The Essential Director Update: 15

THE ESSENTIAL DIRECTOR UPDATE:15
© Copyright Australian Institute of Company Directors or its licensors 2015. All rights reserved under Australian and foreign laws. 2015 V1
Essential Director Update:15
Keynote presentation by:
Alan Cameron AO FAICD
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Today’s agenda
• Culture
• Information technology / cyber risk
• Recent litigation
• Corporate governance
– Independence
– Diversity
– Remuneration
• The regulators
• Not for profits
• Government bodies
• Not legal or specific advice; for educational use only

Letter to the Editor, SMH, 13 July 2015
• So the Prime Minister wants union governance to have ‘the same
integrity that we’ve long had in corporate governance’. Really?
• Let’s look at some recent examples of corporate ‘governance’;
financial advice industry ripping off clients, labour hire companies
ripping off backpackers, trucking companies disabling speed
limiters, international companies underpaying tax, exorbitant
executive remuneration ripping off shareholders, small business
underpaying junior staff, and so on and on.
• The bar does not seem very high for union governance to have the
‘same integrity’…

Corporate culture
• Bribery concerns
– Thiess allegations; CommBank IT
– ‘Pass mark’ for Australia
– The cost of responding
• Culture in banks — and other companies
– APRA’s concerns
– ASIC, and
– ACCC eg. Coles decision
– 7-Eleven? VW!

Corporate culture
• What can a non executive board do about culture?
– Respond to whistleblowers
– Deal with unconscionable and fraudulent behaviour
– Collective responsibility for mistakes
– Coats and ties for football players

Information technology / cyber risk
• Repelling cyber attackers — McKinsey Quarterly
– Consequences of breaches of privacy — SingTel Optus Enforceable
Undertaking to Privacy Commissioner
– May be rogue employees
– ASIC Report 429, March 2015 — Cyber resilience: Health check
• Board involvement in cyber issues
– Are boards, and managers, ready to respond to digital transformation?
– Director technology toolkit — Company Director Magazine, June 2015
• Update on Bitcoin
– February, stop order on Bitcoin Group prospectus
– August, Senate Committee recommends treatment as currency, not a good
or a service

Recent litigation
• Penalty decision in ASIC v Aust Property Custodian [2014] FCA
1308
– Disqualifications ranging from 15 years, to 2 years and 4 months
– Pecuniary penalties — $230,000, and four of $20,000
– Complications — multiple contraventions, parity between defendants,
and one newly appointed director
– Relief applications all denied

Recent litigation
• Both a shadow and a de facto director
– Featherstone v Hambleton as Liq of Ashala P/L [2015] QCA 43
– Resigned and transferred shares to another for $100
– But conceded they were held on trust
– And remained in day to day control

Recent litigation
• ‘A massive loss to ASIC’? (by ASIC, actually)
– ASIC v Mariner Corporation [2015] FCA 589
– Takeover announcement that did not proceed claimed to have been
reckless and in breach of the law
– Held —
• test for recklessness is subjective, and this announcement was not
reckless;
• directors did not contravene the law even if the company had;
• 2 of the directors could have relied on the third

Recent litigation
• Can you rely on insurance?
– Poole v Chubb Insurance [2014] NSWSC 1832
– Poole one of 4 people found by NSW ICAC to have acted corruptly over
a Hunter Valley coal licence; his legal bill exceeded $650,000; insurer
denied liability on ground of non disclosure of relevant information.
– Insurer failed to satisfy judge that Poole engaged in either fraudulent
non disclosure or fraudulent misrepresentation

Insider trading
• Former banker and ABS analyst both jailed for insider trading in
foreign exchange derivatives, ‘using’ unpublished labour force, new
capital expenditure, retail trade and building approvals data
– 7 years 3 months; 3 years 3 months respectively
• Note — guilty pleas, no listed company involved, no shares
involved, and ASIC did not need to prove use, merely possession of
info
• Judge said ‘the worst instance of insider trading to come before the
courts in this country’
• Recent case of guilty plea by Stephen Xiao may displace that "title"

