Newsletter: Regulatory Updates

Mertons' Corporate Update - April 2016

Mertons’ Corporate Update is intended to provide you with an overview of corporate governance matters, including regulatory changes, trends and other issues that are important for your business

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Serious Data Breaches Notification Bill

In late 2015, the Australian Government released an exposure draft of the Privacy Amendment (Notification of Serious Data Breaches) Bill 2015. If the Bill goes through, all entities bound by the Privacy Act (government agencies and most private sector organisations with a turnover above $3 million) will be required to notify ‘serious data breaches’ to each affected individual and to the Australian Information Commissioner. A ‘serious data breach’ is one that crates a real risk of serious harm’ to the affected individuals.

Under the Privacy Act 1988 (Cth), organisations are required to protect personal information from misuse, interference and loss, unauthorised access, modification and disclosure, under the Australian Privacy Principle 11 (APP11), but they are not required to notify a breach. The purpose behind the proposed amendment is to ensure that individuals can take remedial steps in the event that their personal information is compromised, and limit or avoid adverse consequences.

The Exposure Draft also sets out requirements for timing, content and communication of notifications. Failure to comply with the provisions could result in enforcement action, including civil penalties.

If the bill passes, entities will need to:

  • Understand its new responsibilities and ensure processes are in place to protect data and to notify affected persons of a serious breach
  • Identify data that could be affected
  • Review agreements with third party providers to assess risk.

View the discussion paper and Exposure Draft.

Do you have a robust Privacy Policy? Mertons is the leading provider of company secretarial and corporate governance services in Australia.  Contact us for an obligation free discussion on how we can help you. 

Board composition more important than ever

GPS Governance has released its Post AGM Season Governance Report: February 2016, assessing corporate disclosures against the ASX Corporate Governance Council’s Recommendation 2.2. This is a new recommendation that first applied during the 2015 AGM season. It focuses on the need for a mix of skills and diversity on a board. To this end, it requires a listed entity to “have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership”. The expectation is that the recommended board skills matrix disclosure will lead to improved reporting for the benefit of shareholders and the company.

GPS studied the board skills matrix disclosure of 161 ASX 200 companies in 2015 and assessed them into one of four categories: good, basic, poor, or not disclosed. The report found that only 4 of the companies provided good disclosure, 46 provided basic disclosure, 79 provided poor disclosure and 32 provided no board skills matrix. In other words, two thirds of companies did not disclose a board skills matrix or provided poor disclosure.

The report points out that corporate governance stakeholders, particularly proxy advisers who provide voting recommendations to domestic and international institutional investors, have amended their proxy voting policy following the introduction of recommendation 2.2. Global proxy advisers Glass Lewis updated their Australian policies in advance of the 2015 AGM season as follows:

“If a board has not addressed major issues of board composition, including the composition and mix of skills and experience of the independent element of the board, [CGI Glass Lewis] will consider recommending voting against the chair of the nomination committee or equivalent. CGI Glass Lewis will evaluate the skills and experience across individual directors based upon publicly available information and will identify any apparent gaps.”

The report states, “Corporate governance stakeholders believe that there is an absence of disclosure or recognition for the aggregate composition of Board skills and experience and whether it is effectively structured to oversee a Company’s communicated strategy to support future shareholder wealth creation.”

Merton believes that – as has been the case with, for example, executive remuneration – it is likely that there will be an increased focus on the disclosure of board skills in future reporting seasons. Merton urges companies to ensure that they have carried out board skills analyses to ensure the board has the skills required to support its successful operation.

The GPS report also covers voting on remuneration reports and shareholder resolutions put forward by the Centre for Corporate Responsibility at the ANZ, Origin and AGL AGMs.

Contact Mertons for help in carrying out a detailed board analysis and skills reporting, and to develop a robust succession plan for key roles.

Proxy advisory firms recommendations on “overboarding”

Proxy advisory firms CGI Glass Lewis and ISS Governance have policies on ‘overboarding’ of directors, as does the Australian Shareholders’ Association (ASA), while the Australian Council of Superannuation Investors will review multiple directorships on a case-by-case basis rather than setting a fixed number of appointments before it will recommend an ‘against’ vote in director elections or re-elections.

