Governance Wrap – Summer Edition December 2009 – January 2010

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CompliSpace Blog

Australian Governance Wrap – Summer Edition December 2009 – January 2010

In 2009 CompliSpace produced a series of weekly governance wraps. In 2010 we have decided to change tack slightly and publish a series of comprehensive monthly governance wraps starting with this one which covers December/January.   For those readers who would like more frequent updates we invite you to follow CompliSpace on Twitter where you will find  key media and regulatory feeds and posts on governance items of interest during the day.

So what happened in the governance space whilst most Australians were enjoying the festive season?  In this bigger than usual blog we cover:

  • ASIC – The Losses, the Reaction and the Resolve
  • Confusion Reigns as Modern Awards and National Employment Standards Commence
  • ATO Urges Crack Down on Sham Contractor Arrangements
  • ASX Company Directors Behaving Badly
  • ASX Executive Remuneration – Two Strike Rule Softened
  • Federal Government silent on AML/CTF Tranche 2 Rollout
  • New Gender Diversity Requirements for ASX Entities

ASIC – The Losses, the Reaction and the Resolve

Whilst the last quarter of 2009 was a public relations disaster for ASIC with high profile losses against Andrew Forest (Fortescue), Jodee Rich (OneTel) and Andrew Lindburg (AWB),  it seems the Federal Government and the corporate regulator are not backing away from the fight.  To the contrary, December 2009 and January 2010 saw a range of new laws proposed and a clear signal of ASIC’s resolve to crack down on insider trading, market manipulation and director’s who breach their duties  http://ow.ly/10IW3.

With the Federal Government pushing for ASIC to take over the role of share market supervisor from ASX by September 2010, in December 2009 it announced new fines of up to $A5 million for market breaches by stockbrokers and a new system of infringement notices. Not surprisingly the broking industry is up in arms claiming that the new laws are harsh and oppressive and will prompt an exodus from the profession http://ow.ly/Z8uJ. Brokers’ nerves were probably not calmed by ASIC’s decision to invest in a powerful new technology infrastructure to manage its new market surveillance powers. http://ow.ly/LHNi

In December 2009 ASIC also released a draft consultation paper on handling confidential information for listed companies and their advisers in an effort to make it easier for the regulator to investigate possible insider trading http://bit.ly/9glUuI.  This time it was the investment bankers turn to scream at new requirements that would require them to keep a log of investors contacted http://ow.ly/Ovyu.

This was all followed up in January 2010 with Minister Chris Bowen announcing a dramatic increase in criminal penalties for market offences as well as increased powers for ASIC to conduct raids on premises and to tap phones http://ow.ly/11xFV.

All this action seems quite timely with a recent research report finding that Australia’s record on insider trading and market manipulation is getting worse with the “information leakage” ratio at the ASX doubling in the past 4 years http://ow.ly/11CIK.

Whilst ASIC has a miserable “mega-litigation” track record it seems that the regulator is kicking some goals at the small end of town including:

  • Banning two Moore Stephens audit partners over their role in the Estate Property Group collapse http://ow.ly/T4TA
  • Grounding the founders of failed fund manager LKM Capital as they prepared to travel to the UK http://ow.ly/10i0Y

Expect these types of prosecutions to continue in 2010.

Fair Work: Modern Awards and National Employment Standards (NES) Commence

Given the lack of government advertising regarding the second stage of the Fair Work Act it is not surprising that confusion reigned went it commenced on 1 January 2010.  Fair Work Australia’s help line went into overload. The Retail Industry Association came out swinging saying that 90% of its members were considering reducing staff hours.  Having not said a word in anger prior to Christmas, the Opposition has finally arisen from its slumber with newly installed Leader Tony Abbott calling for a moratorium on prosecuting small businesses that breached the new laws.

Expect IR to once again be a key issue in the upcoming election.

The big elephant in the room is that, under the old system, many businesses used to simply ignore awards believing, mistakenly, that if they paid “above award wages” the awards didn’t apply. The reality is that because the new system is simpler, it is also easier to enforce and employers who don’t comply will find themselves at high risk of fines, penalties and employee claims.

