A round-up of recent governance news.
Six key questions in REM report process
Leading executive pay consultant Guerdon Associates has published a checklist for board remuneration committees that have a tight timetable to produce this year’s remuneration (REM) report.
The checklist is particularly useful for boards that govern companies with a 30 June year end. They often have limited time from when the first draft of the remuneration report is complete to when the annual report is printed. The gap can be less than four weeks in some organisations.
Guerdon recommends remuneration committees ask six key questions:
- Who is responsible for the REM report at board level? Although the board owns the report, its completion usually relies on finance, legal and human resource teams in large organisations. Knowing who does what, by when, is critical, as is ensuring the remuneration committee oversees the process.
- What’s a good timetable for preparation of the REM report? Guerdon recommends identifying queries for the remuneration committee in January each year; agreeing on the remuneration report format in February; having management prepare a draft by March; ensuring a review of the first draft is complete by April; determining short-term incentive outcomes and testing long-term incentives vesting outcomes in June/July; ensuring management reviews and finalising the report in July/August; with a final review in August.
- Who in management is responsible for preparation of the REM report? Guerdon says boards should ensure the REM report process has a competent project manager who is a skilled communicator.
- What is best practice for REM report structure? Guerdon argues there is no best practice as REM reports often vary and should be flexible to match a company’s needs. However, some simple rules can help: tell the company’s REM story in plain English in the report’s first half and package up the compliance aspects in the second.
- Should an actual or realisable table of pay outcomes be included? Although not statutorily required, a table of realised or received pay during the year can be good practice, provided disclosure each year is consistent, transparent and well explained. Guerdon suggests showing the total value of what has vested in the executive on the day of vesting, and the proportion of value that was granted and what has grown since the grant date.
- What are the red flags? Guerdon says the board should not expect any REM surprises during shareholder voting on the report. Reviewing the report through the eyes of investors and proxy advisers can help identify red flags and provide a framework for boards to address any controversial issues or consider how they will be handled if investors complain.
The big question
The chair of my non-profit board is having trouble moving “legacy” style board members on and gaining agreement for new board members. What is the minimum requirement for putting on new effective board members? Does each addition require a vote by the entire board or can the chair conduct a lower direct involvement process to add board members?
The best place to start in determining the rules around how directors are appointed and re-elected or replaced will be the entity’s constitution or articles of association. These will set out the minimum requirements for new board members (if any) and procedures around their replacement, re-election or removal.
Typically, a director is likely required to stand for re-election on a rotating basis every three years or so and it is generally shareholders who vote on the re-election.
The board of directors generally has the power to appoint directors in the case of a casual vacancy or an additional (and often independent) director. It would not be typical for a sub-committee to have the power to appoint directors.
This Q&A is taken from Director Assist, a complimentary member service operated in partnership with IFX. Answers are provided by a network of specialist practitioners.
War of words over corporate culture
Few governance issues are potentially more explosive than moves by regulators to rein in corporate culture. The notion of “regulating culture” in financial services has incensed some of Australia’s leading company directors.
A war of words on the issue erupted as prominent bankers, such as David Murray, former Commonwealth Bank CEO, and David Morgan, former Westpac CEO, criticised the Australian Securities and Investments Commission (ASIC) for a seemingly prescriptive approach to culture.
The Federal Opposition’s push for a banks royal commission, which appears to be gaining support in the electorate judging by opinion polls, has further inflamed the situation.
The governance community is deeply concerned by the corporate regulator’s proposal to introduce personal and corporate liability for organisational culture. ASIC says it had no intention to regulate culture by “black-letter law”.
Last year it recommended amendments to the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001 . The laws would extend Part 2.5 of the Criminal Code Act 1995 to provisions of the Corporations Act 2001 that regulate financial services and markets. That could expose a corporation, and its directors and officers, to criminal liability.
Steven Cole FAICD, says ASIC’s language implies it is an offence if companies have a poor culture. “It’s like a scene from the movie Minority Report , where you have thought police trying to predict if you will do something wrong. A company with a bad culture has not done anything wrong, provided it did not offend the law.” Cole chairs Neometals and Reed Industrial Minerals, and is a director of Matrix Composites & Engineering.
