Australian Regulatory Compliance Review

Is there a risk in attending board meetings remotely?

In recent years changes to electronic technology and the law (Section 248D Corporations Act) have allowed directors to attend board meetings by telephone, video conferencing or over the internet. But does that result in an effective meeting?

I suspect that the two James Hardie non-executive directors who attended the February 2001 board meeting,by telephone and video from the USA in hindsight would have preferred to be at the meeting in person. (That meeting is the subject of ASIC v MacDonald,)

Whilst urgent single issue meetings can be effectively dealt with remotely provided all relevant documents are circulated, other meetings may be more successful if they are "face to face". With all directors present in person there could be better board interaction and understanding of the issues and even what is actually agreed.

There is a risk that directors attending remotely can get distracted the longer the meeting takes even if they have all documents being discussed. What happens if the remote directors are disconnected? What if documents are tabled that the remote directors do not see?

The James Hardie penalty decision may have more to say on this issue.

CAMAC report on board diversity

The Corporations and Markets Advisory Committee (CAMAC) has released its report Diversity on boards of directors.

In considering diversity on corporate boards, the report looks at:

• the role and structure of boards, including the processes by which directors are appointed and the elements that make up an effective board
• the current state of diversity
• possible ways to promote an environment conducive to a more open approach to the composition of boards, including recruitment of directors from a more diverse pool of qualified candidates
• possible ways to assist in the development of a broader pool of skilled and experienced board candidates.

The Committee does not support any move to impose a particular model of board diversity on private sector companies, such as through quotas. Such a move would cut across the responsibility of shareholders for the appointment of directors who are to be accountable to them.

CAMAC considers that effective change depends on convincing corporate leaders and shareholders of the benefits of a more open approach to the identification and selection of directors.

New edition of IFSA Blue Book

The Investment and Financial Services Association has published a new edition of its Blue Book on Corporate Governance.

Draft Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 released

Senator Nick Sherry, Minister for Superannuation and Corporate Law, has released an exposure draft of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 and Regulations. The Bill will change the regulatory framework relating to the payment of termination benefits to company directors and executives currently set out in Sections 200F and 200G of the Corporations Act.

If passed, the Bill will:

• lower the threshold at which shareholder approval is required for a termination payment from seven times an annual remuneration package to one times average annual base pay;
• expand the number of company officers for which approval is required from directors to also include senior executives and key management personnel;
• broaden the definition of what constitutes a "benefit", including a new Regulation-making power to deem new forms of payment that seek to avoid the law as a termination benefit;
• clarify the definition of a termination benefit and expand it to include the accelerated or automatic vesting of options and payments in lieu of notice;  
• require immediate repayment of unauthorised termination benefits. Any unpaid benefits will continue to be held on trust for the company;
• impose higher penalties for breaches of sections 200B, 200C and 200D, with potential fines for individuals to be increased to $19,800, up from $2,750, together with the option of six months imprisonment, and for corporations to be increased to $99,000, up from $16,500 ; and
• a mechanism for shareholders to assess golden handshakes in the context of the recipient's actual performance by requiring shareholder votes on termination benefits to take place at a future annual general meeting following an executive's departure and a ban on the calling of extraordinary general meetings that are only to undertake such an approval vote.

The Bill will not alter contractual arrangements entered into before the Bill becoming law, including defined benefit superannuation arrangements, and excludes statutory superannuation payments from the calculation of "termination benefits".

The Rudd Government has also asked the Productivity Commission (PC) to undertake an inquiry into executive remuneration. The PC inquiry will take the new laws into account as part of its inquiry into Australia's executive remuneration framework.

The Bill, which will be introduced into Parliament during the Winter sittings, will be open for public consultation for a four-week exposure period ending on 2 June, 2009

ASIC v James Hardie decision: company, directors and officers were misleading

In Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 the New South Wales Supreme Court has decided in favour of ASIC's civil claim that a number of statements in the Draft ASX Announcement by James Hardie to the effect that the Foundation would have sufficient funds to meet all legitimate Asbestos Claims, that it was fully funded and provided certainty for people with legitimate Asbestos Claims were false or misleading and that the directors were in breach of Section 180(1) of the Corporations Act.

Gzell J also decided that:

• the CEO Mr Macdonald and Company Secretary and General Counsel Mr Shafron failed to advise the board of JHIL that the Draft ASX Announcement was expressed in too emphatic terms concerning the adequacy of funding to meet all legitimate present and future Asbestos Claims and in that respect they were in breach of Section 180(1).
• by failing to advise the board of JHIL that the reviews of the Cashflow Model by PwC and Access Economics were limited to reporting on the logical soundness and technical correctness of it and they had not verified, and had been specifically instructed not to consider, the key assumptions adopted by the Cashflow Model, being fixed investment earnings rates, litigation and management costs and future claim costs, Mr Macdonald, Mr Shafron and Mr Morley breached Section 180(1).
• Mr Macdonald breached Section 180(1) in approving for release the Final ASX Announcement, or in failing to advise that the Final ASX Announcement not be released, or that it be amended before being released to remove the matters that were false or misleading.
• by issuing the Final ASX Announcement to the ASX on 16 February 2001, JHIL engaged in conduct that was misleading or deceptive, or was likely to mislead or deceive, contrary to Section 995(2) of the Corporations Act.

A number of ASIC allegations of false and misleading conduct were not successful.

UPDATE 24 April: ASIC has released a table analysing proved contraventions and dismissed allegations against each defendant.

ASIC notes that a future hearing will consider penalties and submissions by the defendants relating to penalties.

Update: Company minutes as evidence

The public debate on executive pay

SBS's Insight program is always well researched and last week's program Are executive salaries justifiable? is worth reviewing. You can either see the video or read the transcript online.

Representatives of the major stakeholders participated including Corporate Law Minister Nick Sherry, directors Charles Macek, Harold Mitchell and Yasmin Allen, and Dean Paatsch from RiskMetrics and John Colvin from AICD.

Regulation of Director and Executive Remuneration in Australia

The Productivity Commission has published an Issues Paper relating to its public inquiry into the regulatory framework around remuneration of directors and executives of companies regulated under the Corporations Act.

Initial submissions are due by 29 May 2009

Do better governed firms outperform poorer governed firms?

Treasury has released a paper which examines the relationship between a company’s adoption of the Australian Securities Exchange (ASX) Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations (ASX Corporate Governance Principles) and its financial performance in the areas of shareholder performance, operating performance and one year sales growth for the top 300 Australian listed companies.

Their results suggest that companies demonstrating greater compliance with the ASX Corporate Governance Principles outperform less compliant companies in each of these three financial areas.

Outsourcing risks: Satyam

Leading Indian IT outsource provider Satyam Computer Services has become involved in an accounting fraud scandal allegedly involving more than US$1billion that could affect its services to Australian customers. Business Week.

Satyam has more than 50,000 employees.

The issue for customers is one of trust, especially if the service they outsource is a material business activity.

According toThe Times of India " The initial investigations by the Registrar of Companies (RoC) into the Satyam scam has revealed large-scale selling of the company's  shares by institutional investors just days ahead of Ramalinga Raju's startling confession of sexed-up company accounts. 

The Serious Fraud Investigation Office (SFIO)... would probe all aspects of the scam, especially since the RoC's initial report has suggested that the company's books of accounts and its corporate filings with the exchanges seem to be unreliable.

The SFIO probe, expected to be completed in three months with the Government's intention to fast-track the process, is likely to be an all-encompassing affair and would also cover the auditors and independent directors and their role.

Gupta said the priority for the Government was to protect the interest of the over 3 lakh shareholders, employees and Satyam's clients, both domestic and overseas. Asked to comment on the fallout of the episode for the credibility of India Inc, the minister insisted that Satyam was an "aberration". "

Risk management by directors

One of the important lessons of 2008 is that we can't predict everything and that there will always be surprises (even if in hindsight the cause of the surprise appears to be obvious).

The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us. (page 197, Against the Gods, Peter L Bernstein, 1996)

Whilst the law does not expect directors to be able to predict the future, it does expect them to be diligent in their risk oversight function. There will be increasing regulatory pressure for boards to be more involved in risk management decisions.

Specific hotspots in 2009 will be:

• managing solvency, the level of debt, liquidity, capital management and dvidends;
• board and management evaluation and succession;
• executive remuneration;
• corporate social responsibility and high ethical standards;
• stakeholder communication;
• developing strategies to deal with opportunist investors;
• maintaining compliance resources;
• aligning business performance with your values.

Whilst the board need not be involved in day-to-day activities, it does need to show leadership in the areas of strategy, culture and values.