CGI Glass Lewis will recommend an ‘against’ vote where non-executive directors serve on more than six major boards, but notes it may recommend voting against a non-executive director who serves on more than five major boards. It counts service as non-executive chairman of a board as being equivalent to two ordinary non-executive directorships and will also recommend an ‘against’ vote where an executive director holds more than one non-executive director role in an unrelated company.

ISS Governance’s voting policy states that it will recommend an ‘against’ vote where a director sits on more than a total of five listed boards (it also treats a chair as equivalent to two board positions), or where an executive director holds more than one non-executive director role with unrelated listed companies.

The ASA holds the same position on ‘director overboarding’ as ISS Governance, but will only support executive directors of ASX200 companies serving on unrelated ASX200 boards if the individual is well established in the role and transitioning away from an executive career.

In its 2016 Voting Policies, CGI Glass Lewis includes notice that it will typically recommend voting against an audit committee member who is up for election or re-election ‘if the member sits on more than three public company audit committees, unless the audit committee member is a financial expert, in which case the limit shall be four committees’.

The Governance Institute is clearly critical of this approach, stating that this push to exert control over appointments to board committees is micromanaging the business of the board. It states: “Boards are the agents of shareholders, and shareholders have every right to examine whether the governance frameworks put in place contribute to shareholder value creation and risk‐reduction. It is considered inappropriate for Australian shareholders to be afforded the capability to direct the conduct of the board — this is supported by Australian case law. This intervention by a proxy advisory firm seems to blur this essential boundary.”

Independently of individual views on the matter, the fact remains that the ultimate responsibility for a listed entity’s decisions rests with the full board. As such, it is crucial to have a robust board and clear delegations of responsibilities to board committees. This is part of a robust corporate governance structure.

Contact Mertons for a review of your corporate governance structures.

UK Financial Reporting Council – Culture project

The UK Financial Reporting Council (UK FRC) last year launched a project to gather insights into corporate culture and the role of boards, to understand how boards can shape, embed and assess culture, and to identify and promote good practice.

The UK FRC states: “The board has a vital role to play in shaping and embedding a healthy corporate culture. The values and standards of behaviour set by the board are an important influence on culture and there are strong links between governance and establishing a culture that supports long-term success.”

The project is looking into four key areas:

  • Delivering sustainable success – the role of an effective board.
  • People issues – delivering alignment between culture, values, human resource practices and performance reward systems.
  • Stakeholder issues – relationships between culture and business models, with shareholders, customers and suppliers, and the impact on the wider community and environment.
  • Embedding and assurance – measuring and monitoring culture, the role of internal audit, risk management and pubic reporting of cultural indicators.

A report will be published mid-year.

Go to the UK FRC website for more information.

In Australia, ASIC has made it clear that it intends to focus on culture in companies, initially concentrating on financial institutions. ASIC has stated that culture can provide a signal of behaviours, incentive frameworks and practices that do not support good governance or ethical conduct.

ASIC chairman Greg Medcraft has stated that ‘you cannot regulate culture, but you know bad culture when you see it’. ASIC is interested in seeing that the governance framework includes mechanisms to alert companies about misconduct. These could include third-party assessments, such as stakeholder surveys, proper complaints and whistleblowing processes and monitoring of social media, which can highlight issues the company needs to address. Read a speech by Greg Medcraft on Corporate Culture and Corporate Regulation.

In the US, the Financial Industry Regulatory Authority uses five indicators to assess culture: whether control functions are valued within the organisation; whether policy or control breaches are tolerated; whether the organisation proactively seeks to identify risk and compliance events; whether immediate managers are effective role models of firm culture; and whether sub–cultures that may not conform to overall corporate culture are identified and addressed.

Contact Mertons for a discussion on how we can help you develop and promote the right governance culture within your company.


ASIC update on red tape reduction

In January 2014, ASIC released Report 391 ASIC's deregulatory initiatives (REP 391), which provided an overview of ASIC’s commitment to reduce compliance costs.

Report 466 ASIC’s work to reduce red tape (REP 466), released in January this year, outlines ASIC’s current deregulation work, its progress implementing the measures highlighted in Report 391, and responds to new deregulatory ideas received from the market.

The report shows that in the two years from September 2013 to September 2015, ASIC achieved deregulatory savings of more than $470 million per year. These savings stem from initiatives to cut red tape, including ASIC wavers from the law.

