ASIC looks at the responsibilities of directors of emerging market issuers

Challenges faced by directors of companies with foreign operations.

John Price, Commissioner

This article was submitted to the Australian Institute of Company Directors for publication in the Company Director magazine in April 2014

The importance of Australian directors on boards of companies with foreign operations has received media coverage over the past week, in relation to Sino Australia Oil & Gas Limited. While ASIC does not comment on particular cases, especially those that are currently before the courts, it is an opportune time to review the challenges associated with being an Australian director on the board of a company that has operations or assets located offshore.

Companies incorporated in Australia are required to have two resident directors at all times. This important provision provides confidence to investors that Australian companies will have directors equipped with knowledge and understanding of how to comply with the Australian legal and regulatory system while operating globally.

As well as directors’ various statutory duties under the Corporations Act, directors are responsible for a company maintaining adequate corporate governance standards in the major financial and business dealings of a company.

Directors of companies operating off-shore have the added challenge of ensuring that the company continues to operate in accordance with the standards of corporate governance that Australian investors expect, regardless of where the company’s operations are located or majority of board members reside.

The challenges faced by these directors are not insignificant and vary according to the extent of off-shore operations and the jurisdictions in which the company operates, including the inter-relationship between Australian and local laws.

Standards of disclosure satisfactory in one jurisdiction may not necessarily meet the standard required under Australia’s continuous disclosure regime, for example.

Such challenges were highlighted in a report published by ASIC in August 2013.

Report 368 Emerging Market Issuers (REP 368) looked at the almost one-third of companies listed on the ASX who have business operations or assets located outside Australia, and how these companies deal with the added challenges in the space of corporate governance, risk management, ownership and control of assets and reliance on key individuals across borders.

A major challenge for directors is in ensuring effective communication where boards are geographically spread across borders.  Companies operating out of emerging markets must implement efficient policies to facilitate the free flow of information across the board in a timely manner. This should be a top priority.

This matter also highlights the need for all companies, but especially those with operations offshore, to put in place efficient internal controls and risk management systems. The more diverse the company’s operations, the more important it is for a board to have in place policies for preventing miscommunication, or fraud by officers or external parties, and to ensure that investor funds are protected. These challenges are compounded for entities with limited financial resources.

Companies with global operations also often experience challenges in structuring their board in a way that provides transparency and accountability to the company.

In ASIC’s review into emerging market issuers, we observed that most entities did not have a board with a majority of independent directors, nor did they have an independent chair of the board. This is unsurprising, given that many emerging market issuers have limited resources and small board. It is however a matter that boards need to be mindful of and ensure that their board is structured in a way that meets Australian laws, and strives to meet the ASX’s corporate governance guidelines.

Due to the nature of many emerging market issuers’ operations, these companies often place a high level of reliance on the work of one or two key individuals in circumstances where there may be less oversight of those individuals’ actions. Related party transactions were also found to be more prevalent in these companies.

Boards have the primary role and responsibility of overseeing and verifying the work of key individuals, related parties and experts performing work on behalf of the company. 

ASIC expects that directors will be vigilant in scrutinising and monitoring such transactions to ensure that the actions of the company by key individuals are not to the detriment of the company’s shareholders.

Australian companies with international operations often have wonderful opportunities. With these opportunities come important responsibilities for the directors on these boards to ensure that the companies operate within the Australian regulatory framework and consistently with the expectation of Australian investors.

See Report 368, Emerging market issuers and ASIC’s media release on its involvement in the Sino Australia Oil & Gas Limited matter.

John Price is a Commissioner with the Australian Securities and Investments Commission.

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Last updated: 26/05/2016 09:33