By Brett Stevenson.
Lesson one of Brett’s blog post provided a brief introduction the overall principle of the individual responsibility of board members. This case study using the $4.9 million termination payment to the CEO Alex Malley based on a three year termination contract provides an excellent way to illustrate this principle.
A. The Background
You have recently completed your directors course with the AICD (Australian Institute of Company Directors) or the GIA (Governance Institute of Australia), and being a long standing member member of CPA Australia, you have been appointed to their board (along with another member) on 1st October 2016. Your first board meeting is coming up on 7th October, 2016. You are rearing to go. You do know that you will be on an annual remuneration of at least $98,604. You do recall an article in the AFR in Feb 2016 criticising the large marketing spend focussed on the CEO Alex Malley, and you have had similar concerns yourself, but nothing has seemingly come of that and the divisional councillors that you know haven’t mentioned it as an issue. You don’t know any of the other board members personally however they appear to carry some significant reputational weight so you feel encouraged.
Questions
1. Who are the two board members that commenced on 1st October 2016? (refer the spreadsheet of board members by year, or the 2016 annual report, and also page 26 of Board Note to Members 31st May 2017).
2. Have a look at the CV’s of the ther directors in the CPA Australia Annual Report (p.57-62). Can you identify those with a legal, political, academic and public accounting background? How about the positions of those from Macquarie and Sydney Universities? Identify the two non-CPA members? Is this a reasonable skills-based selection of directors? How about gender balance?
B. Your First Board Meeting 7th October 2016
You and the other new board member are welcomed, the new Chair (Tyrone Carlin) takes over from the previous Chair (Graeme Wade who held it for 2 years). The first item of business is the CEO (Alex Malleys) contract. You were surprised when they said his current annual salary was $1,786,000 (which included $250,000 from the fully owned subsidiary CPA Australia Advice). You were even more surprised when you saw that his current contract provided a two year notice period for termination as you knew that public listed companies cannot provide for greater than one year without shareholder approval.
When you read the attached external consultants advice (from February 2015) that the two year notice period was well above executive contracts, you expected that they might be looking to reduce this to one year. So when the Chair of the Nominations and Remunerations Committee (Graeme Wade, who recently took over from Richard Petty who had filled the role for the previous six years) said that the Committee recommended increasing the notice period from two to three years, you almost fell off your chair. The other N & R Committee members who spoke in support were Kerry Ryan, Jim Dickson and Tyrone Carlin. A vote was taken by asking if anyone disagreed with the recommendation, and without one hand being raised, the decision was made unanimously.
Questions
3. Make sure the above narration is factual by referring to the spreadsheet of Board members (from the annual report) and the Independent Review Panel’s Final Report p.56-7.
4. Should this or the other directors have acted differently? Give two reasons why this was not okay, and any reasons why it was okay?
5. What objections should have been raised by the board of directors at this stage?
6. What questions should have been asked of the Nominations and Remunerations Committee? Do you think this might have indicated some deeper concerns?
7. Why did the N & R Committee recommend this increase to three years at this time?
8. What could/should the two new board members have done during this discussion?
9. Can good ‘searching and deeper’ questions from individual board members prevent group-think on a board?
C. What The CPA Leadership Said Of This In March And May 2017
2nd March 2017. “Far from a circumstance where directors have sought a remuneration framework essentially guaranteed to deliver escalation over time, they sought and gained the support of the membership to alter the constitution to allow the exercise of prudence and restraint. And they have lived to that. No office bearer’s remuneration was the subject of a request for the approval of an increase in either 2014, 2015 or 2016 and there is no evident mood to alter this approach in the foreseeable future. By contrast, modest increases have been approved for non-office bearing directors over the same period, after the application of extensive market testing and rigorous external advice. The same considered rigour is applied to remuneration framework for the Chief Executive and by extension other staff of CPA Australia”.
16th March 2017. “Board remuneration and chief executive remuneration is in line with the market, based on regular advice obtained from independent remuneration consultants. Additionally, the chief executive remuneration is also recommended by the Nomination and Remuneration Committee and approved by the Board. Similarly, staff remuneration is also regularly benchmarked by external remuneration specialists. Remuneration includes performance payments based on achieving Board-approved key long-term incentive and short-term incentive performance indicators linked to the company’s strategic objectives”.
“Under what is allowed in the Constitution and taking into account the organisation’s capacity to pay, neither Directors nor staff are remunerated excessively to the detriment of the organisation” (p.6).
31st May 2017. “Board and chief executive remuneration is in line with the market and the scope of the organisation, based on regular advice obtained from independent, external remuneration consultants” (p.12).
“The remuneration of the Chief Executive is approved by the Board and the organisation’s remuneration framework is approved by the Board Nomination and Remuneration Committee. Similarly, staff remuneration is regularly benchmarked, including in international markets, by external remuneration specialists globally” (p.13).
