate Governance Council gender diversity recommendations

The ASX Corporate Governance Council has announced proposed changes to the Corporate Governance Principles and Recommendations which will include a new recommendation requiring each listed entity (on an “if not, why not?” basis) to establish a diversity policy that includes measurable objectives relating to gender as set by the board of the entity. The policy must be disclosed to the market in full or in summary.

Other recommendations will require

• each listed entity to disclose in its annual report (on an “if not, why not?” basis) its achievement against the gender objectives set by the board of the entity.
• each listed entity to disclose in its annual report (on an “if not, why not?” basis) the proportion of women employees in the whole organisation, in senior management and on the board.

The Council expects to provide an exposure draft of the proposed changes to the Corporate Governance Principles and Recommendations for public consultation in early 2010 with an anticipated implementation date of 1 July 2010.

AWB update: ASIC v Lindberg

More than 3 years after the Cole Inquiry report into AWB's activities in the UN Oil for Food Program was published, ASIC civil proceedings against the former AWB CEO are still not resolved.

The latest decision in Re AWB Ltd (No 10) [2009] VSC 566 recaps the ASIC actions against Lindberg and the various rulings against ASIC.

AWB Index

UPDATE 17 December 2009: ASIC to appeal permanent stay of its second civil penalty case

APRA final standard on remuneration for ADI's and insurers

The Australian Prudential Regulation Authority (APRA) has released the final version of its prudential requirements on remuneration for authorised deposit‑taking institutions (ADIs) and general and life insurance companies.

The relevant industry governance standards (APS 510, GPS 510 and LPS 510) and an associated prudential practice guide (PPG 511) have now been published, along with a response paper to the second round of consultation that explains further modifications made in response to submissions and other feedback.

Some details in relation to foreign branches and to the coverage of different groups of persons have been modified.

The revised governance standards will come into effect on 1 April 2010. By this date, APRA requires that the Board Remuneration Committee, with appropriate composition and charter, will be established and a suitable Remuneration Policy will be in place.

Director and executive termination payments amendments commence

The Corporations Amendment (Improving Accountability on Termination Payments) Act 2009 commenced on 24 November 2009.

Background here.

UPDATE: Corporations Amendment Regulations 2009 (No. 9) commenced on 25 November 2009

ASIC v Rich: ASIC One.Tel case against Rich and Silbermann dismissed

In Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 Judge Austin decided that ASIC had failed to prove its case against One.Tel director and joint chief executive Jodee Rich and One.Tel's finance director Mark Silbermann.

ASIC brought civil penalty proceedings for breach of the statutory duty of care of company directors and officers. The proceedings were initially brought by ASIC against four defendants, arising out of the collapse in May 2001 of a large Australian listed company, One.Tel Ltd and its local subsidiaries, and the collapse or on-sale of overseas subsidiaries.

The actions against two of the defendants, joint managing director Bradley Keeling and non-executive Chair John Greaves were previously settled.

ASIC alleged that the defendants did not disclose the true financial position of the company to the board, and that they knew or should have known the true position.

The focus of the argument was on whether ASIC had proved its case as to the true financial position in the January- April 2001 period.

In his conclusion Judge Austin said

"The question for determination is not the larger issue of how it happened that a rising corporate group supported by two well-resourced investors came to fail, in spectacular circumstances. The court has not been asked to determine, at large, who was to blame for the disaster, as amongst the defendants, other executives, non-executive directors, major shareholders and advisers. The proceedings are not a Royal Commission. Notwithstanding the huge amount of effort that has been devoted to these proceedings by the parties and their advisers, and by the court, many questions about the failure of One.Tel are left unanswered....

One of the unanswered questions is whether One.Tel would have survived if, in May 2001, PBL/CPH and News had maintained their support for the company and implemented their plan to underwrite a deeply discounted rights issue to raise $132 million. The tendered evidence has led me to reject ASIC's figures as to the financial circumstances of One.Tel at the end of February, March and April 2001and to prefer the figures set out in Chs 11, 13 and 15 respectively. If those figures are right, a fundraising of $132 million accompanied by continuing support by the major shareholders would probably have been enough to address the company's cash requirement until November 2001, by which time, according to the business plans, the company's businesses would have been generating more healthy Group cash flow. The withdrawal of that support, and the abandonment of the rights issue, may well have ensured that the company could not survive."

