Governance and Sense – For Directors

By Scott Tobutt

21 October 2020

The recent decision by the government to extend the insolvent trading relief out to at least 2021 has been greeted with a mixed response – on the one hand, it is hoped that this will allow viable businesses to recover and prevent further job losses, therefore helping protect the economy. Alternatively, the relief may be shielding the “walking dead” businesses which could actually benefit from restructuring initiatives facilitated by the insolvency professionals.

In addition, the relief for directors from personal liability has been extended for companies that may be trading while insolvent. However, could this provide directors with a false sense of security, or a level of complacency? For instance, are directors aware that the recent temporary law changes do not protect them from personal liability that may arise in relation to unpaid GST, superannuation or PAYG amounts? 

Now, more than ever, there is a need for strong and effective governance within companies. Directors should have greater visibility over their operations and set enhanced expectations of the information provided to them by the executive management teams. This requires a greater focus on the ‘four Rs’ in the information provided, being:

  • The right information
  • Of the right quality
  • Of the right quantity
  • Of the right timeliness

This is because, although there has been more certainty in NSW recently and with there being a new “way of life”, we only need look at Victoria to see how the COVID situation can escalate quickly. Therefore, it is critical that companies adopt dynamic modelling, with forecasts that are challenged, flexed and updated on a regular basis, and with various scenarios being applied and considered.

In addition, there has never been a greater need to adopt a “fit for purpose” risk management approach so that potential events that may impact the business are identified, managed and mitigated. This includes appropriate crisis management plans established and ready to operate.

A continued focus on internal controls and compliance is also vital, as the opportunities for internal and external fraud has been heightened in this COVID period, with scaled down resources in many businesses and a focus on “greater” priorities, such as the survival of operations. It must not be forgotten that a large fraud or compliance breach would also have a significant impact on the reputation and viability of a company.

In summary, directors and management need to work closely together and continue to maintain effective governance, strong culture and high ethical standards in these challenging times. Directors should be confident in receiving information that has clarity and consistency to assist them in making informed decisions without exposing them to personal financial risk. This is represented by the following diagram:         

     

Banks have been very supportive of businesses in recent months, but they are already preparing to deal with impending failures. Of course, directors should be optimistic and supportive of their company’s position, but they should be inquisitive, ask questions and challenge management, and form realistic expectations.

If directors have any concerns, they should seek advice from restructuring experts early, and not before it is too late, otherwise they run the risk of personal exposure. Restructuring initiatives are not always the end game but often deliver a rehabilitated and improved business.

PKF would be pleased to assist directors with any queries that they may have regarding governance and risk management, or alternatively restructuring advice.