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2013Current issues and challenges facing Australian directors and boards

DIRECTI NS

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A ustralian directors are increasingly facing an identity crisis. For several years, Australian directors and boards have been facing a wide range of business and commercial challenges which are reshaping the perception and reality of their role. These include ongoing difficult economic and business conditions domestically and internationally, which have naturally tempered the confidence and enterprise of the pre-global financial crisis halcyon days. There is also increasing pressure to re-orient towards the burgeoning Asian economies and prepare for the Asian Century, which has challenged more domestically-oriented businesses.

However, the growing sense of identity crisis has been exacerbated by developments in Australia’s legal and regulatory landscape. These developments have conditioned responses to various challenges, and opened a widening gap between, on the one hand, the traditional understanding of the role of directors as custodians of the strategic direction of companies and, on the other, directors’ increasing risk and compliance-based responsibilities and functions.

In this context, Australian directors are questioning the true nature and extent of their role in today’s corporate environment, and whether the role of director today still carries with it the potential for the level of creativity and entrepreneurship associated with the role in the past. This is the portrait of the Australian director that has emerged based on three years of responses to our annual survey of Australian directors.

As with previous surveys, our most recent survey, which we conducted in November 2012, aimed to capture the opinions of Australian directors on a variety of legal and regulatory issues. This year’s Report reflects the results of that survey, and themes emerging from the results of previous surveys regarding the areas of concern for Australian directors and boards over that time period. The most prominent of these themes is the shifting view of the role of the director in the context of a rapidly changing business, legal and regulatory environment.

Overview of the Report

The Report focuses primarily on the legal and regulatory issues which are reshaping the role, and expectations for the role, of the director in 2013.

The Report begins with an analysis of the key areas of disconnect – the “expectation gap” – between the perception held by some sections of the government, the Courts and the public as to the proper role of directors, and how directors perceive their role.

The Report then moves to consider the regulatory landscape and issues which are shaping the dialogue with respect to the role of directors, including:

the form and substance of regulation and the nature of the regulatory reform process;

challenges relating to stakeholder engagement and shareholder activism, including the role of the AGM; and

challenges and opportunities posed by the Asian Century.The Report ends by offering a tentatively optimistic outlook, despite the prediction that economic uncertainty and regulatory burdens are unlikely to ease significantly in 2013. In particular, we expect that more confident attitudes in an improving global environment should assist in re-orientating both the public perception, and directors’ perceptions, of the role of directors today.

We trust that our Report makes a useful contribution to the ongoing debate regarding the appropriate role and responsibilities of boards and directors in Australia and is able to assist in bridging the expectation gap.

Meredith Paynter Partner King & Wood Mallesons

Nicola Charlston Partner King & Wood Mallesons

06The Widening Expectation Gap Divergent views on the role of directors remains a hot topic

Directors’ entrepreneurial spirit stifled by legal and regulatory burdens

High profile Court decisions and media scrutiny feed the expectation gap

16Challenges of Effective Stakeholder Engagement AGMs under siege but here to stay – can become captive to vocal few

“Two strikes” rule misused by shareholder activists to voice dissatisfaction

The use of proxy advisers remains a contentious issue

11Regulatory Landscape: the good, the bad and the ugly Regulatory change continues, but fewer ‘big ticket’ populist reforms

Shift from understanding new regulation to monitoring and implementation

OH&S legislation, directors’ duties and red tape are top of mind

Continuous disclosure remains a challenge

5King & Wood Mallesons / Directions 2013

22Preparing for the Asian Century Asian literacy important for doing business in the Asian region, but board quotas are overly prescriptive

Corporate Australia is coming to terms with the challenges of operating in the Asian region

Many Australian boards are well positioned to capitalise on opportunities in China, with 40% having a China strategy

Cross-border investment flows have shifted towards Asia

282013: An Uncertain Outlook Impact of political uncertainty weighs heavily on directors Directors hoping for respite after the election Directors quietly confident for improvement in 2013 and an uptick in M&A activity

Increasing confidence may assist in re-orientating perceptions of the role of directors

30Background to the Report The Report The survey Key contacts

About Us About King & Wood Mallesons Our Corporate Head Office Advisory practice

6 King & Wood Mallesons / Directions 2013

The Widening Expectation Gap

Directors and their identity crisis

One corporate governance trend that continues to cause concern for Australian directors is the widening, and entrenchment,

of what is commonly referred to as the “expectation gap”. As we discuss below, the expectation gap is leading to a form of identity crisis for directors as they try to reconcile their view of what the role of a director is, against the view held by other stakeholders.

Entrenchment of the expectation gap“If these expectations were to be met, all directors would have to become, in effect, full time employees of the organisation. This would undermine the non-executive director’s independence of outlook and objectivity which are vital for effective corporate governance.”1 Steven Cole, AICD White Paper

The expectation gap is the gap that exists between the perception held by some sections of government, the Courts and the general public as to the proper role of directors, compared to what directors themselves perceive to be their intended role.

“it has led to unrealistic expectations about what directors should be doing in areas that are the responsibility of corporate managers.”2 Steven Cole, AICD White Paper

1 Steven Cole, Mind the expectation gap: The role of a company director, (Australian Institute of Company Directors 2012), pVII.

2 See footnote 1.

A key factor in the development of the “expectation gap” has been the increased focus placed by regulators, the public and the media in recent years on the directors’ role in relation to the oversight and management of compliance and risk issues. This expectation gap contributed to the general sentiment amongst survey respondents that increasing compliance burdens and excessive red tape are leaving directors with insufficient time to devote to providing companies with the strategic direction and guidance that directors see as being the fundamental purpose of their role.

Another aspect of the expectation gap identified by survey respondents was the fact that corporate failures are often given greater prominence by mainstream media than are corporate success stories. There is a sense that this imbalance is feeding the expectation gap by diminishing the general level of confidence and trust that people have in directors.

The current public perception in relation to corporate governance in Australia is that ‘corporate boards and their directors (both non-executive and executive) should

“We need to rewrite the ‘position description’ for directors – there is a huge gap between what shareholders want directors to do…and what government and regulators think directors should do and be liable for.” Survey respondent


be so closely involved in the affairs of the corporation that they can ensure nothing can go wrong.’3

The recent White Paper commissioned by the Australian Institute of Company Directors (AICD), entitled ‘Mind the Expectation Gap: The role of a Company Director’ (AICD White Paper), suggests that ‘…unless the expectation gap can be closed, there is a real risk of negative consequences which will impede optimal corporate performance for the benefit of all relevant stakeholders.’4

3 See footnote 1.4 See footnote 1, p8.

It appears that the sentiment amongst a number of directors is that increased regulatory, compliance and time burdens are making the job less interesting and therefore less attractive to directors and those considering being a director.

This sentiment is reflected by the fact that 17% of survey respondents said that they had refused, or resigned from, a directorship due to one or more of the concerns listed in the graph below. By comparison, 9.6% of survey respondents in our 2012 Directions Report said that they had refused, or resigned from, a directorship due to similar concerns.

International comparisonThe expectation gap is not unique to Australia. According to a report by PricewaterhouseCoopers (PwC) in the UK, entitled ‘A challenging role: Non-executive director survey 2011’, 37% of PwC’s survey respondents considered that the role of a non-executive director had become less attractive and that increasing levels of boardroom regulation and risk had placed greater demands on non-executive directors.5

A recent survey conducted in China6 also found that there is a gap between what independent directors of Chinese listed companies can reasonably be expected to achieve and their actual achievements in relation to their role as controllers and strategic directors of corporations.7

5 PwC, A challenging role: Non-executive director survey 2011 (March, 2012), p4.

6 The survey involved 30 in-depth interviews with a number of Chinese executive directors, independent directors, institutional investors and stock exchange regulators.

7 Pingli Li et al, ‘Is there an Expectations Gap in the Roles of Independent Directors? An Explorative Study of Listed Chinese Companies’ (2012) 23 British Journal of Management 206, p218.

Have you reconsidered taking or keeping a directorship?

