A monthly review of the Australian Institute of Company Directors’ policy and advocacy team’s key projects and issues.

    In November we lodged a submission with the Competition Policy Review Panel in response to its draft report. Our submission focuses mainly on the recommended changes to section 46 of the Competition and Consumer Act 2010, and the issue of misuse of market power. Key elements of these changes include that prohibited conduct should have either the purpose or the effect of “substantially lessening competition” in a market, and the introduction of a defence, based on the “rationality” of the conduct and whether it is in the long-term interests of consumers.

    We maintain that any proposed legislative changes should have a sound policy basis and be likely to achieve their intended purpose. With section 46, the main aim is to foster competitive markets, which in turn should lead to improved economic and societal outcomes.

    We believe the proposed changes will present considerable difficulties for corporations seeking to comply with section 46, as well as courts seeking to interpret it.  More generally, we consider the changes will adversely impact on innovation, efficient outcomes and market competition, as well as on the long-term interests of consumers.

    Given the potential for civil penalties of up to $500,000 for individuals relating to breaches of section 46 and the prohibition on corporations from indemnifying their officers against this conduct, it is critical any amendments are clear and capable of readily being complied with. We do not believe this will occur under the draft policy changes put forward by the panel.

    We are concerned that the uncertainty created by draft changes to section 46, alongside liability provisions, which impose significant penalties, will create a burdensome liability risk for directors and lead to an increase in risk-averse behaviour.

    Risk management
    We have long been concerned with the blurring of the role between management and the board by policymakers, regulators and the courts.

    This issue again came to light in the Australian Prudential Regulation Authority’s (APRA’s) amended Prudential Standard CPS 220 – Risk Management (CPS 220) and draft Prudential Guide CPG 220 – Risk Management (CPG 220). We lodged a submission with respect to draft CPG 220 in March 2014 raising our concerns regarding a number of instances in the draft (and also in the final version of CPS 220) where the roles of the board and management had been blurred.

    Subsequent to this submission, we have met with APRA to discuss our concerns regarding CPS 220 and the draft CPG 220.

    We are pleased to report that APRA has now released a draft of its proposed amendments to CPS 220 and the draft CPG 220 for public consultation, which included changes to take into account the concerns we raised.

    We hope these changes will go some way to lessen the regulatory burden for the boards of financial services companies. They are a step towards addressing concerns (as highlighted in our recent Essential Director Update) that APRA expects directors to have a hands-on role in company affairs, akin to management.

    It is still intended that the amended CPS 220 and CPG 220 will come into effect from 1 January 2015.

    Honest and Reasonable Director Defence
    The advocacy campaign around our Honest and Reasonable Director Defence (HRDD) proposal has continued in earnest.

    We are regularly meeting with stakeholders, policymakers and parliamentarians to discuss the detail of our proposal and answer any of their questions or concerns.

    One of the primary reasons we believe a broad-based defence is required is to give directors the confidence to take appropriate business risks to stimulate investment, contribute to economic growth and, ultimately, create more jobs.

    The latest Director Sentiment Index highlighted this issue. Seventy per cent of directors perceive there to be a risk-averse decision-making culture on Australian boards.

    More than 80 per cent of directors claim that the risk of personal liability has caused them to take an overly cautious approach in their business decision-making at some point.

    Looking forward to 2015
    Our board has recently approved the work plans for the policy and advocacy team in 2015. Our law, reporting and corporate governance committees will assist our in-house experts to work on the identified issues. These work plans will shape our priorities for the coming year.

    In 2015, the law committee will assist the policy and advocacy team to continue its focus on the issues of director liability, insolvency, class actions and litigation funding. The committee will also support our efforts in the ongoing advocacy campaign for the HRDD.

    The reporting committee will continue to support us on issues relating to corporate reporting both in Australia and abroad. This includes accounting standards, regulatory guides released by the Australian Investments and Securities Commission or other regulators, the complexity of corporate reporting or any other issues that may arise related to corporate reporting.

    The corporate governance committee will support us on key issues relating to corporate governance domestically and internationally. Issues the committee will focus on include shareholder engagement, board composition and the board’s role in risk management.

    We will also continue to monitor issues as they arise and respond as appropriate.

    In addition, as part of our involvement in the Global Network of Director Institutes (GNDI), we will continue to be involved in the formulation of their global policy perspectives papers. In 2015, issues to be considered by the GNDI as part of its work plan include cyber security and big data, public sector governance and anti-bribery and corruption.

    Thank you to our committee members
    We would like to thank the members of our three standing policy committees (corporate governance, law and reporting) and the chairman’s forum, as well as our division councils and the many policy task forces that have given their time and expertise to enhance our policy activities throughout the year.

    Honest and Reasonable Director Defence – FAQs
    We regularly receive questions from members about our Honest and Reasonable Director Defence (HRDD) and to this extent we have updated the Frequently Asked Questions (FAQs) document on our website.

    This document sets out answers, in plain language, to many of the questions we have received about the proposal to date. You can read this in conjunction with our full proposal paper, which goes through the need for change and the elements of the Defence in more detail.

    An example of a question we often get asked is below. To read more answers to FAQs visit our website.

    Q. Will the HRDD just allow well-paid directors to get “off the hook”? What safeguards will protect the community from corporate misconduct?

    No. The aim is to protect honest directors, not to allow others to escape their responsibilities. Directors that act dishonestly, irrationally or for an improper purpose will not be able to rely on the Defence. 

    The HRDD could be used by all directors of companies regulated under the Corporations Act, not just the directors of big companies. This includes small business directors and some not-for-profit (NFP) directors.

    Despite liability risks, 84 per cent of NFP directors do not get paid at all. The Defence would offer a safety net that would hopefully encourage more people to serve on the voluntary basis often required for NFP boards.

    The Defence applies only to directors, not to companies, so there would be no change to the responsibilities of companies if the proposal was adopted.

    The proposed reform is about ensuring that honest, rational and careful directors are able to carry out their oversight responsibilities and make sound business decisions without undue concern for personal liability.

    Don’t miss

    • This month’s update of the Centre for Governance Excellence and Innovation (CGEI) includes:
    • Exclusive video footage of our CGEI roundtable with leading directors, discussing regulation and economic growth.
    • Recent insights around the role of boards in strategy development.
    • Insightful analysis from Boston Consulting Group about the characteristics that separate successful innovators from others.
      Recent director views on economic challenges facing Australian businesses and government priorities.

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