The judgment is 3,105 pages long. The table of contents alone is 62 pages.

A costs hearing has been set for November 27. Judge Austin has already indicated that ASIC should pay the defendants' costs on a party and party basis.

ASIC is considering whether to appeal.

UPDATE 17 December 2009: ASIC appeals One.Tel decision

Director and executive termination payments bill passed

The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 was passed by the Senate on 16 November after it dropped an amendment requiring a review in three years time. The House of Representatives sent the Bill back to the Senate after it disagreed with the proposed Senate change.

Key features of the Bill include:

• termination benefits for company directors and executives exceeding one year's average base salary are subject to shareholder approval.
• The scope of the requirements relating to termination benefits is expanded to include senior executives or key management personnel of a disclosing entity.
• The definition of what constitutes a "benefit" is broadened.
• New regulation-making powers will specify what types of payments are, or are not, a termination benefit, and to define 'base salary'.
• The obligation to immediately repay unauthorised termination benefits .
• The retention of the existing requirement for the giving of the benefit to be approved by a resolution passed at a general meeting.

The legislation and accompanying regulations will take effect the day after Royal Assent is granted.

UPDATE 25 November: The Bill was assented to on 23 November and commenced 24 November 2009.

It inserts new sections 200AA and 200AB in the Corporations Act and amends sections 200A-G and J relating to the payment of termination benefits to company directors and executives.

The Corporations Act currently allows for termination benefits up to seven times a director’s total annual remuneration package before shareholder approval is required. Additionally, only company directors’ termination benefits are subject to shareholder approval.

The new rules will not apply retrospectively to existing contracts. The new arrangements will apply to contracts that are entered into and renewed or extended.

The new rules will also apply to existing contracts for which a variation of a condition is made. Minor changes to an existing contract would not be considered a variation of a condition. However, changes that effect an essential term, including any term relating to remuneration would be considered a variation of a condition.

Director and executive termination benefits update

The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 (see background here) has been passed by the Senate with one amendment: a clause that the law ceases if not extended by Parliament after 3 years.

The House of Representatives will now consider the amendment made by the Senate.

UPDATE 30 October: On 29 October the House of Representatives disagreed to the Senate amendment.

Report on regulation of not-for-profits

The Productivity Commission has released its draft research report on the contribution of the not-for-profit sector.

The report recommends, amongst other things, clearer governance and accountability of NFP's via a consolidated regulatory framework that provides a simple one-stop-shop for Commonwealth registration and tax endorsement for NFPs. This would bring together the multiplicity of governance, taxation and fundraising regulatory arrangements, especially at the Commonwealth level.

The Commission proposes the establishment of a ‘one-stop shop’ for Commonwealth regulation in the form of a Registrar of Community and Charitable Purpose Organisations. This could be a new organization or a statutory division of the Australian Securities and Investments Commission, and would replace the equivalent functions in existing regulators, including incorporating the Office for Registrar of Indigenous Corporations.

The Registrar would:
• register and regulate a new Commonwealth Incorporated Associations regime, Companies Limited by Guarantee, and Indigenous Corporations
• register and endorse NFPs for all Commonwealth tax concessions
• potentially register NFPs for cross-jurisdictional fundraising
• establish a single portal for the lodgement, maintenance and access to public record corporate and financial information, proportionate to size and risk-based on the principle of ‘report once use often’. Such a facility could be used as a single place for corporate and basic financial ‘health checks’ for government contracting purposes and/or by prospective donors.
• investigate complaints
• provide education and guidance on governance issues.