Yes, I have seriously considered refusing / resigning a directorship

Yes, and I have refused / resigned a directorship

Still considering whether to refuse or resign

No

57%

14%

17%

12%

0% 10% 20% 30% 40% 50% 60%

Rank 3

Rank 2

Rank 1

Risk of removal from the board

Other

Gender diversity

Time burden (continuing trainingand education requirements)

Increased scrutinyof remuneration

Personal liability in relation to continuousdisclosure obligations

Risk of class actions against you as adirector or against your organisation

Personal liability forinsolvent trading

Risk of breach of your duties

Risk of damage to your reputation as a resultof actions by or against your organisation

Time burden (number and length of meetingsand volume of materials for review)

Excessive bureaucracy and regulation

Inability to devote sufficient time to providingstrategic direction and guidance

Increasing compliance burden(including risk of personal liability)

Issues concerning company directors in fulfilling their role



The expectation gap and concerns in the marketThe expectation gap is reflected in the top five issues (see graph on previous page) that concerned survey respondents in fulfilling their role as a director of an Australian organisation in 2012, being:

increasing compliance burden (including risk of personal liability);

inability to devote sufficient time to providing strategic direction and guidance;

excessive bureaucracy and regulation; time burden (number and length of meetings

and volume of materials for review); and

risk of damage to reputation as a result of actions by or against the organisation of which the survey respondent is a director.

These results are consistent with recent findings in the UK, where:

55% of PwC’s survey respondents considered that a lack of time to debate issues, and 53% of survey respondents considered the burden of paperwork and regulatory requirements, were the key factors that significantly impact a non-executive director’s ability to perform their role effectively;8 and

8 See footnote 5, p15.

58% of PwC’s survey respondents expected their time commitments to increase over the coming year.9

Reinforcing these concerns, over the past 12 months:

12.4% of our survey respondents noted an increase in the volume of materials to be reviewed in preparation for board meetings;

11.7% of survey respondents noted an increase in the time devoted to considering compliance and risk management issues; and

9% of survey respondents noted an increase in the number of board meetings and 7.4% of survey respondents noted an increase in the length of board meetings.

These observations may be attributed to a number of recent Court decisions, including the decisions in James Hardie and Centro.10

Interestingly, despite the emphasis that was placed on the importance of keeping good minutes by the High Court in Shafron v ASIC,11 only 1.9% of survey respondents said they were provided with guidance and/or training on good minute keeping practices in 2012.

9 See footnote 5.10 ASIC v Hellicar & Ors [2012] HCA 17 and ASIC v Healy & Ors

[2011] FCA 717.11 [2012] HCA 18.

The increasing time commitment directors are required to devote to their directorships, including compliance and other matters that were traditionally the responsibility of management, may also be impacting on the number of directorships that individual directors hold. It has been common practice in Australia for non-executive directors to sit on a number of boards leading to the concept of “professional non-executive directors”. A recent study, entitled ‘Board Composition and Non-Executive Director Pay in the top 200 Companies’, published by the Australian Council of Super Investors (ACSI) in 2012, found that:12

169 individuals accounted for 36.5% of the 1,046 non-executive director positions on the boards of ASX 200 companies in 2011; and

98 individuals accounted for 30.3% of the 610 non-executive director positions on the boards of ASX 100 companies in 2011.

According to the ACSI study, there has been a gradual decline in the proportion of “professional non-executive directors” (i.e. individuals holding more than one board seat) on boards, compared to individuals who only hold one board seat, since 2006.13

12 Australian Council of Super Investors, Board Composition and Non-Executive Director Pay in the Top 200 Companies: 2011, (October, 2012), p15.

13 See footnote 12.

“…because of a number of high profile corporate collapses and failures, the pendulum has swung back towards having more checks and balances – this has come at the cost of being able to focus on output and growth. The question is, at what point do you say the pendulum has swung too far, to the point where it is not in shareholders’ best interests?”

“The increasing compliance and time burdens, the inability to devote sufficient time to providing strategic direction and guidance and excessive bureaucracy and regulation is leading to ‘death by boredom’.”

“Personal exposure to liability has reached unreasonable levels with inadequate defence options available at law.”

Views expressed by survey respondents:


Given the increased time commitment and compliance burden placed on directors, it will be interesting to see whether we see a decline in the number of “professional non-executive directors” who are willing to take up positions on boards of companies outside the ASX 100 over coming years.

Reducing the risk of corporate failure, but at what price? 17.8% of survey respondents identified regulatory challenges (including excessive bureaucracy and red tape) as the number one challenge of doing business in Australia. 23.3% of survey respondents identified the increasing compliance burden (including risk of personal liability) as their number one concern regarding their role as a director of an Australian organisation.

The corollary of this increasing compliance burden is that directors have less time to devote to providing strategic guidance to companies. A survey of directors conducted by the AICD in 2010 supports these findings, with 79% of the AICD’s survey respondents noting that they were concerned that the time their board devoted to compliance with regulation detracted from their focus

on issues such as enhancing corporate performance and productivity.14

Strategic, entrepreneurial and financial acumen remain key attributes Despite the continuing emphasis on compliance and legal and regulatory issues, our survey results indicate that directors continue to see strategic, entrepreneurial and financial acumen (as opposed to legal and regulatory experience) as the most important attributes that a director should possess.

“Effective risk oversight is about courage – the courage of swimming against the tide when there’s momentum for something, whether it’s a new product or innovation or an M&A opportunity. And part of the courage is to accept that you’ll have false positives and will be engaged in a degree of apology, but you won’t be deterred.”15

We asked directors to rank, in order of importance, a list of attributes that were the

14 AICD, Business Deregulation: A call to action (July 2012, working paper), p18.

15 As cited by Kevin M. Connelly, Carolyn C. Eadie and Valerie R. Harper, The growing role of the board in risk oversight, (December, 2010), p2.

key priorities in any board appointments made during the past 12 months. Consistent with findings in our 2011 Directions Report, the top three skill sets identified by survey respondents were:

industry sector knowledge (22% of survey respondents);

business skills and experience (20% of survey respondents); and

financial expertise (11.7% of survey respondents).

It is interesting to note that 7.3% of survey respondents identified legal and regulatory experience as the attribute that was the key priority when considering board appointments during the past 12 months. This represents a relatively significant increase in the emphasis placed on this attribute since our 2011 Directions Report, where less than 1% of survey respondents considered regulatory knowledge and legal experience to be the most important attribute for directors.

Although not a skill set, 13% of survey respondents considered diversity to be a key priority when considering board appointments during the past 12 months. This result was down significantly compared to the findings in our 2011 Directions Report,

“More time to focus on strategy and less on bureaucracy and

“protection” – it is stifling growth.”

“We see persistent negative comments from the government and the media regarding a small number of directors who do the wrong thing…very rarely do we see these people focusing on the positives.”

“Directors need to put just as much time into an ASX 50 company as they do an ASX 200 company…the main difference is that there is far greater risk and far less reward for the director of an ASX 200 company.”

“While times are good, no one asks any questions – it’s when things take a turn for the worse that the microscope comes out.”

“Entrepreneurs are starting to be driven out of the boardroom.”



where almost 63% of survey respondents reported that gender or other diversity attributes were key priorities for board appointments. The decrease in diversity as a priority may be explained by the fact that an increased proportion of directors feel that companies have adequately addressed their diversity requirements at the board level.

Does the expectation gap have a silver lining?The reason many individuals accept positions as a director is to allow them to have an entrepreneurial role and be involved in the guidance and growth of the company that they are directing. There is concern that the existence of the expectation gap will become an increasing deterrent for individuals who are considering taking up appointments as directors.

As noted above, between the 2012 Directions Report and the 2013 Directions Report, there was a significant increase in the proportion of survey respondents who refused, or resigned from a directorship due to issues that concerned them in

fulfilling their role as a director in the past 12 months. However, interestingly, we also saw a 36% increase in the proportion of directors who said that they had not reconsidered taking or keeping a directorship as a result of such issues. This may be because a proportion of directors are becoming more accustomed to the expectation gap.

In the UK, 49% of PwC’s survey respondents considered the role of a director has actually become more attractive over the past few years due to its challenging nature and the ability to add value.16 This could suggest that a number of directors enjoy the increased challenges and derive a greater sense of satisfaction from their position and that the corporate environment in the UK is more conducive to directors performing what is considered to be their traditional role.