More cases
• When must the company indemnify?
– Leckenby v Note Printing Australia [2014] VSC 538
– Company claimed it did not have to pay defence costs until acquittal,
otherwise Corporations Act would be breached
– Judge held otherwise; 1998 amendments intended to avoid that
– Now confirmed on appeal — [2015] VSCA 105

More cases
• Who runs the company anyway?
– Molopo Energy v Keybridge Capital [2014] NSWSC 1864
Meeting sought to be convened to change constitution so that
members could effect a capital reduction, not merely ‘approve’ it.
Judge ruled directors not bound to convene that meeting
– Aust Centre for Corporate Responsibility v Commonwealth Bank [2015]
FCA 785 .
Members cannot require company to put an advisory motion to an
AGM

For noting
• NewSat
– Now in administration. Media allegations only
– Alleged extravagance in travel and entertainment
• Were there appropriate polices / explicit understandings about these matters?
– And claims of video recordings of board meetings.
• Non exec director approving allegedly misleading reports to ASIC and a trustee
company, banned for 2 years — (ASIC MR July 2015)
• Former Sigma CEO and CFO pleaded guilty to false accounting charges, said to be
facing jail — (ASIC MR July 2015)
• Ex ABC Learning CFO — $2000 fine,18 month suspended sentence, for false info to
auditor
• Proceeds of Crime recovery against ex Gunn’s chief, fails

Corporate governance — independence
• Independence in super context
– Cbus report by Graeme Samuel AC —
• recruit more independents with no association with any sponsoring
body, establish a nominations committee, and independent
chairman
– APRA recommends some independents for board, for chair and for
committees
– FSC argues for majority of independents.
– legislation for one third independents, now introduced
• Definition refers principally to connections with sponsoring bodies, gives
powers to APRA to rule whether a director is, or is not, independent
• Will it lead to ‘great expense and more mergers’ as predicted/feared?

Corporate governance — miscellany
• Rule allowing 100 shareholders to convene an EGM, repealed.
– But they can still require resolutions to be put to general meetings, and
– Holders of 5% or more can convene meetings
• Put subject matter experts on committees, not necessarily on board
— suggested by David Gonski AC

Corporate governance — diversity
The women on boards thing, I think soooo what? What is really
happening is that non-execs like me are being hired onto boards
but you only have to turn up a few times a year for meetings —
that doesn’t change a business.
Do I think it’s important to have women executives in senior
positions? Yes, of course I do.
Do I understand why women look at those jobs and don’t fancy
it? Yeah..
Lucy Kellaway, writing in the FT 24 April 2015, is a columnist and on the board of
motor insurance company Admiral Group.

• Having more women directors makes good economic sense — John
Brogden — and also research by Centre for Gender Economics and
Innovation & Infinitas Asset Management
– AICD reportedly asking Top 200 to commit to a target of 30% — not a quota.
• Boards need forceful chairmen to champion diversity and prevent
directors from forgetting, obfuscating or ignoring younger female
candidates who might be more shy and self effacing than young
males — Graeme Samuel
• BlackRock report 2015 — more women needed in senior
management to allow more choice, and address more multiple
directorships being held by women than men

• Tasmanian Government — target 50% women on Government
boards by 2020
• Senator Xenophon — Bill for 40% representation on such boards,
before Parliament
• Germany now joining at least 7 other European countries with
legislated quotas and Canada, on an if not why not basis
• Gender pay equity gaps remain…
• Diversity not just gender, but age, skill sets, global experience,
ethnic origin, disability

