Superannuation, financial reports and class actions go under the microscope
Two important reports were released in May 2018, highlighting opportunities for improvement in governance practices in the superannuation sector.
On 17 May, the Australian Prudential Regulation Authority (APRA) released the findings of a thematic review of board governance of 29 superannuation funds representing a “broad cross-section of fund type, fund size, ownership structures, and board composition.”
On 29 May, the Productivity Commission released a draft report with recommendations to improve the efficiency and competitiveness of Australia’s superannuation sector. Both reports suggest that governance standards can be strengthened in the interests of member outcomes.
Some examples of issues raised in the reports:
- Related party transactions are cited as a concern, with the Productivity Commission arguing that some arrangements “are not sufficiently cognisant of members’ best interests”;
- According to APRA, most funds in its survey did not demonstrate active consideration of the collective skills, capabilities and experience required on their boards. The regulator pointed to a lack of clear criteria on composition, training and fit and proper policies
- Both reports cite a lack of evidence of rigorous board assessment and evaluations
- The Productivity Commission concluded that a “critical mass” of independent directors on super fund boards would be a positive step.
The AICD has long maintained the inclusion of more independent directors on boards would be a positive improvement to governance arrangements in the sector, subject to the definition of “independence” being appropriately framed to the specific needs of the sector.
However, as the Productivity Commission notes, “it is of equal importance — and arguably matters more — to ensure that funds have thorough processes in place to recruit highly skilled and experienced boards, as it is to focus on the number of independent directors.”
The AICD will be reviewing the governance proposals in detail in our submission to the Productivity Commission (due mid-July).
Members can send their views to AICD policy advisor Matt McGirr via email here.
ASIC focus for financial reports
The corporate regulator has called on companies to focus on the impact of new accounting standards in preparing financial reports this year (available here asic.gov.au).
The Australian Securities and Investments Commission (ASIC) has reminded boards that “directors are primarily responsible for the quality of the financial report”, including that quality financial information is provided on a timely basis.
The Australian Accounting Standards Board’s new standards may affect how and when revenue can be recognised, and assets and liabilities relating to leases, among other issues. Full-year reports at 30 June must disclose the future impact of the standards, while half-year reports at 30 June must meet new requirements for revenue recognition and financial instrument valuation.
ASIC is concerned that some companies may not have adequately prepared for the impact of the new standards — which could significantly affect results reported to the market — and says “surprisingly few” companies have made disclosures of the expected impact.
As in previous years, ASIC will also be looking closely at impairments of non-financial assets. ASIC expects directors to be testing and challenging impairment decisions and reviewing valuation models. See ASIC Information Sheet 203 for more guidance.
Class action reform
The AICD has welcomed the Australian Law Reform Commission’s (ALRC) discussion paper on reforms to Australia’s class action regime, released on 31 May. While class actions are an important mechanism for access to justice, an overhaul of the current framework is overdue. Currently, much time and money is spent on opportunistic cases where the interests of class holders may not be the dominant driver. Fixing this is in the interests of all stakeholders, including shareholders, companies and customers. The ALRC’s paper is an important step towards sensible reform.
Research from law firm King & Wood Mallesons shows the quantum of class action settlements has increased more than tenfold over the past decade. However, cases are not being tested in court, with no shareholder class action proceeding to final judgment.
The AICD strongly supports the ALRC’s call for a review of the legal and economic impact of the continuous disclosure obligations of listed entities, and misleading and deceptive conduct provisions. The ALRC has suggested this include the propensity for corporates to be the target of funded shareholder class actions, the economic cost of class actions and the availability and cost of D&O insurance in the Australian market.
These are important issues. As the ALRC notes, there is growing evidence of the unintended consequences of our current class action regime, coupled with the “peculiar characteristics” of our statutory provisions, that warrant closer review.
We support ALRC proposals on licensing litigation funders, a reform we have argued for over many years. The AICD has concerns about proposals to ease the ban on lawyers charging contingency fees, notwithstanding the checks and balances suggested. The ALRC’s proposed federal collective redress scheme also warrants further consideration.
This year, Company Director is monitoring progress on the AICD target of 30 per cent women on boards by the end of 2018.
Women now account for 27.7 per cent of ASX 200 board positions, up from 25.4 per cent this time last year and 26.7 per cent last quarter, according to new figures released in the latest AICD Gender Diversity Progress Report.
The report also reveals that, for the first time, women account for 30 per cent of board positions across the ASX 100, 50 and 20 companies, and another 10 boards have reached the 30 per cent target since February 2018.
The number of boards with zero women has remained constant, and those with one woman remains at 60.
While the appointment rate of women to ASX 200 boards remained strong over February, March and April, it fell in May, with the year-to-date appointment rate for female directors dropping below that of male directors (49 per cent to 51 per cent). This decline could jeopardise the target of 30 per cent women on ASX 200 boards being reached by the end of this year.
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