As corporate governance stays in the spotlight, it worth considering some of the key themes that are likely to occupy the minds of board members next year.
1. Corporate culture
A series of “sensational corporate events” at CBA, Australia Post, QBE and CPA Australia have challenged the reputation of boards and management and given rise to debate about whether corporations deserve the social licence to operate, which is essential to ongoing community support. In turn, regulators are focused on how to encourage boards to take leadership responsibility for the culture of their organisations.
2. Director liability
The Australian Securities and Investments Commission (ASIC) case against former AWB (Australian Wheat Board) chair Trevor Flugge is a key development in director liability relating to corporate reputation. Told by Austrade that Australian wheat sales to Iraq were in breach of the United Nations’ Oil-for-Food program, Flugge did nothing. ASIC alleged several breaches of Section 180 of the Corporations Act (directors’ duty of care and diligence), losing on all but one allegation. The court ruled that a reasonable director in Flugge’s position should have made specific inquiries with the UN or commissioned legal advice as to the propriety and legality of various payments made to the Iraqi government. Last April, Flugge was fined $50,000 and banned from managing corporations for five years.
“The case poses challenges for directors as to how to handle the many market rumours, indirect feedback and information relevant to corporate reputation that inevitably come across your desk,” said presenter Graham Bradley at the Essential Director Update.
3. Corporate reporting and disclosure
The issue of reporting underlying profit or alternative earnings measures has been “hotly debated” over the past year and ASIC has cautiously endorsed the practice in its Regulatory Guide 230. The commission has also been considering the treatment of asset valuations and impairments; all directors must apply their minds to this issue, question assumptions made by management and test impairment, endorse the realism of future business projections and, if necessary, ensure they have expert advice.
4. Cybersecurity and data management
Given the rapid development of malware, no company can ever be fully protected. The Privacy Amendment (Notifiable Data Breaches) Act 2017, which comes into effect in February 2018, requires organisations to have an appropriate plan to respond to data breaches, and to notify affected individuals and the Office of the Australian Information Commissioner of breaches likely to result in “significant harm”.
5. Shareholder activism
Executive remuneration was also in the headlines in the 2016 AGM season. In 2016, 17 ASX 300 companies recorded the first strike against their remuneration report — down from a high of 23 in 2011 — including Boral, Oil Search and the “hapless CBA”. “The investment community has made it very clear that they expect executive bonuses to be earned and not routinely awarded. They also expect to see bonuses reduced even to zero in cases where corporate value has been seriously diminished by reputation-damaging events,” said Bradley.
6. Non-profit sector
The Australian Charities and Not-for-profits Commission (ACNC), which is approaching its fifth year, is due for a statutory review. Issues include the possible introduction of a fit-and-proper-person test for board members of NFPs, the secrecy provisions that inhibit the ACNC from informing the public about its regulatory activities and complaints against charities, and the ACNC’s enforcement powers.
by Christopher Niesche
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