The Personal Liability for Corporate Fault Reform Act In 2012, the Federal Government introduced the Personal Liability for Corporate Fault Reform Act. This Act is based on the Council of Australian Governments (COAG) principles which support the reduction of the number of offences that impose criminal liability on directors for corporate fault across all jurisdictions. The Act is intended to address the differing standards of director’s fault and responsibility that exist under various statutes, in an attempt to promote greater certainty for directors by reducing the liability of directors in circumstances where the corporation is at fault.

While the Act goes some way in reducing the level of risk and complexity that a director faces in relation to criminal liability in their role as a director, it is not sufficient to bridge the expectation gap and there are other aspects of director liability that need to be addressed.

16 See footnote 5.

Outlook – Bridging the expectation gap

The expectation gap and resulting identity crisis that directors face are largely attributable to tough economic conditions, high profile corporate failures and the impact of increasing regulatory burdens that we have seen over recent years. As economic conditions improve, and business confidence levels increase, we believe that the public’s view of the role of a director should shift, allowing directors to spend a smaller proportion of their time on compliance and regulatory issues. This will enable them to refocus their attention toward providing strategic guidance and leadership to the companies that they have been appointed to govern.

“It’s too early for directors to be able to assess the benefits of this legislation.”Survey respondent

“Directors are feeling hemmed in and need to be given space to take some brave decisions.” Survey respondent


The expectation gap has been exacerbated in recent years by regulatory reforms which have imposed increased responsibility,

and risk of personal liability, on directors in relation to a range of issues, many of which were previously the clear responsibility of management. Despite some recent attempts by the Federal Government to address concerns regarding the role and extent of personal liability of directors, excessive regulation and red tape remains a key area of concern for directors.

Although there continued to be a large number of new laws enacted in 2012, we saw fewer “populist” reforms compared to prior years. Despite this, the results of our survey suggest that regulatory issues continued to be front of mind for directors in 2012. The list of regulatory issues receiving director attention in 2012 (see over page) indicates that the focus of boards and directors was still largely on reforms

introduced in previous years (for example, relating to occupational health and safety, carbon tax and executive remuneration), suggesting that there has been a shift from directors seeking to understand the impact of new reforms towards ongoing monitoring of implementation and compliance matters.

Key regulatory issues receiving director attention in 2012The top three regulatory issues which received attention from survey respondents during the past year were:

1 changes to the occupational health and safety laws (up from the 4th ranking issue in 2011) – almost 50% of survey respondents included this issue as one of their top 3 issues, and it was also the issue most frequently cited by survey respondents as their most significant area of regulatory focus in 2012.

This result is of little surprise given the laws regarding harmonisation of Australia’s occupational health and safety laws came into effect in many Australian States and Territories in early 2012, with other jurisdictions to follow in 2013. These laws impose new obligations on directors, including to exercise due diligence to ensure compliance;

2 directors’ duties (including the implications of recent Court decisions) – this remained a key concern in 2012, after having been the regulatory issue of most concern in 2011, with nearly 44% of survey respondents ranking it as a top 3 issue (down from just over 50% in 2011); and

3 ineffective regulation / excessive red tape – cited by more than 30% of survey respondents as a top 3 issue.

Regulatory Landscape: the good, the bad and the ugly



Some other regulatory issues that received substantial attention in 2012 were continuous disclosure regulations and practices (discussed in more detail in this section) and, notably given the current minority Federal Government, the effect of political uncertainty at the federal level in Australia.

Significant time still spent on regulatory mattersSurvey respondents were again asked to indicate how many hours they had spent in the previous 12 months addressing the issue ranked as their top regulatory issue of focus in 2012. The results show that the time directors dedicate to regulatory issues remains considerable – in respect of their top ranking issue, 39.7% of survey respondents had spent more than 30 hours,

56.5% of survey respondents had spent more than 20 hours, and 80.5% of survey respondents had spent more than 10 hours.

As we noted in the Directions 2012 Report, it is not surprising that the key regulatory issue faced by a company attracts significant director time and attention. However, when there are multiple issues requiring attention, it is clear that the time dedicated to regulatory issues continues to be significant. This highlights the dilemma that substantial director time is being diverted away from the traditional focus of boards, being the oversight of the strategic direction and business of the company. It was commented that this is a result of the “legislative machine being cranked up” with an emphasis on “imposing checks and balances as opposed to seeking to improve productivity output”, leading to a blurring

of the line between the roles of directors and management which is not in the best interests of shareholders.

Excessive red tape and the regulatory impact analysis processAs noted previously, one of the most commonly cited regulatory issues which concerned survey respondents in 2012 was ineffective regulation / excessive red tape. In previous Directions Reports, a similar strong theme of director frustration with the volume and nature of regulatory reform emerged, with a clear concern that an appropriate cost / benefit analysis of proposed reforms and their implications was often lacking prior to their adoption and implementation.

An independent review of the Federal Government’s regulatory impact analysis process (RIA Process), the process by which the Federal Government assesses the likely impact of regulation and other options available to meet policy objectives, was

Top 3 regulatory reform issues which received attention during the past year

2012 Ranked 1st

2012 Ranked top 3

2011 Ranked 1st

2011 Ranked top 3

Occupational health and safety laws 20.6% 47.8% 11.2% 36.0%

Directors’ duties (implications of recent Court decisions) 12.8% 43.9% 16.8% 51.2%

Ineffective regulation / excessive red tape 9.4% 32.2% N/A* N/A*

Executive and director remuneration 7.8% 27.2% 14.4% 42.4%

Basel III regulatory standards on bank capital adequacy and liquidity 13.9% 26.7% 9.6% 20.0%

Continuous disclosure regulations and practices 6.1% 23.9% N/A* N/A*

Carbon emissions policies and carbon tax 8.9% 23.3% 20.0% 43.2%

Effect of political uncertainty at the federal level in Australia 5.0% 22.8% N/A* N/A*

Tax law changes 7.8% 22.8% 2.4% 9.6%

*not an option in 2011

Over 30 hours

Less than 5 hours

5 to 10 hours

20 to 30 hours

10 to 20 hours

16.8%

13.4%

39.7%

6.1%

24%

Hours spent in the past twelve months dealing with regulatory reform issues?

“there is a need for clear air to allow a focus on strategic direction, productivity and growth.”Survey respondent


conducted in early 2012 by Robert Milliner, former Chief Executive Partner of Mallesons Stephen Jaques (one of the predecessor firms of King & Wood Mallesons) and David Borthwick AO PSM, with a mandate to report on the consistency of the RIA Process with the OECD’s guiding principles for regulatory quality and performance.17

The report on the RIA Process (RIA Report) concluded that while the current RIA Process is “entirely consistent” with the OECD’s guiding principles, there is a “vast gap” between the requirements of the principles and actual practice.18

“widespread lack of acceptance and commitment to the RIA Process by ministers and agencies.”19

The RIA Report found in respect of the RIA Process that:

the problems to be addressed were not clearly identified and therefore regulatory responses were not appropriately targeted;

consultation was below best practice standard;

insufficient information was provided in order to form proper judgements about the effects of proposed regulation; and

consultation was sometimes little more than conveying what was already decided and the RIA Process did not actually result in quality analysis of options and impacts.20

Ultimately, the RIA Report concluded in strong and damning terms that there has been a serious failure in the use and

17 Terms of Reference, “Review of the Australian Government’s Regulatory Impact Analysis Process: Department of Finance and Deregulation. Available at: www.finance.gov.au/deregulation/riareview.html

18 David Borthwick AO PSM and Robert Milliner, ‘Independent Review of the Australian Government’s Regulatory Impact Analysis Process’, 20 April 2012, pp9-10.