The report states, “The clear guiding principle for our deregulatory work is that compliance cost savings should outweigh regulatory risk, resulting in a small regulatory detriment at most.” It also states that feedback received to Report 391, “reinforces our view that it is the accumulation of obligations that creates a red-tape ‘burden’, rather than any one area of regulation.” The report highlights the ways in which ASIC attempts to cut red tape:

  • “granting waivers (relief) from the law, where appropriate, which allows the law to apply flexibly and facilitate innovation;
  • advocating for and facilitating international recognition of our laws, which makes cross-border operations easier for business;
  • providing clear and detailed guidance to make it simpler for businesses and individuals to understand their obligations;
  • improving systems, such as our forms, website and lodgement facilities, to enable faster and better public interactions with the regulator; and
  • advocating for and making changes to the law, by identifying, consulting on and using ASIC’s powers to modify or provide exemptions from the law, or by recommending changes to the Government that will have a deregulatory benefit.”

The report provides details of initiatives under each of the above points, to explain the progress made to date.

Deregulation suggestions from the market following the release of Report 391 fell in three broad categories – policy recommendations, IT solutions, and administrative and process changes. Suggestions were prioritised based on policy merit, potential compliance cost savings and ease of changes. Those being implemented are detailed in the report.

Suggestions for cutting red tape can be sent to

Download REP 466; REP 391

ASIC starts legal action against German construction group Hochtief AG

ASIC has started legal action in the Federal Court of Australia against German construction group holding company Hochtief Aktiengesellschaft (Hochtief AG), seeking a declaration of contravention and a financial penalty order against the company for insider trading.

ASIC’s action centres on the early 2014 on-market acquisition of ordinary shares of Leighton Holdings Limited (now called CIMIC Group Limited) (ASX code: LEI) by Hochtief AG's subsidiary, Hochtief Australia Holdings Limited (HAHL).

ASIC alleges that Hochtief AG contravened the insider trading provisions of the Corporations Act by procuring its Australian arm, Hochtief Australia Holdings, to acquire Leighton Holdings Limited (now called CIMIC Group Limited) (ASX code: LEI) while it was in possession of insider information, being that Leighton Holdings Limited's 2013 financial results were likely to be at the high end of previous earnings guidance.

Hochtief AG has admitted the alleged contravention. 

In early March, the Federal Court in Sydney ordered that the question of whether the Hochtief AG contravened the Act as alleged by ASIC, be determined separately from and in advance of the determination of what relief should be granted. These matters have been set down for hearing on 12 April 2016.

Visit the ASIC website for more information about the case.

Governance in sports

In the past few years, various sports codes have provided poignant examples of the wide-ranging and long term impact that governance failures can have on an organisation and its stakeholders.  

Governance is the system by which organisations are directed and managed. It influences how the objectives of the organisation are set and achieved, spells out the rules and procedures for making organisational decisions and determines the means of optimising and monitoring performance, including how risk is monitored and assessed.

The Essendon Football Club doping saga, which has been going on for more than four years, is still going through the courts in various forms. In the meantime, it has destroyed the club, the careers of many of its players, club officials, and coach. The financial and reputational cost has been enormous and continues to add up. In addition to court and solicitor fees, penalties and fines, the loss financial support from sponsors and other income will have an impact long into the future.

Other recent examples include rugby (drugs), FIFA (bribery and conflict of interest), tennis (match fixing) and athletics (corruption).

What these examples all have in common is the lack of robust governance systems and processes to ensure the right decisions are made. The effects are there for everyone to see.

Contact Mertons for help in undertaking a governance review and development of a solid governance framework, board performance review and/or formulation of a board skills matrix.

End of voting on a show of hands?

The Governance Institute is advocating for the Corporations Act to be amended to mandate voting by poll on all resolutions at the AGM. The Institute points out that a poll reflects the wishes of shareholders present at the meeting as well as the wishes of those shareholders who have lodged proxies.

Only a very small percentage of shareholders, by number and value, generally attend the AGM. Shareholder attendance at the AGMs of ASX200 companies has been declining for years – only 0.17% of shareholders attended these AGMs in 2014 and 2013, according to research undertaken separately by both Governance Institute and Computershare.

Regulator interest has arisen because some companies held the vote on the remuneration report on a show of hands and the resolution passed, but the proxy voting position disclosed to ASX showed that more than 25% of votes cast were against the remuneration report. If the vote had been taken on a poll, the companies would have received a first strike.

The advent of technology that allows for electronic voting devices has made polling quicker and allows for adding votes from the floor to the proxies received and already tallied, providing a clear picture of shareholder intentions.

Contact Mertons for help with planning and implementing your AGM and put in place shareholder engagement initiatives.

Fraser review of super funds disappoints key groups

In December 2014, Industry Super Australia (ISA) and the Australian Institute of Superannuation Trustees (AIST) announced the appointment of Bernie Fraser, former Reserve Bank governor, to lead a review of governance arrangements of not-for-profit superannuation funds.

The review arose from the senate’s lack of support for the government’s proposed legislation to mandate a minimum number of independent directors for not-for-profit superannuation funds. In broad terms, the review sought to identify the hallmarks of good governance for superannuation funds and whether not-for-profit funds should be viewed differently from other funds.

In their submissions to the review, the Australian Institute of Company Directors ( and the Governance Institute of Australia ( both state their strong preference for a majority of independent directors, pointing out that this is consistent with internationally recognised principles of good governance.

Both organisations point out the many failings of the industry-sponsored review, commencing with its independence. Other key points raised include:

  • Questioning the desirability of having an optional code of conduct for one segment of the superannuation industry, rather than a consistent set of standards that applies to all funds and represent recognised principles of good governance. APRA already requires that banks and insurance companies have a majority of independent directors and independent chair. Both the AICD and the Governance Institute make calls for the same rules to apply to industry super funds.
  • Pointing out that as the review concentrated primarily on the independence of directors, it limited consideration of equally important governance issues, such as board composition, definition of independence, management of conflicts of interest, and others.
  • Pointing out that industry funds demand that they demand standards of independence and transparency of the companies they invest in, but are not prepared to adopt similar standards.

Contact Mertons to arrange a performance review of your company’s board.

The ACNC to continue

In a joint media release issued on 4 March by the Minister for Social Services, Christian Porter, and the Assistant Treasurer, Kelly O’Dwyer, the government has confirmed the continuation of the Australian Charities and Not-for-profit Commission (ACNC).

The ACNC will have a renewed focus on championing charities, working with them to become more effective, and helping them improve their governance.

The government has also announced it will continue to work with the ACNC, states and territories, and the sector to identify areas where the burden of red tape for charities and not-for-profit organisations can be reduced.

The government has also confirmed that it will cease the development of the Civil Society National Centre for Excellence.

Read the media release.

Contact Mertons if you are a not-for-profit organisation wanting to improve your governance practices and reporting protocols.

Cutting red tape in the not-for-profit sector

A key function of the Australian Charities and Not-for-profits Commission (ACNC) is to help reduce the regulatory burden on the Australian not for profit sector. To achieve this, the ACNC has commissioned Deloitte Access Economics to undertake research on a range of options to cut red tape.

These options seek to identify and quantify the benefits that could accrue to charities through red tape reduction in three key areas that are the responsibility of the states and territories: fundraising (including gaming), state taxation (principally eligibility for taxation concessions), and incorporated associations legislation.

  • Fundraising: Overwhelmingly, fundraising is the source of the greatest amount of regulatory burden for charitable organisations. Fundraising legislation differs significantly between jurisdictions, which very quickly escalates the administrative costs a charity incurs. Consequently, the annual regulatory burden associated with fundraising regulations is estimated at approximately $13.3 million per year across the sector. Fundraising regulation has not kept pace with new forms of fundraising, particularly as online campaigns for funds have grown through the use of third party websites. The current arrangements treat fundraising as an activity isolated to one state or territory, when, in reality, even small organisations may attract interest nationally and internationally through online channels such as crowdsourcing websites.
  • State taxation: one of the main regulatory impediments to gaining state taxation concessions is in relation to the lack of a standard definition outlining the types of organisations who are eligible for concessions. Further, there are significant barriers to entry to gain concessions due to the search and application time associated with gaining approval from state and territory governments. The total annual regulatory burden this creates is estimated to be approximately $11.0 million per year across the sector.
  • Incorporated associations legislation: Under the current arrangements charitable incorporated associations are regulated at both the state, territory and Commonwealth levels. As an incorporated association they must remain compliant with state and territory legislation, while as a charity they must also comply with ACNC requirements. A number of these requirements are duplicative, and lead to unnecessary administrative costs due to individual regimes for reporting, notification and application requirements.

