AWI review report questions directors’ independence

Terry Sim, July 11, 2018

EY’s Andrew Metcalfe

SEVERAL Australian Wool Innovation directors have inherent conflicts of interest and lack independence, AWI reviewer and EY Australia’s Federal Government lead partner Andrew Metcalfe has concluded.

The review report released this week has made 82 mandatory, critical and recommended changes to AWI’s governance, structure, transparency and performance, and its board selection, election and consultation processes.

The recommended changes to the AWI board’s makeup and charter include a 10-year director term cap and a new board nomination committee (BNC) structure, to be implemented by the current board by October 31 this year, before the 2018 annual general meeting on November 23.

The report has said AWI’s current process for member selection of the BNC is inappropriate as the chair of the board has a substantial influence over the membership of the committee, which then reviews potential candidates for director roles.

The review has recommended that the BNC member selection process be strengthened to increase its independence and the BNC committee consist of a chair independent of the wool industry appointed by the Department of Agriculture and Water Resources secretary; a non-executive director of AWI, other than the chair; an experienced wool industry person nominated by the National Farmers Federation president, and; a senior executive from an international executive search firm nominated by the AWI CEO and subject to approval of the independent chair.

Some directors have ‘questionable independence’

In the 509-page report’s assessment of director independence, three directors, including chairman Wal Merriman elected in 2004, and directors Meredith Sheil and David Webster elected in 2008, are indicated as having “questionable independence based on number and materiality of registered interests and length of tenure.” The three directors’ continued tenure on the board would be in doubt if a 10-year AWI director term cap is adopted.

Only Colette Garnsey was found by the report to be independent without qualification, whereas directors Jock Laurie, James Morgan and Don Macdonald, are classed as independent, but should have their independence regularly assessed given their number of registered interests.

“The majority of directors are wool levy payers and active players in the wool industry.

“This creates an inherent conflict of interest,” the report said.

The report highlighted the exclusion of “outsiders” by the requirement of rule 13.3(d), which required 100 eligible members to nominate a director and recommended that it be amended so any shareholder can nominate a person to be elected as director.

Mr Metcalfe’s concluded that AWI currently lacks a broad skills-based board and the inherent emphasis on wool growers/levy payers means a lack of independence of those who are selected in accordance with clause 13.3(d) of the current AWI constitution.

“This means that there are inherent conflicts of interest and a lack of independence for a considerable number of the board members.

“This is also substantiated by the register of material/standing interests that has been provided as well as the length of the tenure of some of the directors,” Mr Metcalfe writes in the report.

“Our view is that the removal of clause 13.3(d) of the constitution, changes to the BNC (board nomination committee) and entrenching the ability to identify and elect directors who reflect a broader skills based board will assist in alleviating this inherent lack of independence.”

Constitutional changes to be in place for 2019 election – DAWR

The Department of Agriculture and Water Resources said the implementation timeline in EY’s AWI review report notes a number of constitutional changes that need to be progressed at the next AWI AGM to support the 2019 director selection process.

AWI chief executive officer Stuart McCullough said the company, from a board and operational point of view, has a huge amount of work to undertake in delivering the 82 recommendations.

“We will work through all these items based on the criticality attributed and in turn seek the counsel required to determine what is the most appropriate place for them to be discharged.

“I can report the board’s acceptance of the 82 recommendations and plan for adoption.”

WoolProducers Australian chief executive officer Jo Hall said the issues of the recommended 10-year director term cap and BNC are a matter for the board. The capped term provision could be inserted into an amended board charter and the change to the operations of the Board Nomination Committee is governed by its own specific charter, as per the Statutory Funding Agreement.

“The AWI board has ultimate control over the business and have previously developed the Board Charter and the Board Nomination Committee Charter without shareholder input, so we expect to see these updated documents, including the length of tenure and amended BNC rules and composition, in the coming months.”

Ms Hall said there are a number of recommendations that will require shareholder approval, but also a number that the board can implement themselves.

“We see no reason why those recommendations that the Board can implement themselves aren’t done immediately to make AWI the most effective and efficient organisation for wool growers.”

Ms Hall said WPA believed that the recommendations relating to governance are an absolute priority to ensure that AWI is run as effectively, transparently and with as much accountability as possible.

“A strong theme of the EY Report was industry unity and collaboration, we would obviously like those recommendations enacted as soon as possible.

“WPA is more than happy to assist AWI in this area and look forward to working with them for the betterment of wool growers.”

Is an implementation committee needed?

Australian Wool Growers Association director Rob Ingram welcomed the AWI review report’s recommendations, but said there could be a need for an industry implementation committee.

However, Ms Hall said WPA echoed Agriculture and Water Resources Minister David Littleproud’s call for the AWI board to demonstrate leadership in reforming and modernising the company.

“There are a number of recommendations that the board needs to implement by the end of October this year, which the establishment of an implementation committee could hinder.

“WPA sees no reason as to why the AWI board would not move to implement these in a timely manner,” she said.

“However, if it appears that these recommendations aren’t being acted upon, an industry implementation committee may be an option that needs to be considered.”

Wool growers should continue to be represented

Mr Metcalfe said it is right that wool growers continue to be represented on the AWI board; however, they are only one of seven sets of experience that should be reflected in a broader skills-based board.

“Therefore, while the AWI Board Charter, the AWI constitution and the SFA, partially meets the ASX Corporate Governance Principles on their face, the underlying structure of how the board is comprised means that the substantive independence of the board is limited.

“In our view, this means that there is opportunity to better align the constitution with the ASX Corporate Governance Principles to create a broader skills-based board,” he said.

“This represents a dilemma for how the Board of AWI is structured in terms of balancing a desire to have deep representation of the wool industry with a requirement of public company independence of the directors.

“However, our review has found that a number of other RDCs have amended their corporate governance structures such as their constitutions and board nomination process to introduce greater independence and an ability to create a broader skills-based board,” Mr Metcalfe said.

We believe that the other changes that we have recommended in corporate governance will contribute to assisting to enable AWI’s board to satisfy the ASX Corporate Governance Principles on independence of directors.”

Sheep Central has attempted to contact AWI directors Wal Merriman, David Webster and Meredith Sheil for comment on the review report’s findings in regard to AWI directors. Ms Sheil and Ms Garnsey are overseas.

Ms Sheil said all matters that seek to make fundamental changes to the current system of director elections and appointments “are rightly a matter for the shareholders of the company.

“I believe AWI will seek to consult widely with wool grower shareholders on these matters to understand their wishes.”

Ms Sheil saw the re-assessment of director independence as AWI-accepted good governance practice.

“At AWI, as for any board of any company, the independence of a director is always re-assessed after a period of time such as 10 years.

“This is accepted good governance practice to ensure directors remain capable of independent decision making and have not become too close to management.”

“As I am approaching 10 years on the board, my independence will be assessed as part of this good governance practice.”

For more information and a copy of the review click here.


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