19 See footnote 18, p9.20 See footnote 18, p37.

implementation of the RIA Process, finding that it was “regarded with derision or, regarded at best, as unhelpful or adding little value” and that “from a ministerial and agency perspective in many, if not most cases, the RIS was irrelevant to the decision actually taken”.21

“a box that had to be ticked off and an inconvenience that had to be borne.”22

Interestingly, the RIA Report also noted that some representatives from government agencies expressed “considerable frustration about their experiences” with putting the RIA Process into practice, and in some cases there was “evident hostility” toward a process some regarded as imposing “unnecessary red tape on government”.23

In December 2012, the Federal Government released its formal response to the RIA Report’s recommendations, stating it was committed to regulation that is “effective, proportionate and can demonstrably deliver net benefits to the community” and would introduce changes to the RIA Process and review the revised arrangements after two years.24 In particular, the Federal Government has said it will implement changes amending the format and content of the RIS to permit better and earlier assessment of proposed regulation to ensure that alternative options are canvassed earlier, and more meaningfully, in the policy development process.

The implementation of these measures by the Federal Government will be an important step towards ensuring that a

21 See footnote 18, p38.22 See footnote 18, p38.23 See footnote 18, p37.24 Australian Government Final Response to the Recommendations

of the Independent Review of the Australian Government’s Regulatory Impact Analysis Process, p2, available at: www.finance.gov.au/deregulation/riareview-final-govt-response.html

meaningful cost / benefit analysis, and a full assessment of all options, is undertaken before regulatory reforms are adopted and implemented.

Some positive moves towards simplifying regulationThere have been some recent examples of reforms which seek to reduce the adverse effect of too much regulation on business and the economy. One such example is the Personal Liability for Corporate Fault Reform Act (discussed in this report on page 10) which seeks to simplify the laws imposing personal liability on directors and other officers for the actions of their companies.

Another example is the proposed changes to legislation governing the corporate bond market which seek to impose less onerous disclosure obligations in relation to prospectuses for bond issues (and also make changes to the liability regime applicable to directors) “in an attempt to provide a cheaper and easier way for businesses to gain entry into the fixed-income market”.25 We consider this to be a significant reform which takes advantage of a listed company’s compliance with its continuous disclosure obligations. It is also a first step in removing anomalies in Australia’s securities law regime for offers of debt and equity to retail investors, although we would welcome further changes to remove the need for a prospectus for the issue of simple corporate bonds and to permit the use of a “lo-doc” cleansing notice process similar to that available for rights issues of continuously quoted shares.

Continuous disclosure challengesDecisions regarding disclosure of material information in accordance with ASX Listing Rule 3.1 often require directors of listed entities to make judgement calls as to whether and how information regarding their entity should be disclosed. Directors are repeatedly faced with balancing the technical requirements of ASX Listing Rule 3.1, the need to manage practicalities regarding the proper assessment of information, the preparation and review of proposed

25 Gemma Daley and Jonathan Shapiro, ‘Overhaul of corporate bond market under way’, Australian Financial Review, 11 January 2013.

Key recommendations of the RIA Report Cabinet re-endorsing and publicly stating the commitment of the Federal Government

to a mandatory RIA Process

Implementation of recommendations proposed by two earlier reviews into the Australian regulatory framework and the compliance burden which regulation places on business

Specific recommendations on the structure, timing and content of the RIA Process and regulatory impact statements (RIS) to ensure objectives, problems and other options are appropriately considered to reach an informed regulatory decision

Ministers and agencies consistently complying in practice with existing policy on stakeholder consultation



announcements and the appropriate timing of disclosure. In particular, there is a risk that premature disclosure of information may lead to a false market. There are additional challenges in circumstances where information has become public outside the control of the company to protect market integrity and protect against manipulation of the entity’s share price.

Directors were asked in our survey what, in their opinion, was the most difficult issue to manage in relation to a listed entity’s continuous disclosure obligations. 26.7% of survey respondents cited “determining the materiality of information” and 25.6% of survey respondents identified “managing the “immediacy” disclosure obligation”. In addition, 18.6% of survey respondents respectively identified “timing and level of detail of disclosure regarding control transaction approaches” and “level of disclosure regarding earnings guidance” as the most difficult issue.

This relatively even split in responses reflects that directors face many and varied difficult

issues when determining whether, and when, information requires disclosure to the market. This sentiment was reflected in the comment of one survey respondent who said that “each of the above is difficult depending on the facts”.

There have been a number of high profile Court cases in recent years concerning market disclosures, along with a number of instances of ASIC issuing infringement notices for alleged breaches of ASX Listing Rule 3.1. There has also been a growing trend of shareholder class actions relating to alleged breaches of continuous disclosure obligations.

The ever expanding influence of social media, and the speed at which information is disseminated, also presents challenges when it comes to monitoring information available to investors. As a result, companies are increasingly losing control of the release of information. Through no fault of their own, directors may be put in a position where, with no prior warning, they have to very quickly assess information, determine its legitimacy (or otherwise) and formulate a response, while the market is trading. A recent example is the Whitehaven Coal incident where a hoax press release was issued stating that a significant loan to Whitehaven Coal had been withdrawn. The release caused Whitehaven Coal’s market capitalisation to fall by approximately $300 million before the company was put into trading halt. Another example was the disclosure of the proposed takeover approach to David Jones by a little known party about which David Jones was unable to gather much, if any, information to assess the bona fides of the party or their proposal.26

26 All descriptions relating to events affecting companies are based on publicly available information.

The revised ASX Guidance Note is not expected to significantly change existing practicesIn October 2012, the Australian Securities Exchange (ASX) issued a consultation paper regarding proposed amendments to ASX Listing Rules 3.1-3.1B and a proposed revised Guidance Note 8 on continuous disclosure, which ASX stated is aimed at assisting “listed entities to understand and comply with their disclosure obligations under Listing Rules 3.1-3.1B”.27 It is a detailed and technical document, which also contains worked examples on various possible disclosure events.

The table on page 15 summarises a number of key areas in respect of which the proposed revised Guidance Note provides assistance to directors, officers and their advisers.

In our survey, we asked directors whether the proposed revised Guidance Note (if implemented) would cause them (or their organisations) to change their practices regarding the release of information to ASX. The overwhelming response, 71.1% of survey respondents, was that it would cause no change. 16.8% of survey respondents expected a moderate increase in the number / detail of disclosures, while 10.8% of survey respondents expected a moderate decrease in the number / detail of disclosures.

These survey results, and comments received from survey respondents, indicate that the proposed revised Guidance Note largely reflects current market practice. Notably, particularly in the context of concerns regarding ineffective regulation, some directors did comment that the proposed revised Guidance Note reflected a good example of ASIC and ASX taking steps to “rebalance” regulation in a constructive and facilitative manner based on positive stakeholder consultation.

What is less clear from the survey results is whether directors believe that the continuous

27 ASX Listing Rules Consultation Paper: Guidance Note 8 Review; p2, 17 October 2012.

What is the most difficult issue to manage in relation to continuous disclosure obligations?

Timing and level of detail of disclosure regarding control transaction approaches

The timing of release of periodic disclosure

Other

Managing the ‘immediacy’ disclosure obligation

Level of disclosure regarding earnings guidance

Disclosure regarding material changes in business activities

Determining the materiality of information

4.7%

18.6%

18.6%

2.3%3.5%

25.6%

26.7%

“investors are not well served by companies constantly announcing half-baked statements.”Survey respondent

“in some respects, companies have lost control over the release of information.”Survey respondent


disclosure laws need to be overhauled. 43.5% of survey respondents indicated that they do not believe there is a pressing need to rewrite Australia’s continuous disclosure laws, while 31.8% responded that there was and 23.5% of survey respondents had no opinion. Of those who responded yes, just over 70% felt that the most pressing area for reform is to provide a safe harbour from liability for disclosure decisions believed to be reasonably taken.

Company reconstructions when facing insolvencyAnother area of potential law reform involves a safe harbour from liability for directors in respect of decisions made when a company is facing insolvency. Section 588H of the Corporations Act provides directors with certain defences to personal liability where a company incurs a debt when it is, or becomes as a result, insolvent. However, there has been much debate regarding, and support in many circles for, the application of a broader “business judgement rule” defence in insolvency circumstances, in particular, where a director acting in good faith is of the view that it is in the interests of the company, creditors and other stakeholders to carry out a reorganisation or to trade its way out of insolvency.

