The future regulation of not-for-profit organisations and the issue of director liability have been high on our agenda this month.
Options paper for Abolition of the ACNC
We have continued to engage with the government on matters of concern to the not-for-profit (NFP) director community, including on issues relating to the abolition of the Australian Charities and Not-for-profits Commission (ACNC) and proposed Centre of Excellence (COE).
This has included making a submission to the Department of Social Services in response to the replacement options following the abolition of the ACNC proposed in its options paper. In our submission, we noted that the separate consultations regarding the abolition of the ACNC and the creation of the proposed COE is causing significant confusion. Given how closely these consultations interact, it is difficult to provide substantive feedback on one without knowing the outcome of the other. That is why we have encouraged the government to reconsider its timeframes on this reform and recommended it conduct consultations simultaneously.
In our view, the level of detail set out in the options paper is severely lacking.
We did, however, make some comments on the proposals. These included that the proposed self-reporting standards neither reduce the regulatory burden for charities nor enhance public accountability in the sector. Most importantly, the proposal does not reduce the duplication in reporting requirements that organisations face due to differing requirements across federal and state governments, agencies and departments.
We also noted that the directors’ duties and responsibilities under the final ACNC legislation were the result of considerable consultation with the sector and offered appropriate protections for directors who, for the most part, perform their roles voluntarily and often without much executive support. As such, these should be retained under any replacement regime.
We acknowledge that the government is committed to abolishing the ACNC. While we do not agree with this approach, we have encouraged the government to maintain elements of the ACNC that we believe are on their way to delivering improved outcomes for the sector. In particular, we believe the government could meet its commitment to abolish the ACNC, and improve outcomes for the sector, if the following features of the current regime are maintained:
- Directors’ duties and governance standards in the ACNC Act 2012 that offer protections for volunteer directors.
- A central reporting mechanism to government.
- A charities register that provides valuable information to a range of stakeholders. Data collected on the charities register is a valuable source for research and policy development in the NFP sector.
- A firm commitment and an agency tasked with harmonising jurisdiction laws affecting the NFP and charity sector.
Honest and Reasonable Director Defence
Last month, we released our proposal for the insertion of an Honest and Reasonable Director Defence into the Corporations Act 2001. (For more, see p44 and visit our our website).
This proposal has also received considerable coverage in the media. But one thing that seems to be missing in aspects of the media coverage is that this proposal is not just about “the big end of town”. The defence would apply to all directors of companies regulated by the Corporations Act.
Australia has over 2.3 million company directors. The majority of these directors serve on companies that are regulated by the Corporations Act. They can include small businesses, family enterprises, public companies, not-for-profits and listed public companies. Importantly, charities may also shortly return to being regulated by the Corporations Act regime, pending passage of the ACNC abolition legislation through parliament.
The Defence is a response to a number of pressures in Australia’s business operating and regulatory environment which suggest that a cultural shift in how we regulate directors is necessary. These pressures include, but are not limited to:
- Directors concerns about personal liability.
- The limited nature of the business judgment rule.
- The risks for directors when companies approach insolvency.
- The ongoing expectation gap between the role of the executive and that of directors.
Discussion on this issue so far has also included comments that assert or imply that we are seeking to “lower the bar” for directors through the introduction of the Defence. This is simply not the case. One of our aims is to help achieve world-leading performance by Australian boards and directors and we fundamentally believe that this Defence is about strengthening governance not lowering the standards. Those directors who act dishonestly, irrationally or for an improper purpose will not be able to rely on the Defence.
This proposal is not just about seeking legislative change, it is also about starting a conversation about the whole culture of how we regulate directors and to question whether our approach actually encourages strong, yet responsible, corporate performance.
Australia’s system of regulation needs to actively create an environment where those directors who act with integrity and commitment are free to pursue and harness new opportunities, drive performance and create jobs without being overly focused on personal liability concerns. The reform we are proposing would underpin a system of corporate regulation that focuses on supporting honest and committed directors – not holding them back or lowering the bar of governance.
It is important that the director community starts a conversation about the need for regulatory change in this area. We encourage you to talk to your networks about the issues you face and what our proposal could achieve.
State-based director liability
Our work continues on trying to improve the director liability environment created by state-based legislation.
We recently attended meetings with relevant politicians and advisers across government and opposition, in both Tasmania and Victoria. Although some reform has already been completed in these states, we still believe there is, particularly in Tasmania, a significant amount of work to be done on reducing the number of circumstances where directors will be automatically criminally liable for the acts of the company. We have, in the past, seen real progress in a number of jurisdictions, particularly Queensland and New South Wales, and we hope to achieve similar outcomes in Tasmania and Victoria.
Guidance for proxy advisory firms in Canada
In July, Company Directors lodged a submission with the Canadian Securities Authority in response to its proposed National Policy 25-201 Guidance for Proxy Advisory Firms.
While the guidance is only intended to apply to proxy advisory firms providing services to Canadian companies, it is important for us to comment on them as there is a tendency for Australian regulators to look to the regulations in other jurisdictions when developing regulation for Australia.
In our submission, we noted that despite proxy advisory firms playing such an important role and, in our view, exerting significant influence over their clients with respect to the exercise of voting rights, they are currently not held to any standard when it comes to the communications they make to shareholders. This is to be compared with the obligations of issuers and their directors who, in most jurisdictions, must comply with a number of regulations related to shareholder communications, and have potential liability in the event the materials they send to shareholders contain inaccuracies, misrepresentations and/or misleading statements.
While acknowledging that the guidance represents a useful step towards addressing the disconnect between the influence and accountability of proxy advisory firms, we do not agree that they should apply on a voluntary basis. Instead, proxy advisory firms should, at a minimum, be required to meet the standards set by the guidance. Our view is that the proxy advisory industry should be regulated by an industry body that could set and enforce professional standards, investigate complaints and administer discipline to ensure the integrity of the services being provided by proxy advisory firms.
Our submission also noted that, in our view, the guidance does not go far enough to address concerns relating to the transparency and accuracy of voting recommendations made by proxy advisory firms. The guidance should include requirements that proxy advisory firms have their voting recommendations “fact checked” with the issuer before they are finalised, not apply proxy voting guidelines rigidly as “one size fits all”. It should also ensure that their staff possess appropriate qualifications and experience to analyse or advise on the relevant issues and have sufficient time and resources to analyse the issues necessary to make informed and accurate voting recommendations.
As a member of the Global Network of Director Institutes, our submission has been informed in part by members of this group, including the Institute of Corporate Directors in Canada.
Responsibilities of auditors
In July, we provided comment on the Exposure Draft: ISA 720: The Auditor’s Responsibilities Relating to Other Information, Proposed Consequential and Conforming Amendments to Other ISAs (ISA 720).
We are concerned that the exposure draft does not explain in significant detail the reasons for the need to revise the current ISA 720. We encourage the IAASB to clearly articulate the need for revising this auditing standard. In particular, we noted the following concerns:
- What would be included within the “other information” for the purposes of ISA 720.
- Whether the proposed auditor reporting would effectively communicate with users as to the nature and extent of consideration by the auditor of “other information”.
- ISA 720 would not effectively reduce the audit expectation gap.
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