About not-for-profits

According to the Productivity Commission:

• On a rough estimate, there are 600 000 NFPs (excluding body corporates such as for strata titles). The majority, about 440 000, are small unincorporated organisations (such as neighbourhood tennis, babysitting, or card clubs).
• Of the remainder, the ABS classifies 58 779 as ‘having an active tax role’ (on the basis that they employ staff or access tax concessions). These ‘economically significant’ NFPs employed 889 900 staff, around 8 per cent of employment, and contributed just under $43 billion to Australia’s GDP in 2006-07.
• The ratio of the NFP contribution to GDP has increased from 3.3 to 4.1 per cent between 1999-00 and 2006-07.

Australian remuneration governance standards for financial institutions and insurers

This article by me was first published by Complinet.

The Australian Prudential Regulation Authority (APRA) has started a second round of consultation on changes to its governance standards for authorised deposit-taking institutions (ADIs), general insurers and life insurers (currently contained in APRA’s Governance Prudential Standards APS 510, LPS 510 and GPS 510) to deal with the risks involved in remuneration structures of APRA-regulated institutions.

The proposed changes will implement the Financial Stability Board’s Principles for Sound Compensation Practices which were endorsed by the leaders of the G20 in April 2009. The Principles aim to ensure effective governance of compensation, alignment of compensation with prudent risk-taking, and effective supervisory oversight and stakeholder engagement in compensation.

It reflects government, investor and community concern in recent years at excessive risk-taking, conflicts of interest and apparent examples of individual greed taking priority over the interests of shareholders and customers.

The standards will come into effect on 1 April 2010.

Which institutions are affected?

APRA’s remuneration proposals will apply to all APRA Regulated institutions: authorised deposit-taking institutions (ADIs), general and life insurers (including friendly societies) and authorised non-operating holding companies.

APRA‘s remuneration requirements will also apply to Australian branches of foreign ADIs and eligible foreign life insurance companies.

How the standards will work

The new standards will require the establishment of a Board Remuneration Committee and the adoption by Boards of a Remuneration Policy.

APRA has proposed that the composition of the Board Remuneration Committee be consistent with that of the Board Audit Committee:  it must have at least 3 members and all members must be non-executive directors with a majority of independent directors and an independent chair.

The Committee’s functions include conducting regular reviews of the Remuneration Policy including an assessment of its application, effectiveness and compliance with APRA’s requirements. The Committee must also make recommendations to the Board on the remuneration of the personnel covered by its Remuneration Policy.

APRA has the power to exempt a regulated institution from establishing a Board Remuneration Committee.

APRA will allow the use of a group Board Remuneration Committee for regulated institutions that are part of a group.

For foreign ADIs, the senior officer outside Australia must perform the responsibilities of the Remuneration Committee.

Who does the Remuneration Policy apply to?

APRA will require that the Remuneration Policy apply to three categories of personnel:
1. responsible persons (excluding responsible auditors and non-executive directors);
2. risk management, compliance, internal audit and financial control personnel (collectively, ‘risk and financial control personnel’); and
3. all other employees or agents for whom a significant portion of total remuneration is variable and determined by performance measures. A person need not be an employee of the regulated institution to be covered, and may be an employee of a subsidiary or otherwise related company, a consultant, a contractor or an agent.

The key issue is that personnel need to be remunerated in a manner which does not expose the institution to excessive risk, for example if the independence of an internal auditor is affected or if the remuneration arrangements of third party brokers provide inappropriate incentives.

The Remuneration Policy

The Remuneration Policy must form part of a regulated institution’s risk management system.

The Remuneration Policy must outline the remuneration objectives and the structure of the remuneration arrangements, including but not limited to the performance-based remuneration components,of the regulated institution.

The performance-based components of remuneration must be designed to align remuneration with prudent risk-taking, and must allow for adjustments to reflect:
(a) the outcomes of business activities;
(b) the risks related to the business activities taking account, where relevant, of the cost of the associated capital; and
(c) the time necessary for the outcomes of those business activities to be reliably measured.

The Remuneration Policy must provide the Board with discretion to adjust performance-based components of remuneration downwards, to zero if appropriate, if such adjustments are necessary to:
(a) protect the financial soundness of the regulated institution; or
(b) respond to significant unexpected or unintended consequences that were
(c) not foreseen by the Board Remuneration Committee.