In our survey, we asked directors whether a “business judgement rule” defence for directors negotiating restructuring

proposals for companies facing insolvency was needed. A large proportion of survey respondents (45.1%) answered that there is an urgent need for law reform to provide such a defence, with a further 25.6% responding that, while such reform would be a positive development, there was no pressing need for change. 11% of survey respondents felt that the law currently provides directors with adequate protection, though approximately 17% of survey respondents had no views on the issue.

We consider that the current defences available to directors in relation to insolvent trading are inadequate and that reform to the insolvent trading laws to provide for a restructuring safe harbour would be beneficial. As one survey respondent noted, in most cases “the damage … has been done a long time prior” to the time when

directors are confronted with deciding if the company’s solvency position is terminal. Unfortunately, at this stage the Federal Government has decided not to extend the defences available to directors for insolvent trading, and the Federal Government’s exposure draft Insolvency Law Reform Bill 2012, released in December 2012, does not include any proposed amendments to the insolvent trading provisions.

OutlookDespite the Federal Government’s positive response to the recommendations in the RIA Report, we remain sceptical as to whether reform processes and proposed regulation will be subject to a more robust assessment process in 2013. It is unlikely that this will be a priority in the lead up to the Federal election in September or in the early months of the next parliamentary term, regardless of who is in power. However, we also expect the pace of reform to slacken during 2013 as politicians focus on the election campaign, which may provide a welcome respite for companies and directors.

Continuous disclosure

Issue / Topic Guidance Note 8

Meaning of disclosing information “immediately”

• “promptly and without delay” and not “instantaneously”• various factors will influence the timing of disclosure

and are relevant in assessing compliance with Listing Rule 3.1 – eg how the information became known, any advance knowledge and complexity

Materiality guidance • less than 5% is presumed immaterial, more than 10% is presumed material, 5-10% requires a judgment to be made

Use of trading halts • greater role for trading halts in managing continuous disclosure – including to deal with the tension between immediate disclosure and accurate disclosure

• ASX will usually agree to a trading halt if information is market sensitive and an entity has acted promptly to request a halt

Takeover approaches • the “reasonable person” test does not generally require disclosure of confidential approaches concerning a possible control transaction

Company reconstructions: Attitudes to need for a business judgment defence

While a business judgment defence would be a positive development, the need for change is not pressing

There is an urgent need for law reform to provide for a business judgment defence

Other

I have no views on this issue

Current Australian law adequately protects directors in this area

17.1%

45.1%

1.2%

25.6%

11%

“no progress and no hard decisions.”Survey respondent


The role of the AGM

As in previous years, the AGM continued to be a focus of interest, and some concern, for directors in 2012. Whilst there

does not seem to be any real question as to the intended role of the AGM - as a forum for shareholders to meet with the board and management of the company, raise comments and express their concerns - there are doubts as to whether the AGM is effectively fulfilling that intended role. This is not a new issue, as reflected by comments from survey respondents in the 2011 Directions Report who felt at that time that the AGM was too formal and compliance driven.28 Similar sentiments were reflected by survey respondents in 2012, some of whom commented that the AGM was “procedural only” and held to “meet compliance requirements”.

Many survey respondents indicated that they felt that the AGM gave shareholders the opportunity to express their views directly to the board and management, and provided an opportunity to hold directors accountable. However, other survey respondents were of the view that the AGM in its current form does not serve its intended purpose, with one respondent commenting “it is outmoded and now counterproductive” and another commenting that “the event itself lacks purpose”. Reasons for these views may

28 Directions 2011, pp21-22.

include that questions and discussions at the AGM are unduly focussed on governance and the formal business of the AGM rather than business issues, most resolutions are typically decided by proxy votes ahead of the meeting, and that institutional shareholders typically do not attend or speak at AGMs, leaving the floor to a few, potentially disgruntled, retail shareholders and their representatives. As one commentator recently noted “AGMs held by major corporations over the years have been million-dollar expenses mainly for the pleasure of ….grabbing yet another hour upon the stage for a rant.”29

29 Michael Pascoe, “From the ashes, a New AGM could arise”, Sydney Morning Herald, 9 January 2013.

Relevance of the AGMThe relevance of the AGM was considered in Corporations and Markets Advisory Committee’s (CAMAC) recent report entitled “The AGM and Shareholder Engagement”.30 That report partially considered whether the AGM, in its current form, continues to serve the purpose for which it was originally designed or any other worthwhile purpose, and suggested some alternatives to the AGM structure. In our survey, we asked directors which of the alternatives to the AGM structure (based on the alternatives outlined in the CAMAC report31) they would prefer. Notably, 24.6% of survey respondents indicated that no reform to AGMs was required. The alternatives offered were:

30 Corporations and Markets Advisory Committee, The AGM and Shareholder Engagement, September 2012.

31 See Footnote 30 above, pp104-108.

Challenges of Effective Shareholder Engagement


limit the AGM to deliberations only on the resolutions before the meeting and related decision making – this option would entail restricting the AGM to discussion and voting on the remuneration report, the election of directors and other resolutions on the AGM agenda: Only 6.6% of survey respondents supported this as a preferred format for the AGM;

separate decision making from the reporting, questioning and deliberative part of the AGM – reporting, questioning and deliberations (including general deliberations and deliberations on the resolutions before the meeting) would be held first, but voting would not need to be completed at the AGM. Voting would remain open for a specified period after the AGM: This was the most popular option with survey respondents, with 27.5% of survey respondents supporting this option;

abolish the requirement for AGMs – only 7.8% of survey respondents supported this option; or

“some other adjustment” to the AGM – adjustments would depend on the size of the company, its shareholder base and whether the company was listed: This alternative was not offered to survey respondents.

A number of survey respondents indicated that they supported the retention of the AGM in some form as they felt that the AGM remains an important way to demonstrate accountability to shareholders.

Whilst there are still concerns about the effectiveness of the AGM in its current form, there appears to be overwhelming support for maintaining the AGM, at least until a better option is developed.

“It is outmoded and now counterproductive … biased by a few rabble rousers … who are there for simple self aggrandisement reasons.” Survey respondent

“the one day in the year the owners of the business can ask questions …”Survey respondent

“members of the company get to ask questions, eyeball directors.”Survey respondent

Should any of the following reforms be implemented in relation to AGM’s for listed entities? Responses

Limit the AGM to discussion and voting on the remuneration report, the election of directors and other specific resolutions included in the agenda for the AGM

6.6%

Use the AGM purely as a method via which the stakeholders provide feedback to the board in relation to the management of the company

11.9%

Divide the AGM into two separate parts so that a shareholder briefing takes place followed by online / electronic voting for a specified period following the conclusion of the briefing

27.5%

Conduct AGMs wholly or partly online 20.1%

Abolish the legal requirement for an AGM 7.8%

No reform required 24.6%

No answer provided to this question 1.6%



Activist shareholders and the “two strikes” rule 2012 was the first year in which a company could incur a “second strike” under the “two strikes” rule. However, whilst the remuneration report vote and its implications continued to occupy directors’ minds in 2012, 42.2% of survey respondents indicated that remuneration issues did not dominate discussions at AGMs, and only 6.7% of survey respondents indicated that they sat on boards which had experienced a strike in 2012.

As at 30 December 2012, 24 companies had received a “second strike”, but interestingly shareholders of only six companies have passed the “spill” resolution requiring those companies to hold a spill meeting.

As at 6 February 2013, two spill meetings had been held – one by Penrice Soda Holdings Limited (Penrice) and one by Globe International Limited (Globe).32

At the Penrice spill meeting, five candidates stood for election to the board of Penrice, including two spilled directors and three new candidates. Interestingly, only the spilled directors were (re)elected. The three new candidates had been nominated by an activist shareholder of Penrice who had previously requisitioned two extraordinary general meetings to remove incumbent


directors (one of which was withdrawn and one of which was unsuccessful). The Chairman of Penrice published a statement following the spill meeting commenting that “In the aftermath of this failed …. process … I will not tolerate any more of the behaviour they have displayed to date … If they now choose to be constructive and forward looking, well and good. Otherwise they might consider selling their shares …”.

At the Globe spill meeting, three candidates stood for election to the board of Globe consisting of the three spilled directors – no new candidates stood for election. All these directors were re-elected to the board of Globe. However, it is interesting to note that these directors held 68.5% of the shares in Globe and voted those shares to support their own (re) election. Thus, regardless of the fact that Globe was required to hold a spill meeting, there was no real prospect of shareholders either electing new directors or blocking the (re) election of the spilled directors given that a “no” vote of 50% or more of the votes cast would have been required to achieve either of those outcomes, and the spilled directors held more than 50% of the issued shares in the company.

The low incidence of shareholders requiring companies to hold spill meetings (compared to the number of companies who have received a “second strike”) could be a result of a number of factors, including that the strikes on the remuneration report do not relate to unhappiness with remuneration, but with some other issue such as overall performance of the company or the absence of the payment of dividends. If this is correct, this reflects concerns raised by survey respondents in the 2012

Directions Report, and again this year, that the “two strikes” rule can be used for ulterior motives, rather than simply as a way for shareholders to express discontent with the company’s remuneration policy. Of course, failure to utilise the opportunity to “spill” a board could also reflect a lack of suitable candidates to fill director positions, an unwillingness to disrupt the management and oversight of the company and/or the market addressing the shortcomings inherent in the “two strikes” rule. Those shortcomings were detailed in the 2012 Directions Report and include:

the fact that there appears to be a tenuous link between executive remuneration and the re-election or removal of directors - the “two strikes” rule assumes a correlation between remuneration concerns and a desire to spill the board. However, most companies that receive strikes on their remuneration reports usually have resolutions for the re-election of directors passed at the same AGM; and

the allocation of disproportionate power to shareholders not excluded from voting - the fact that key management personnel and their “closely related parties” are prevented from voting on the remuneration report gives other shareholders a greater, and possibly disproportionate, power especially in light of the fact that a “strike” occurs if only 25% (as opposed to 50%) of the votes cast by shareholders attending and able to vote are a “no” vote on the remuneration report resolution.33

33 Directions 2012, pp14-16.

To what extent have remuneration issues dominated discussions at AGMs?

Remuneration issues have not dominated discussions

Remuneration issues are increasingly dominating discussions

An appropriate amount of time

A disproportionate amount of time

25%

13.8%

42.2%

19%

0

5

10

15

20

25

Board spillresolution

Secondstrikes

Second strikes received in 2012 and the passing of board spill resolutions

“the “two strikes” rule is expensive for companies, counter-productive and open to manipulation.” Survey respondent


However, despite shareholders to date not requiring spill meetings for most companies who have received a “second strike”, some boards and directors came under considerable pressure from other sources during 2012, ensuring that shareholder34 activism continued to be a topical issue. There were at least three high profile cases in 2012 in which shareholders exerted overt public pressure on boards and directors for various


reasons, taking what would more usually be dealt with in “backroom” discussions into the public arena (see table below).

Of course, the use of the general meeting to seek to remove directors demonstrates another criticism of the “two strikes” rule – that shareholders have always had, and continue to have, the ability to “spill” the board via their ability to requisition

an extraordinary general meeting, and/or resolutions to remove one or more directors. This was noted by the Chairman of Penrice who commented at Penrice’s recent spill meeting that “shareholders who are sufficiently disgruntled with the performance of the Board can always muster the numbers to requisition an EGM and move against some or all directors.”35

35 See Footnote 34.

Key players34 What happened?

Echo Entertainment Group Limited (Echo) and Crown Limited (Crown)

The Executive Chairman of Crown, James Packer, requested that the Board of Echo agree to the appointment of a Crown nominee to the Board. That request was rejected.

Pennwin (a wholly owned subsidiary of Crown) then requisitioned a general meeting. The purpose of the meeting was to consider the removal of the Chairman from the Echo Board and the appointment of a Crown nominee as a director of Echo.

In response, Echo announced that a general meeting would be held and the Board of Echo unanimously recommended that shareholders vote against the resolution to remove the Chairman. Pennwin launched a media campaign, including advertisements in various newspapers.

Prior to the general meeting being held, the Chairman of Echo resigned from the Board and Pennwin withdrew its requisition for a general meeting.

Fairfax Media Group (Fairfax) and Hancock Prospecting Pty Limited (Hancock)

Gina Rinehart (Rinehart) sought three seats on Fairfax’s Board, Deputy Chairmanship, some editorial control of Fairfax’s newspapers and the unfettered appointment of alternate Directors. The Board of Fairfax rejected these requests.

Rinehart responded by launching a media campaign against Fairfax, including by releasing a letter on an Australian newspaper’s website addressed to Fairfax’s shareholders. The letter claimed that Fairfax’s performance over the past five years had been “distressing for shareholders” and proposed a milestone for Fairfax’s share price. Further, Rinehart called for the Chairman of the Board to resign if the share price milestone was not achieved prior to Fairfax’s 2012 annual general meeting.

Rinehart currently has one seat on the Board of Fairfax. The Chairman did not resign.

Whitehaven Coal Limited (Whitehaven) and Nathan Tinkler (Tinkler)

Tinkler sought release from a standstill agreement he had entered into with Whitehaven during a failed takeover bid. Whitehaven refused this request.

Tinkler then indicated his intention to vote his entire stake against Whitehaven’s remuneration report and the re-election of 5 directors at the Whitehaven 2012 AGM.

Tinkler made a number of public statements about the Board of Whitehaven and questioned their ability to deliver value to shareholders. The Chairman of the Board responded in a similar fashion. The Chairman also wrote a letter to shareholders prior to the AGM addressing Tinkler’s allegations.

A strike was not recorded against Whitehaven’s remuneration report and the relevant Whitehaven directors were re-elected at the AGM.



Survey respondents also indicated an increase in the level of criticism expressed by stakeholders over the last 12 months.

Despite this, survey respondents did not indicate any noticeable increase in communications with key stakeholders outside of the AGM over that period.

Most survey respondents who indicated that they had increased communications with key stakeholders outside the AGM, also indicated an increased level of engagement with institutional shareholders and proxy advisers. This could be due to the perception that institutional investors largely follow proxy adviser recommendations when voting, as discussed later in this section.

Proxy advisers and preparing for the AGM The use of proxy advisers by institutional shareholders continues to be a contentious issue, with assertions that the extent of reliance on proxy advisers by institutional shareholders is inappropriate as some institutional investors appear to simply follow the recommendations of proxy advisers without question.36 This perception may be partially due to the fact that institutional shareholders are often required to make many voting decisions in a compressed time frame. In a study conducted by the AICD, AICD survey respondents indicated that 80% of votes cast by institutional shareholders occur in the six to eight week period during which approximately 80% of listed companies hold their AGMs.37

There are also criticisms that proxy advisers focus too much on technical governance issues, such as the remuneration report, and undertaking comparative analysis across peer companies, rather than business and operational issues. However, this could merely reflect the fact that proxy advisers are publishing recommendations on items of business at general meetings and the resolutions put to the AGM usually only deal with technical governance matters shareholders are not typically required to vote on operational matters, in part due to directors being primarily responsible for managing the business and affairs of the company.

The perception that institutional shareholders outsource decision-making is one of the factors leading to suggestions that proxy advisers should be regulated, possibly via some form of professional standard.38 It has also been suggested that institutional shareholders should be more active in deciding how to vote and that failing to do so “abrogates an important responsibility”.39

By contrast, proxy advisers do not appear to see themselves as directing institutional shareholders how to vote, with three of the larger Australian proxy advisers generally describing their role as assisting institutional shareholders to analyse risk associated with

36 See footnote 30, p25 citing the Productivity Commission Report “Executive Remuneration in Australia” (December 2009).

37 AICD report, Institutional Share Voting and Engagement – Exploring the link between directors, institutional shareholders and proxy advisers, 2011, p3.

38 See footnote 30, p42.39 See footnote 37, p6.

Has engagement with shareholders increased over the past 12 months?