The three options to reduce regulatory burdens on charities across the above areas included

  • a base case (continue with current arrangements)
  • option 1 (ACNC obligations fulfil state and territory regulatory requirements)
  • option 2 (alignment of state, territory and ACNC regulatory obligations)
  • option 3 (ACNC as the central regulatory body)

The regulatory costing analysis found that Option 3 delivers the greatest opportunity for red tape reduction across all three areas of regulation. Indeed, Option 3 has the potential to reduce the current state and territory based regulatory burden costs placed on charities by approximately $29.4 million. While the potential for benefit realisation is high, it is also noted that the time and effort required to support a move towards centralised regulation through the ACNC would be significant.

In the case of incorporated associations’ legislation, significant regulatory cost savings can be achieved across all options.

Consistent with the fundraising estimates, state taxation regulatory burden cost savings are significantly higher under Option 3. While this can be attributed to a centralised application process, a major contributor is the provision of centralised information and assistance for state and territory taxation concessions.

Based on the findings, ACNC is seeking the support of state and territory governments to pursue the implementation of Option 1 as a first tangible step towards red tape reduction for charities. ACNC will also continue work towards the implementation of Option 3 in relation to fundraising regulations and state taxation. The report concludes that implementation of Option 3 for incorporated associations would have no additional benefit when compared against Option 1, and consequently it is not recommended for implementation in this instance.

Read the Deloitte Access Economics report.

This research is considered a companion piece to the Research into Commonwealth Regulatory and Reporting Burdens on the Charity Sector report carried out by Ernst & Young for the ACNC in 2014.

Contact Mertons if you are a not-for-profit organisation wanting to improve your reporting and compliance with various state, territory and Federal legislation.

Gender equality

Despite companies’ aspirations for gender equality in the workplace there continues to be a significant gap between commitment and results. Women continue to earn less than men, are less likely to advance their careers as far as men, and are more likely to spend their final years in poverty.

While legislation and regulation is one approach to closing the gap, gender equality provides opportunities for progressive companies to get a competitive edge in the market place. Read the business case for gender equality.

Women constitute the largest emerging consumer market and are often the driving force behind the vast majority of household purchases, even in industries with traditionally male buyers. In short, gender equality makes sense, not only because it is the right thing to do, but also financially.

Australian employers are required to report annually on pay and composition of their workforce by gender. It is important for companies to measure their gender equality initiatives, not only to comply with this regulatory requirement, but also to indentify improvement opportunities.

Contact Mertons for help in developing your diversity policy, action plan and reporting framework.

ASX News

T+2 settlement commenced Monday 7 March

Share market trades conducted from Monday 7 March will settle in two days, instead of the former three days – known as T+2.

The Australian Financial Markets Association (AFMA) has also moved to T+2 settlement for Australian fixed income products on 7 March 2016, creating consistency between the cash and debt markets.

Read the media release.

ASX compliance monthly activity report – February 2016

The ASX compliance monthly activity report covers all the latest compliance activities at the ASX, including new listings and delistings, key listed company statistics, participants statistics and enforcement, as well as any ASX rule changes, waivers and exemptions.

Read the February report.



Sources of information for this document:

Australian Charities and Not-for-profits Commission (ACNC); Australian Government; Australian Institute of Company Directors (AICD); Australian Institute of Superannuation Trustees (AIST); Australian Securities and Investments Commission (ASIC); Australian Securities Exchange (ASX); Australian Sports Commission (ASC); Clayton Utz; ComLaw; Commonwealth Government; Ernst & Young; Fairfax Media; Fair Work Commission; Governance Institute; Grant Thornton; Industry Super Australia; Office of the Australian Information Commissioner (OAIC); Minter Ellison; Productivity Commission; PwC; UK Financial Reporring Council; Workplace Gender Equality Agency (WGEA).


Disclaimer: The content in this Mertons Corporate Update is only intended to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. We attempt to ensure that the content is current but we do not guarantee its currency. You should seek legal or other professional advice before acting or relying on any of the content.