Directors & governance in a time of concern

There’s the debate on executive remuneration and how directors should think about the quantum of executive pay in an environment where there are concerns about the impact of income inequality.  

" How do directors think about reputation management and the sustainability of brand in this environment of concern?"

There’s discussion over the need for directors to ensure they provide cultural leadership on various social matters.

So how do directors think about reputation management and the sustainability of brand in this environment of concern?

As directors, we are in an environment where traditional business models are being disrupted and you could almost describe many legacy companies as being in a turnaround situation.

At the same time a lot of government regulation makes directors feel they are defending their company with one hand tied behind their back.

I do not think business can expect much help to arrive any time soon on any of these difficult topics. 

At core, I believe this is because business is so poorly regarded the very needed reforms to deliver things such as repeal of restrictive trading hours, the lowering of our globally uncompetitive company tax rate and better approaches to what the Productivity Commission quaintly described as “business set up, transfer and closure” are very low priorities for our legislators.

They’re perhaps too busy considering new compliance penalty frameworks and industries where returns might justify the imposition of new taxation regimes.

Considering the overall compliance load, how do directors put some focus on avoiding financial stress and ending up with the need for a turnaround?

Safe harbours

Directors are all very welcoming of the moves towards creating safe harbours for company directors. Removing concerns over personal liability for insolvent trading when you are attempting a restructure outside formal insolvency feels an appropriate step.

Providing clarity over which contractual rights become unenforceable while a company is restructuring also makes sense.

Without this sort of safe harbor, The Governance Institute of Australia, of which I am a fellow member, believes the unintended consequence of the current law is directors focus on their own interests rather than those of the company.

Not everyone is cheerleading for all elements of this bill. Everyone I speak to likes the idea directors get a bit of clear water to attempt to turn a company around. But what happens if the restructure doesn’t work and directors turn to the defence? 

Courts will be faced with undertaking retrospective commercial analysis of the directors’ turnaround actions. Whether this will give directors the confidence to press ahead as courageously as turnaround situations generally require is the open question. 

Punish

Let me say, however, as a general rule I think Australian corporate and insolvency law does not punish directors harshly for the mere failure of a company.

Directors of companies which have gone insolvent can go on to become directors of other companies. There are few grounds for disqualification.

But the AICD, of which I am also a fellow member, believes Australia’s insolvency laws are amongst the harshest in the world. The harshness comes when directors are forced down the path of formal insolvency too early.

If this occurs when there are reasonable prospects of recovery the inevitable result is value destruction for shareholders and loss of jobs for Australians.

The other implication of the harshness of the laws is people are understandably wary of starting businesses. If they fail there’s a double negative – you might lose your house but you certainly lose your reputation.

I’ve visited Israel twice recently to look at the innovation ecosystem there.  Israel actually tops the OECD in venture capital investment - the US is second and interestingly only six countries are above average – a skewed distribution -Australia is eighth last.

In dollar terms, Australian venture capital funds raised a record $US568 million in 2016.  In the same period, Israel with one quarter of our population raised $US4.17 billion –more than seven times the Australian number.

The big difference I observed in Israel is it is an incredibly failure friendly country.  Venture capitalists are just about as interested in the businesses an entrepreneur has failed in – and the lessons they have learnt as a result- as they are in the new business idea being pitched.

We need to make this sort of cultural change in Australia sooner rather than later.

Turnaround

So let me turn to how directors should think about turnaround and financial distress given the current environment.  I have a four-part, straightforward prescription: