AICD EDU:17 - My reflection & takeaways

Yesterday was the Sydney AICD Essential Director Update 2017. We heard from two excellent key speakers: Stephen Walters, GAICD and Chief Economist at the AICD and Graham Bradley AM FAICD and Non-Executive Chairman at HSBC Bank Australia. For those of you that couldn't make it, and particularly my AICD Company Directors' Course cohort, I'll just share my reflection and takeaways here, although there is a 45 page update available from AICD.

Summary

The AICD top five issues for Directors in the coming year were given by Graham Bradley as follows:

1. Corporate culture, reputation and social licence to operate (how well are boards monitoring/directing culture?)
2. Cybersecurity (How well-prepared are companies?)
3. Digital economy/disruption and social licence (How should boards balance competing interests?)
4. Public policy uncertainty/populism (How can directors have an effective voice?)
5. Director licencing (Will the BEAR regime take wings?)

Mainly good news for the economy

Stephen Walters presented an upbeat report on 25 years plus of Australian economic growth without technical recession and a positive outlook for 2017-2018. 

This is a record run, and the economy has been agile enough to avoid two quarters of contraction both following the GFC in 2008/09 and the QLD floods in 2011. The ecomony delivers in the range of 2-3% growth. However, Stephen struck a cautionary note that we have built up baggage during these times, especially household debt and poor productivity as no reform agenda has been forced onto the economy. This means that policy is missing bold reforms and restructuring. Stephen reminded us of the maxim "never waste a crisis". Historically, economic crises usually strike every seven years and help to drive reforms and restructuring.

On investment, Stephen told us that non-mining inflows is growing after a flat five years. Investment is also occuring in mining, government/infrastructure and exports. Conversely, there are weaknesses, with households holding the second highest debt ratio in world. Residential accommodation, such as CBD flats are showing signs of oversupply.

On interest rates, 3% was considered an emergency rate during the GFC. Now rates have been around 1.5% for some time. It is inevitable that these rates will rise...

On growth, and particularly China, there is a positive vibe. This began as soft indicators in sentiment and equities. Now broad global growth of 3.6% is expected. Australian exports are mainly sent to Asia with China accounting for one third, Japan 10% and the rest of Asia 10%. There is healthy demand from Chinese tourists and students. Chinese authorities are managing structural challenges well. Japan is benefitting from Olympic construction projects, although longer term may struggle due to low immigration and an aging population. US inflation and interest rates are growing as the US heads towards full employment.

On US politics, Stephen observed the many distractions of the Trump administration. However, substantive policies could greatly help with reforms, less regulation and lower taxes. Generally, these would mean more growth and lower AUD to USD exchange rate. Interest rate shocks around the world, and isolationism including Brexit and Catalonia are potential concerns

 There are risks, as follows, particularly linked to a hard landing:

1. In Australia, underestimating housing debt to income which is enormous at 200%.
2. Early withdrawal of low interest rates - when economies are still in "intensive care"
3. Chinese default, as debt ratios there are also high
4. Geopolitical tensions, not only with N Korea but also in The Middle East and The South China Sea.

The Essential Director Update 2017 - The Governance Environment

Graham Bradley took us on a whistle-stop tour of changes that are, and may still, affect Directors in 2017 and in future. These included:

• Australian regulators expect that culture is a regular discussion topic at board level, and need to see that directors spend time in the business, and seek input from customers and internal audit to determine if stated values match reality. Tone from the top, incentive systems and feedback tools from BUs and key personnel are critical. Also consider what the escalation policy is in place, and what indicators need to be included on reporting dashboards.
• Whistleblowing reforms following federal reviews of 7-11, Domino's and Origin with the question over greater protections for whistleblowers, and whether they should be rewarded. (Personally, I would like to see more data on how effective the reward schemes are - do they drive the wrong behaviours such as vexatious reporting, or protect whistleblowers who may never find paid work again?)
• Bank Executive Accountability Regime (BEAR). BEAR is a dramatic development, for banks (for now). It is a strengthened fit and proper regime, with punishments including removal and penalties of up to $200m. In addition, at least 40% of executive remuneration is proposed to be deferred, and 60% for CEOs. Overall, the legislation appears a little rushed and haste brings risk, especially the risk of blurring the roles of Non-Executive and Executive Management, as both are included in BEAR.
• A reasonable director will make specific enquiries and reassure themselves - not simply ask management. This approach is required under s180 as referred to in the judgment recorded in ASIC v Flugge (Australian Wheat Board). Anything that awakes suspicion increases that need for further diligence. A challenge for directors of all kinds!
• There is talk of including director liability for Climate Change risks within section 180. Although a board would be wise to consider these risks, the practicalities of liability would be very challenging. There is still fluidity in government policy...
• Corporate Reporting and disclosure. Underlying profit is okay to report, if it is reconciled appropriately. Australian Accounting Standards Board changes to accounting standards 9, 15 & 16 are all complex, and every board member needs to understand these. In addition, when testing of value or impairment of intangible assets, directors must question the assumptions, consider future prospects and seek external advice as required.

Questions from the floor included:

1. How should a board set and monitor culture?
2. What can directors do to manage reputation?
3. How can we minimise cybersecurity risk and still use contractors?
4. There is a perception of lost trust in business - and directors not actively engaging in public debate. What can be done to improve on this situation?