Yes - great increase

Yes - minimal increase

Yes - moderate increase

No decrease

No increase40%

12.2%

36.1%

7.2%

4.4%

Types of stakeholder engagement organisations have seen over thepast 12 months

0% 5% 10% 15% 20%

Other

Experienced a strike

Increased requests for meetings byshareholders and/ or their representatives

Increased voter turnout

Requisitions of meetings/resolutions

Increase in the level of criticism expressedby stakeholders

Increase in the number of questions askedby shareholders for discussion at AGMs

Increase in attendence at AGMs 11.9%

15.6%

16.4%

4.5%

7.1%

14.5%

6.7%

9.7%

No answer provided to this question 13.6%


the various companies they invest in so as to empower institutional shareholders to make the right voting decision.

The AICD has highlighted the divergence of views regarding the role and impact of proxy advisers, noting that:

“Our research found that superannuation funds and managed funds view proxy advisory advice as just one input among others in their decision making on voting. However, a number of company directors believe that, because many institutional investors are outsourcing their analysis of companies to proxy advisers due to their own resource constraints, the advisers are too influential and have become de facto decision makers.”40

Given the concern of some companies and directors that proxy advisers are becoming “de facto” decision makers, it is not surprising that there has been an increased focus on preparing for AGMs. This includes closely monitoring proxy advisor recommendations and actively talking to institutional shareholders, especially where a proxy advisor is recommending a “no” vote on a resolution. Companies are also increasingly talking to retail shareholders, for example, where those shareholders have indicated that they intend to ask a question at the AGM. There is also a greater focus on scripts and scripting alternatives if a “no” vote is cast, particularly on the remuneration report resolution. This approach can assist the company to have a “second chance” in relation to a resolution by ensuring that the parties are prepared to be able to call a poll.

Another group contributing to the increased focus on preparing for AGMs is the Australian Shareholders’ Association (ASA), which describes its role as pressing for improvements in certain key areas of corporate governance, such as remuneration and dividend policies. There is a perception that the ASA will engage in

40 AICD media release, 12 October 2011, www.companydirectors.com.au/General/Header/Media/Media-Releases/2011/Research-spotlights-links-between-directors-shareholders-and-proxy-advisers

constructive discussions with companies in setting its recommendations. This can be contrasted to views expressed by some directors that proxy advisers may enter into discussions but their voting recommendations will not change as a result of that discussion.

Outlook The discussion surrounding the format and relevance of the AGM will continue. However, the AGM is likely to remain in its current form at least in the near future, as it is unlikely that there will ever be one AGM format suitable for all public companies.

The extent of institutional shareholders’ reliance on proxy advisers will also continue to be a source of contention.

Generally, it will be interesting to see whether the trends evident during the 2012 AGM season continue in the 2013 AGM season.

Class actionsIn 2012, there were five securities law class action settlements in Australia involving an aggregate settlement amount of approximately $506 million. Approximately three new class actions were commenced against Australian listed companies in 2012.

The experience with class actions in recent years has clearly established class actions as part of the permanent business landscape in Australia. It is clear that directors increasingly need to understand, and be adept at managing, the risks associated with this type of litigation.

Set out below is a graph showing the aggregate amount of securities law class action settlements over the last decade. With litigation funders typically receiving 30-40% of these settlements, the ‘friction costs’ associated with class actions are very substantial and encourage a further proliferation of this type of litigation.

For further analysis of recent class actions, see our report “Class Actions – 2012 Year in Review” to be released in March 2013.

“Even if they talk to you, they are not listening”.Survey respondent

0

200

400

600

800

1000

2002

2003

2004

2005Agg

rega

te S

ettle

men

t A

mou

nts

(A$m

illion

s)

2006

2007

2008

2009

2010

2011

2012


“The White Paper creates the platform for Government to develop policies that will promote and support Australia’s relevance to the region. Business cannot give the Government a choice about this, and needs to work with Government to deliver it. At the same time, we and other businesses need to make ourselves more, rather than less, a part of the region through genuinely integrated business models, the development of capabilities and forming deep personal and business relationships.”Stuart Fuller, Global Managing Partner, KWM


Asian Century White Paper

In October 2012, the Federal Government released its White Paper ‘Australia in the Asian Century’ (White Paper), a key policy document aimed at increasing and

enhancing Australia’s engagement with Asia.

The White Paper sets out twenty-five “national objectives” for 2025 as a roadmap for Australia to navigate the Asian Century. These national objectives are supported by policy pathways to guide their achievement.

The White Paper argues that organisations that will be successful in the Asian Century will require people with knowledge of the products and markets of Asia, as well as the cultural and language skills needed to be active in the Asian region. Accordingly, one of the Federal Government’s “national objectives” is that:

“Decision makers in Australian businesses, parliaments, national institutions (including the Australian Public Service and national cultural institutions) and advisory forums across the community will have deeper knowledge and expertise of countries in our region and have a greater capacity to integrate domestic and international issues.

One-third of board members of Australia’s top 200 publicly listed companies and Commonwealth bodies (including companies, authorities, agencies and commissions) will have deep experience in and knowledge of Asia.

One-third of the senior leadership of the Australian Public Service (APS 200) will have deep experience in and knowledge of Asia.”

In our survey, directors were asked whether they agreed with the Federal Government’s objective that by 2025 there should be one-third of board members on ASX 200 publicly listed companies and Commonwealth bodies with deep experience in and knowledge of Asia. Interestingly, 45% of survey respondents stated that they did not agree with this objective and a further 23% of survey respondents expressed no opinion. Only 32% of survey respondents agreed with the Federal Government’s ambitious objective. Concerns about being overly prescriptive about the composition of boards, and the fact that many Australian businesses remain primarily focused on the Australian market, may explain the relatively muted support for this objective from survey respondents.

Despite governments and businesses increasingly recognising the desirability of Asian experience for certain businesses, it is not a key attribute when it comes to selecting new board members. Less than 5% of survey respondents said that “experience and knowledge regarding doing business in Asia” was a key attribute in board appointments made in the last 12 months. Not surprisingly, as discussed (in ‘The Widening Expectation Gap’ section, see pages 9-10), core competencies such as industry sector knowledge, business skills and experience and financial expertise continue to be key priorities in new board appointments. In that context, it is arguable that “Asian experience” should be seen as a sub-set of the broader attribute of “business skills and experience” rather than a separate attribute in assessing a candidate’s suitability for a board appointment. In any event, we expect that meaningful Asian

Preparing for the Asian Century



expertise will become increasingly important in light of the growing importance of Asia to a multitude of Australian businesses.

While we strongly support the Federal Government’s objective of developing Asia-capable leaders, workplaces and institutions, we do not believe that a quota is the best way to achieve this. We consider that the following would be more effective ways to achieve the objective:

providing ongoing dialogue forums between business leaders in the Asia-Pacific region to enhance business-to-business links, influence decision making, exchange ideas and lessons learned, as well as lift the profile of the Australian business community in the region;

creating a national policy directed to promoting and supporting people-to-people exchanges in education and at the professional level. In particular, increasing the Asian literacy rate of Australians through two-way exchange programs, and academic and professional scholarships; and

encouraging businesses operating in the Asian region to create employment opportunities for Asian-literate graduates and value Asian literacy as an important criterion in overall candidate selection, managerial promotion and executive assessment processes.

Asian literacyMore than ever, Asian capabilities or “Asian literacy” such as language skills and an understanding of local business culture, the regulatory and legal environment and the role of government will be paramount to an organisation’s success in the Asian region. According to a study conducted by Asialink and the Australian Industry Group, the higher the proportion of senior leaders who have cultural training, speak an Asian language or have lived and worked in Asia for more than 3 months, the more likely business performance will exceed expectations.41

Our survey results indicate that while some Australian businesses recognise the importance of having directors who are Asian literate, others may still be coming to terms with the challenges and opportunities presented by the Asian Century and the implications for their businesses. 37.5% of survey respondents said that their organisation generally acknowledged the desirability of knowledge and expertise in the Asian region, 22.2% of survey respondents had received briefings on Asia and cultural issues and a further 4.2% of survey respondents had received formal training (for example, cultural awareness and competency training). We were surprised by the relatively tepid support for Asian literacy training, but believe that the proportion of businesses providing Asian literacy training is likely to increase in future years.