The Remuneration Policy must prohibit responsible persons who receive equity or equity-linked deferred remuneration from hedging their economic exposures to the resultant equity price risk before the equity-linked remuneration is fully vested and able to be sold for cash by the recipient.

APRA’s preference is for deferral of both the allocation and vesting of performance-based remuneration to allow time for the outcomes of the business activities to be reliably measured. This involves measuring results retroactively and putting performance-based remuneration at risk until results can be validated.

APRA’s attitude is that Boards need to retain the discretion to make adjustments to performance-based remuneration for two reasons. One is to protect the financial soundness of the regulated institution in adverse circumstances and the other is in circumstances where formula-based bonus calculations create material unexpected outcomes. Both of these discretions are intended to cater for extreme circumstances.

On incoming payments, APRA recognises that competition in recruiting may encourage some regulated institutions to provide cash payments or cash bonuses to incoming staff. APRA nevertheless expects institutions to place suitable deferral and performance hurdles on such payments.

However APRA has stated that its remuneration requirements are not intended to prescribe business decisions regarding pay levels or limit innovative methods of rewarding staff, provided such measures do not compromise the requirements of the prudential standards.

Timetable

APRA expects to release its final governance standards in November 2009. They are unlikely to depart materially from the revised draft standards recently released.

The standards will come into effect on 1 April 2010. By that date, regulated institutions will be required to have:
• a Board Remuneration Committee in place; and
• a Remuneration Policy in place.

Regulated institutions must also ensure that all contracts negotiated or renegotiated after the release of the final standards comply with the standards.

Contracts already in force at that time must be fully compliant at the first opportunity for renegotiation, and in any event by 31 March 2013.

Compliance tips

Companies should review their current executive employment contracts and consultancy agreements (including third party sales and distribution agreements) to identify whether they are with affected persons or groups of persons and, if so, note the review and termination dates to determine when the agreements need to be amended to comply with the standard.

What else?

The Productivity Commission is examining executive remuneration for listed companies in Australia and has announced that it will release a discussion paper outlining its recommendations by the end of September.

Separately, the Government has announced a lower threshold for shareholder approval of termination payments to directors and executives as well as new rules for the taxation of shares allocated under employee share schemes. These changes may have implications for APRA's proposals.

The government is also reviewing continuous disclosure requirements in respect of remuneration.

James Hardie directors penalty decision

In Australian Securities and Investments Commission v Macdonald (No 12) [2009] NSWSC 714 Justice Gzell of the New South Wales Supreme Court refused to exonerate the former James Hardie directors and executives who contravened section 180(1) Corporations Act in Australian Securities and Investments Commission v Macdonald (No 11)[2009] NSWSC 287 relating to their approving the content of the Draft ASX Announcement at the February 2001 board meeting and related matters.

The 2 US directors who participated by phone were not exonerated even though they did not have a copy of the draft ASX Announcement as they did not request a copy and their abstention was not recorded.

Justice Gzell rejected requests for relief by the non-executive directors saying:

This was a serious breach of duty and a flagrant one. The non-executive directors were endorsing JHIL’s announcement to the market in emphatic terms that the Foundation had sufficient funds to pay all legitimate present and future asbestos claims, when they had no sufficient support for that statement and they knew, or ought to have known, that the announcement would influence the market.

Justice Gzell calculated disqualification periods having regard to the number of declarations made against each director or officer, with some periods being concurrent:

• former James Hardie chief executive Peter Macdonald was disqualified from managing a corporation for 15 years (11 contraventions) with a pecuniary penalty of $350,000;
• former general counsel Peter Shafron was disqualified for 7 years (3 contraventions) with a pecuniary penalty of $75,000;
• former chief financial officer Phillip Morley was disqualified for 5 years (1 contravention) with a pecuniary penalty of $35,000
• Former directors Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel, Mr O’Brien, Mr Terry and Mr Willcox were each disqualified for 5years (1 contravention) with a pecuniary penalty of $30,000 each
• The company was ordered to pay to the Commonwealth of Australia a pecuniary penalty of $80,000 relating to the Final ASX Announcement.

An appeal is likely.

UPDATE: ASIC Media Release