Whilst it is easy to see the logic of Julia Gillard’s position, namely,  that the new system will reduce compliance costs for small business in the long run, the stark reality is that you can’t reduce compliance costs if you weren’t complying in the first place.  There is also no getting away from the fact that, irrespective of the employers’ previous levels of compliance, they will need to undertake work to upgrade their policies, procedures and employment contracts in order to comply with the new regime.

If you need help in this area CompliSpace has developed a comprehensive range of publications and compliance tools that are available free on our website at http://bit.ly/4uXjDC.   If video is your thing you can click on the following links to view CompliSpace director David Griffiths, being interviewed in relation to the changes on the ABC Midday Report http://ow.ly/MA5r and Sky Business News Channel http://ow.ly/OMYp.

ATO Urges Crack Down on Sham Contractor Arrangements

There are 1 million contractors in Australia and a recent Australian Tax Office (ATO) audit found that 84% breached tax rules.  This has prompted the ATO to call on the Federal Government to crack down on sham contractor arrangements.  As if to prove the point, in December 2009 a Sydney real estate company and its director were fined almost $30,000 for underpaying a salesperson more than $20,000 as a result of sham contracting http://ow.ly/NeSV.  IT workers, professional consultants and construction workers are those likely to be hit by any tightening of contractor rules.  

ASX Company Directors Behaving Badly

Despite efforts by the ASX to minimise the risk of insider trading by board members during 2009 it seems that some ASX listed companies and their directors just don’t get it.  ASX research found that out of 713 active trades by directors last year a staggering 31% took place during blackouts involving 151 individual directors in 129 listed companies http://ow.ly/Z8xk. Believe it or not this was down from 33% in the previous reporting period.

ASX chief supervision officer Eric Mayne summed it up nicely when he said “whichever way you slice it or dice it, it’s not a good look for a director to trade during a period when the books are closed until the profit results are announced”.

Given this apparent disregard for market sensitivities it comes as no surprise that the ASX is proposing to change to its listing rules making it mandatory for companies to adopt and disclose trading policies including market sensitive blackout periods.

ASX Executive Remuneration – Two Strike Rule Softened

Whilst there was much written during the AGM season, on the potential impact of the proposed “two strike rule”, it all came to nothing when the Productivity Commission released its final report on 4 January 2010.  The original draft recommendation that directors be required to stand for re-election if remuneration reports were twice rejected by 25% of shareholders was softened so that 50% of shareholders are needed to approve a resolution for a board spill.

However, the report did recommend strengthening governance processes for setting executive pay by requiring institutional investors to disclose how they voted on remuneration reports and banning executives in top 300 companies from sitting on remuneration committees.  Only time will tell if the “softened” recommendations will actually become law.

Federal Government Silent on AML/CTF Tranche 2 Rollout

For some time now the government has been working on Tranche 2 of Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) reforms. The aim of these reforms is to extend regulatory obligations to a range of small to medium sized businesses including dealers in precious metals and stones, lawyers, accountants, real estate agents and trust and company service providers.

Tranche 2 of the reforms was originally scheduled to roll out in 2009 however this was put on hold as a result of adverse economic conditions.  If the Attorney General’s website is to be believed http://bit.ly/9P89BB the government was to revisit the timing of Tranche 2 prior to Christmas.  There has been no announcement  yet as to the revised schedule.  With many thousands of businesses likely to be affected, this will be a big “watch this space” for 2010.

New Gender Diversity Requirements for ASX Entities

In a December, the ASX Corporate Governance Council announced http://ow.ly/12Ncd that from 1 July 2010 all listed entities will be need to:

  • Establish and disclose in the annual report their gender diversity policy. As with other corporate governance principles and recommendations, this requirement will be on an “if not, why not?” basis.
  • Include in their nomination committee charter a requirement to continuously review the proportion of women at all levels in the organisation
  • Ensure the criteria for board performance reviews and new board appointments include diversity in addition to skills.

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