41 “Developing an Asia Capable Workforce – A National Strategy”, Asialink Taskforce, September 2012.

Doing business in ChinaChina will clearly play a critical role in the Asian Century. China is currently the world’s second largest economy and Australia’s single most important trading partner. In 2011, China accounted for 19.9% of Australia’s total world trade and approximately 34% of its trade with Asia.42 Australian companies are increasingly looking to access opportunities in the Chinese market and, according to the latest Asialink Index, at the end of 2011 Australian investment in China was estimated at $17 billion and Chinese investment in Australia was estimated at $19 billion.43 Interestingly, Australian investment in China grew by 278% in 2011 while Chinese investment in Australia actually fell by 51%.44 This fall may be attributable to a combination of the high Australian dollar, taxation changes and the rising costs structures of many Australian businesses.45

It is critically important that companies looking to do business in China have a considered strategy for engaging with China. In our survey, directors were asked whether their organisations had a strategy for investing/operating in China and 40% of survey respondents said that their organisations had such a strategy. In light of the fact that many Australian organisations are domestically focussed (particularly businesses in the services sector) and/or do not have operations in China, the 40% response rate shows that a significant number of Australian businesses have recognised the need for a well-articulated China strategy.

42 2012 PwC – Melbourne Institute Asialink Index.43 See footnote 42.44 See footnote 42.45 See footnote 42.

“There is a justification for introducing targets for females on boards as it is a social issue to push through barriers. However, not every Australian board needs Asian expertise – it is relative to their business operations. If they are a domestic company, which many are, then a quota is not appropriate.”Survey respondent


Although China offers a great number of opportunities, it also poses a unique set of challenges for Australian businesses and investors. Consistent with the results reported in our Directions 2012 Report, the need to adapt to a vastly different regulatory system continues to be a key challenge for Australian companies doing business in China. Survey respondents nominated a lack of transparency in dealings with Chinese regulators and difficulty in obtaining relevant licences and approvals as the two major challenges arising in relation to current or proposed Chinese operations and investments.

“Knowledge, language and local relationships are key. Cultural sophistication and historical knowledge are essential.”Survey respondent

“It is not easy to do business in China...local Chinese citizens are needed to oversee foreign investments in China and the availability of suitably qualified people is sometimes tight.”Survey respondent

Overview of the key Chinese government agencies

Regulator Description

NDRC The National Development and Reform Commission or its local counterparts. Responsible for reviewing and approving both outbound investments by Chinese investors and inbound investments by foreign entities.

In practice, the approval by NDRC and the State Council (China’s cabinet), which is called “project verification” approval is considered to be the most critical for outbound investments by Chinese entities.

MOFCOM The Ministry of Commerce or its local counterparts. Responsible for: - approving Chinese enterprises’ outbound investments through the

establishment or acquisition of overseas companies or entities; - approving foreign investments in China; and- undertaking anti-monopoly/competition review of transactions that reach

prescribed thresholds.

SAFE The State Administration of Foreign Exchange or its local counterparts. Responsible for approving or filing of funds or financing (including in the form of foreign exchange and RMB) used for both Chinese outbound and inbound investments.

SASAC State-owned Assets Supervision and Administration Commission. Approval / filing is required if the target company (involved in inbound investment) or the investing company (involved in outbound investment) is a state-owned enterprise (including wholly state-owned, state-controlled or state-participated enterprises).



Chinese government agencies, such as the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM), have wide ranging powers of review and are increasingly reviewing investments and cross-border transactions which have a connection with China. The involvement of Chinese government agencies can add significant complexity and execution risk to a transaction, as well as increase the time required to implement it.

Difficulty in enforcing contracts in China was the third biggest challenge cited by survey respondents. Traditionally, Chinese parties have been reluctant to enforce rights under

contracts through litigation, preferring to rely on the existing relationship and potential for furthering the relationship when resolving issues. However, increasingly Chinese parties are taking steps to address concerns over enforceability. Although there is now much greater certainty of legal outcomes than existed even in the recent past, further work remains to be done.

Directors also remain concerned about the protection of intellectual property in China, with survey respondents nominating “intellectual property rights infringement and enforcement issues” as the fourth biggest challenge arising in relation to current or proposed Chinese operations and investments.

Cross-border transactions

Trends in cross-border investment

Cross-border transactions have continued to be a focus for Australian companies in 2012, although the number of organisations pursuing such transactions has declined from 2011. The percentage of survey respondents whose organisations were involved in cross-border investments in 2012 was 49% compared to 60.8% in 2011. These results are consistent with the downward trend in the Australian M&A market, with Thomson Reuters noting that Australian M&A activity amounted to only US$88 billion in 2012, a 50% decline from the US$173 billion grossed in 2011.46

55% of survey respondents said that the overall level of cross-border investment by their organisations remained the same when compared to the prior period and 33% of survey respondents reported an increase in the level of cross-border investments.

While the overall level of M&A activity slowed in 2012, Asia remained a hot spot for M&A and a key area of focus for Australian businesses undertaking cross-border investments. According to Austrade statistics, “In 2011, trade with Asia represented over 70% of Australia’s total two-way merchandise trade. Eight nations in the Asian region are now top 10 trade partners, including China, Japan, South Korea, Singapore, New Zealand, India, Thailand and Malaysia. The US and the UK round out the top 10”.47 Our survey

46 Thomson Reuters Global M&A Review, p13.47 “Australia: Benchmark Report 2012”, Australian Trade

Commission, p33.

Jurisdiction in which, or with which, cross-border investment made in 2012

% of respondents

Asia Pacific (ex-China, Japan and Indonesia) 18.8%

United States and Canada 18.3%

China 17.8%

European Community 11.1%

Japan 6.7%

Indonesia 6.7%

India 4.8%

Africa 4.8%

Brazil 4.3%

Other 3.4%

Middle East 2.9%

Russia 0.5%


results strongly support Austrade’s statistics and the trend is clearly towards increased investment in Asia. Of the directors surveyed whose organisations had been involved in cross-border investments in 2012, 54.8% of total investments were into countries in the Asian region. Asia-Pacific (ex-China, Japan and Indonesia) represented 18.8% of this investment (compared to 10.4% in 2011), China represented 17.8% (compared to 11.7% in 2011), Japan represented 6.7% (compared to 3.0% in 2011), Indonesia represented 6.7% (compared to 5.7% in 2011) and India represented 4.8% (compared to 3.9% in 2011). The United States and Canada also continued to be major destinations for cross-border

investments, representing 18.3% of total investments. While Asia-Pacific (ex-China, Japan and Indonesia) rose from the fourth ranking investment destination in 2011 to the top ranking investment destination in 2012, the European Community dropped from the top ranking investment destination in 2011 to the fourth ranking investment destination in 2012.

Challenges of cross-border investments

In our survey, directors were asked to identify the top challenges for Australian organisations undertaking cross-border investments. Not surprisingly, global financial conditions were nominated as the top challenge. Given the ongoing uncertainty and instability in global financial markets, it is likely that this will continue to occupy the attention of directors and management for the foreseeable future when they consider deploying capital and operating offshore.

The second major challenge nominated by survey respondents in the context of cross-border investments was political uncertainty, ineffectiveness or interference. Possibly the most high profile example of this in 2012 was in respect of Rio Tinto Group (Rio). Rio not only faced pressure from the Mongolian Government to renegotiate the ownership split of the giant Oyu Tolgoi copper and gold

deposit in Mongolia’s South Gobi desert, but also experienced development delays at its Simandou iron ore mine (due to concerns about the Guinean Government’s ability to contribute to infrastructure costs) as well as difficulties in Mozambique as a result of uncertainty over the regulatory position on infrastructure.

A number of smaller Australian mining companies operating in developing regions have also been affected by unexpected local ownership requirements. For example, Intrepid Mines Limited faced new foreign ownership restrictions on mines in Indonesia, which will require eventual 51% local ownership of its flagship Tujuh Bukit copper and gold project in East Java.48

Finally, investor sentiment (including investment time horizons) was the third major cross-border challenge noted by survey respondents. This was also a “Top 3” challenge in our Directions 2012 Report, and it is clear that directors and managem

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