Alex Cartoon: www.alexcartoon.com

Corporate governance — remuneration
• Two strikes rule
– 10 new ‘first strikes’, 7 near misses, 2 repeats according to Egan Associates last
year
– 16 strikes in first half of 2015, including 12 Top 300
• Clawback surfacing as well
– In UK and US, especially for banks
– But not here
• Invocare termination package for departing CEO withdrawn in response to
shareholder concerns
• Academics querying value to companies of (say) $10 m bonuses, as US SEC set to
require disclosure of pay ratio — CEO pay compared to rank and file employees…

The regulators
• ASIC
– Survived David Murray enquiry unscathed
• Now subject to capability review, to ‘ensure that ASIC has the appropriate governance,
capabilities and systems to meet [its] objectives and future regulatory challenges
– Sale (or outsourcing?) of Registry
• With plan for user funding, mainly at expense of banks & big business but $5 pa even
for small business
• And cost recovery from targets of investigations
– Funded to implement crowd source equity funding
• Treasury paper
• NZ regime already there, easier than ours
• APRA
– see earlier references to culture
– Changing its regulatory guidance to reflect different roles of boards and management, over
next 3 years

The regulators
• ACCC
– Unconscionable behaviour by Coles
• ACCC Chair — ‘competition does and should involve aggressive and combative
behaviour. Like all things in life, however, … there are some limits on such behaviour…’
• Range of actions by Coles/Wesfarmers in response.
– Cartel conduct claims against several companies and directors re bid rigging alleged in
mining exploration licenses
– Fortescue’s Andrew Forrest reported as inviting competitors to join in capping production in
the name of higher prices
• ACCC — no action
• Chatham House rule
• WHS regulators
– Note width of information gathering powers — Perilya Limited v Nash [2015] NSWSC 706

The regulators
• Independent Liquor and Gaming Authority (NSW)
– Cancelled fishermen’s club licence and suspended 6 directors — for
multiple breaches of the law relating to club administration
• ASX, and ASX CGC
– Neither is a regulator!
– ASX Guidance Note 8 in effect from 1 July 2015
• Useful guidance on continuous disclosure practices
– ASX Corporate Governance Council Principles — 3rd edition
• In effect as from 1 July 2015
• See Company Director magazine — May 2015, and
• Deloitte/ Group of 100 publication on Principle 7 — Risk

Government bodies — Indigenous Land Corporation
• ILC purchase of Ayers Rock Resort
– Significant write down in value soon after purchase
– Current board commissioned review by McGrathNicol
• Reviewers queried whether reasoning for decision was adequately documented
– Minutes showed clear support by 3 of 7 directors, 2 abstaining.
– ‘Given magnitude of transaction, appropriate to fully record deliberations and include
board member views’
– NB – former directors say 5 directors voted in favour, 2 abstained
• ILC required to consult Minister; proceeded in face of strong concerns by 2
ministers and 2 departments
– Entitled to do so…
• ‘Deficient documentation’ left ILC open, possibility that it did not adequately
protect itself against downside risk

Not for profits
• Bread Research Institute
– Reported that $7.5m in tax paid as non-profit status lost
• ACNC survived — now subject to a ‘watching brief’ by new Minister
Christian Porter
• AICD NFP Director Resource Centre available on the AICD website,
has some excellent NFP reference documents.
• New publication — Damn Good Advice for Board Members, 25
questions a board member needs to ask about the finances —
available at ourcommunity.com.au

How many directors are enough?
• New York Met has
– 11 who are members of Exec Committee
– 43 voting members, ‘managing directors’ including the 11 members of the Exec
Committee
– 9 honorary directors — no vote
– 49 advisory directors
– 33 ‘directors’
– 21 young associate directors
– Which is how many?
155
(‘A Fight at the Opera’, The New Yorker, March 23, 2015)

Are boards working?
• Why boards may not be working..
• Attitudes to issues
– Taxation…
– Human rights
– Long term or short term perspective
• Dealing with CEOs
– Replacement for lack of ‘fit’, or perceived bad behaviour
• The future — director-less boards?

The Essential Director Update: 15

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The Essential Director Update: 15

Editor's Notes