Questions
10. Have there been any changes in the leadership (Board and senior executive) of CPA Australia from 7th October 2016 to the dates of the above notes? (Hint. No)
11. What two ‘parties’ are responsible for the remuneration contract of the CEO?
12. Did the Board and Nom and Rem Committee listen to the advice of the “independent, external remuneration consultants in relation to the CEO’s three year termination contract?
13. Are there any reasons why they would not have reduced the then two year termination contract to one year?
14. Are there any reasons why they increased it from two to three years after reading their above statements made 6 months later?
15. Is the ‘reasonable person’ in the directors positions test of any relevance in relation to this three year termination contract?
16. Were these responses from CPA Australia misleading in relation to the CEO’s remuneration?
17. Are there any legitimate reasons why the Board should not have disclosed to the members not only the CEO’s salary but also the three year termination notice period in his contract?
D. What The ‘Old’ Board Said Of The CEO’s Termination Payment 23 June 2017.
“At its meeting today, the Board decided to terminate Alex’s contract in order to allow CPA Australia, CPA Australia staff and Alex to move forward. In the interests of full disclosure, CPA Australia has made a payment of $4.9 million in accordance with our obligations”.
Questions
18. Is this ‘full disclosure’?
19. Given that seven of the twelve Board resigned just prior to this, do you think the directors who resigned should have been more forthcoming with their reasons, especially if they related to this potential termination payment?
E. What The Independent Review Panels Said Of These Responses By CPA Australia In Nov 2017.
“The Board should have responded much earlier to issues raised publicly regarding CPA Australia’s management, strategy and executive remuneration……. There was extensive coverage on the AGM’s location, executive remuneration and the views of disgruntled CPA members in March and April 2017, which continued into May and June 2017……did not translate into a timely public response or explanation.” (p.23 Final Report)
Questions
20. Why did the IRP Final Report say there was not a timely response when CPA did respond very quickly on 2nd March, 16th March and 31st May?
F. What The Independent Review Panel Said Of The CEO’s Termination Payment In Nov 2017.
“The former CEO’s employment contract termination payment was excessive.
The Board decisions and papers do not provide any further background on the decision to extend the notice period. This reflects very poorly on the former Board, given the size of the termination payment being well above any comparable benchmark.
The Review Panel requested all relevant background material and documentation, including Board minutes and relevant external advice relating to the former CEO’s termination payment. Wherever possible, CPA Australia’s provided the requested documents. Where there were strict confidentiality provisions affecting relevant materials, documents were sighted by a member of the Review Panel (the Review Panel Members having signed Non-Disclosure Agreements). The Review Panel is satisfied, and agrees with CPA Australia that the former CEO’s termination payment was paid in accordance with CPA Australia’s obligations. On the basis of the information reviewed, CPA Australia has no ability to recover the former CEO’s termination payment.
The Review Panel cannot disclose any part of the former CEO’s employment contract due to confidentiality obligations binding CPA Australia and the former CEO. Any disclosure of the former CEO’s employment contract is a matter for the Board and the former CEO” (p. 56-57).
Questions
21. Why did the IRP Final Report say (p.4 & 57) “that CPA Australia has no ability to recover the termination payment” while elsewhere saying “this review is not…intended to provide legal advice or develop evidence for the purposes of any legal action” (p.18)?
22. Why did the Board agree to this being a confidential agreement given CPA Australia is a professional membership organisation and public company?
23. What other legal options could be considered in relation to this termination payment?
24. Why didn’t the Independent Review Panel in its Final Report mention these as possibilities given 18 above?
25. Can confidentiality agreements such as this one potentially ‘hide’ breaches of directors duties because access to relevant information is restricted?
26. Should professional membership organisations be forbidden from signing confidential employment contracts with key management personnel?
G. What The New Board Has Said About The Termination Payment And Legal Action In Feb 2018.
“…..the new Board has undertaken our own inquiries about the duties of the former directors.
The Board, through myself as President and Deputy President Merran Kelsall, have met with partners in a leading law firm and with Queen’s Counsel.
The Board is of the view that there is no basis to take action against CPA Australia’s past directors” (Statement from the Board 9/2/18).
Questions
27. Is there a difference between meeting with lawyers to discuss legal action, and writing a legal brief/getting legal opinion?
28. Why wouldn’t the new Board have a legal brief written to obtain legal opinion on this matter?
29. Has the new Board conflated their unwillingness to take legal action on the CEO’s termination payment to include all other possible areas for legal action against the past directors?
30. Is there any legal obligation on the new Board to genuinely investigate possible breaches of directors duties by the previous board based on the prima facie evidence of what has been exposed over the last year?
31. Why isn’t ASIC investigating this matter? What sort of example does this set for the leadership of other companies?
Source: www.excellere.com.au/blog/