Dr Simon Longstaff AO, executive director of The Ethics Centre, says the governance community is over-reacting. “I do not understand why this proposal has caused so much fuss,” he says. “ASIC is not attempting to regulate corporate culture; rather, it is saying that if boards are recklessly indifferent to the quality and character of corporate culture in the companies they govern, or if they encourage or support a culture of indifference to appropriate standards of law, then they should be held accountable, even if they have ticked all the compliance boxes along the way.”
But Longstaff believes directors should not be personally liable for breaches in corporate culture, provided that they have acted in good faith. He says: “Directors who sought to address cultural problems should receive proper recognition and not be held personally liable if there are isolated incidents of rogue conduct.”
Longstaff says there is an opportunity for a conversation between ASIC and the governance community “to find an appropriate balance on director liability around corporate culture”.
Best practices for recruiting new board members
Many private companies tend to recruit their board members from a pool of friends, family, professional networks or via word-of-mouth. But when it comes to board membership, only those best suited to the role can truly represent the interests of the corporation and its stakeholders, while allowing for effective execution of corporate governance and objective oversight.
In an article published in US-based Private Company Director magazine, author Mark Rogers, CEO and founder at BoardProspects.com, states that a good board should include a diversity of perspective, with members who can jointly oversee the corporation’s strategic initiatives while bringing their individual strengths to the table.
He outlines the following three strategies for private company owners and shareholders building a board.
Rogers stresses the importance of quality over quantity, warning that it is not just about filling all the seats at the table, but attracting people who can actually get the job done. He highlights three key questions when considering prospective board members:
- Does my board simply fill blank space on the candidate’s resume?
- Is this candidate guilty of being spread too thin?
- Does this candidate add a key skill set or perspective to our team?
“It’s sad but true: Women and minorities are largely absent from corporate boards. Lack of diversity in the boardroom is a significant problem and affects us all in more ways than we realise,” Rogers says. He says that a board should mirror the company it governs, including its employees and customers and states that a lack of diversity is reason enough for boards to reassess their structure.
Highlighting a report entitled Why Diversity Matters by McKinsey & Company, Rogers says the research found that companies in the top quarter for ethnic and racial diversity are 35 per cent more likely to see financial returns above their national industry median. “The writing is on the wall – diversity on boards is good for business,” he says.
The third strategy for finding qualified and diverse candidates is networking, Roger notes.
While in many situations, it is often a case of those you already know, networking is key to reaching those you do not.
“Simply put, networking today is at your fingertips 24/7 thanks to social media, apps, and other networking tools. Online networking helps expand your network and serves as a helpful complement to traditional in-person networking.”
However, Rogers warns not to discount good old traditional networking. “Face-to-face connections at events, conferences, and social gatherings can present a world of opportunity you may have never known existed.”
Corporate ethics and culture
As companies across the world look at ways of adopting better ethical and cultural practices, a recent article in the Harvard Business Review has warned against implementing compliance checks to ensure such practices are effectively measured.
In Corporate Ethics Can’t be Reduced to Compliance , the authors highlight the risk of using a checkbox mentality that gives the illusion of reducing risk without really doing so and suggests that a compliance-focused approach to eliminating unethical behaviour can stunt a company’s efforts to innovate and to take intelligent risks.
The authors suggest that instead of focusing on the poor choices employers want employees to avoid, they should focus on the positive virtues they want them to exhibit.“Rather than getting together with senior managers to craft a ‘values statement’, corporate leaders should instead foster a series of structured conversations between leaders at all levels and their teams,” the article says.
“The goal of these conversations should be to develop a common language to help frame examples of how people live out the organisation’s values or classical virtues.”
The authors propose seven classical virtues as a framework for discussion that can help to shape these conversations and shift their focus from complying with the rules to excelling ethically:
- Trust: confidence in one another.
- Compassion: an understanding of another’s challenges.
- Courage: strength in the face of adversity.
- Justice: a concern for fairness.
- Wisdom: having good, sound judgment.
- Temperance: having self-restraint.
- Hope: a positive, optimistic expectation of future events.
The article concludes by suggesting that leaders can assess how well they’re modelling virtue-based ethics by asking employees five questions about how the company is exercising its moral muscle:
- How well are we teaching character in our company?
- How might character development benefit our company?
- What is being done to encourage or discourage character development?
- How does character development reduce risk?
- How does character development promote growth?
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