In March 2003, the ASX Corporate Governance Council (“ASXCGC”) issued the Principles of Good Corporate Governance and Best Practice Recommendations (“ASX Recommendations”) as a guide to the top 500 ASX listed companies. The guidelines were reviewed as at 31 March 2004 by the Implementation Review Group and some relaxations agreed particularly in respect to non top 300 ASX listed companies. The ASX recommendations were extensively revised in August 2007 as a “Second Edition” in respect of which Equities and Freeholds Limited (“EQF” or “the Company”) is required to report.
Corporate Governance is the framework by which the Company is effectively managed, in respect of its ethics and honest approach to doing business, the accountability of the board of directors to shareholders of the Company for financial performance and growth, and the management of the inevitable risks which are encountered in running a company reliant upon the performance of financial assets and investments.
The Company is a very small company with a strong commitment to containing costs. This commitment, when related to the small size of the Company, makes it difficult to fully attain all of the recommended principles; indeed, many of the principles have limited relevance to the operation of the Company, and as a consequence, the corporate governance framework has been adapted to the operation of a smaller entity.
All of the board and staff are very experienced company officers and are well aware of their responsibilities to the Company, to the security holders and to all other stakeholders, and fulfil similar roles in other corporations. As a consequence, the Company looks to attract directors who exhibit the requisite innate characteristics of honesty and integrity.
The EQF board largely supports and is largely, though not totally, in compliance with the ASX Recommendations published by the ASXCGC. Where the Company’s corporate governance practices do not correlate with the practices recommended by the Council, the Company does not consider that the practices are appropriate for the Company due to the size of the Company and the view of the board in optimizing shareholder returns.
EQF’s Constitution and various charters and statements in relation of corporate governance discussed in this section are available from the Company upon request in writing.
A. THE ROLE OF THE BOARD AND MANAGEMENT
The board seeks to identify the expectations of the shareholders, as well as other regulatory and ethical expectations and obligations. In addition, the board is responsible for identifying areas of significant business risk and ensuring arrangements are in place to adequately manage those risks.
The responsibility for the operation and administration of the Company is delegated, by the board, to the executive management team. The board ensures that this team is appropriately qualified and experienced to discharge their responsibilities and has in place procedures to assess the performance of the executive management team.
Whilst at all times the board retains full responsibility for guiding and monitoring the Company, in discharging its stewardship it makes use of sub-committees. Specialist committees are able to focus on a particular responsibility and provide informed feedback to the board. To this end the board has established an Audit Committee.
The board is responsible for ensuring that management's objectives and activities are aligned with the expectations and risks identified by the board. The board has a number of mechanisms in place to ensure this is achieved including:
• Setting the goals of the Company including short, medium and longer term objectives;
• Providing the overall strategic direction of the Company;
• Board approval of a strategic plan designed to meet stakeholders' needs and manage business risk;
• Ongoing development of the strategic plan and approving initiatives and strategies designed to ensure the continued growth and success of the entity; and
• Implementation of budgets by management and monitoring progress against budget - via the establishment and reporting of both financial and non-financial key performance indicators.
Other functions reserved to the board include:
• Approval of the annual and half-yearly financial reports;
• Approving and monitoring the progress of major capital expenditure, capital management, and acquisitions and divestitures;
• Ensuring that any significant risks that arise are identified, assessed, appropriately managed and monitored; and
• Acting as an interface between the Company and its shareholders and reporting to shareholders.
B. LETTERS OF APPOINTMENT
Letters of appointment are prepared for directors covering duties, time commitments, induction and company polices and corporate governance. Given the small number of these individuals, their remuneration structure and main elements of terms of employment are reproduced in the Remuneration Report section of this Annual Report.
C. PERFORMANCE EVALUATION OF SENIOR EXECUTIVES
Due to the small size and simple business nature of the Company, its executive management team is only comprised of an executive director and an executive.
The performance of the board and key executives is reviewed regularly against both measurable and qualitative indicators. The performance criteria against which directors and executives are assessed and aligned with the financial and non-financial objectives of the Company.
A. SIZE AND COMPOSITION OF THE BOARD
The composition of the board is determined in accordance with the following principles and guidelines:
• The board shall comprise not less than three directors nor more than such number as the directors may determine at any time.
• The Chairman should preferably be an independent or non-executive director.
• The board shall comprise directors with a diverse and appropriate range of qualifications and expertise and in the event of retirement of a director with particular expertise, the board will appoint a director with skills and experience to balance the needs of the board in the operations of the Company.
• The board shall meet monthly and follow meeting guidelines established to ensure that all directors are made aware of, and have available all necessary information in a timely manner, to participate in an informed discussion of all agenda items.
At the date of this report, the board of the Company comprises a non-executive chairman, an executive director and an independent non-executive director. The Directors’ Report provides the details of the directors in office during the year together with their experience, expertise and qualifications.
The directors in office at the date of this Statement are:
Non-executive Chairman: Lee IaFrate
Executive Director: Campbell McComb
Independent non-executive director: Jonathan Sweeney
B. DIRECTORS’ INDEPENDENCE
Non Executive directors are independent of management, have a substantial shareholding (i.e. over 5%) via relevant interest and have other relationships with management and the Company which result in them being required to stand aside from certain deliberations as a result of a conflict of interest.
Independent directors are independent of management, do not have a substantial shareholding (i.e. less than 5%) and are free from any business or other relationship which could materially interfere with the exercise of their judgement.
The Company presently has only one independent director. The board recognises the Corporate Governance Council’s recommendation that a majority of the board should consist of independent directors.
The board, however, believes that each executive director is able to and does bring quality and independent judgement to all relevant issues falling within the scope of the role of that executive director and that the Company as a whole benefits from the long-standing industry experience and expertise of that director.
In addition, the board recognises the Corporate Governance Council’s recommendation that the Chair should be an independent director. The board further recognises that Mr IaFrate is the Chairman and a major shareholder of the Company, it can be argued that he does not meet the definition of independence.
The board, however, believes that Mr IaFrate is the most appropriate person to lead the board as the Chairman and that he is able to and does bring quality and independent judgement to all relevant issues falling within the scope of the role of Chairman and that the Company as a whole benefits from his long standing industry experience and expertise.
In light of the size and activities of the Company, the directors do not see any advantage in appointing additional directors or re-structuring the board at this time.
C. CONFLICT OF INTEREST
The board has in place a process to ensure that conflicts of interest are managed appropriately. If a potential conflict of interest arises, the director concerned does not receive the relevant board papers and leaves the board meeting while the matter is considered. Directors must advise the board immediately of any interests that could potentially conflict with those of the Company.
D. ELECTION OF DIRECTORS
The directors of the Company are elected or re-elected (on a rotational basis) at the Company’s Annual General Meeting. Details of the members of the board, their experience, expertise and qualifications are set out in the Director’s Report. It is the board’s policy to determine the terms and conditions relating to the appointment and retirement of non-executive directors on a case by case basis and in conformity with the requirements of the Listing Rules and the Corporations Act.
E. BOARD COMMITTEES
Establishment of board committees is commensurate with the size of the Company. Having regard to the small size of the Company, the duties of Remuneration Committee and Nomination Committee are handled by the full board.
F. DIRECTOR’S ACCESS TO INFORMATION AND ADVICE
Directors receive a monthly report from the executive management team and have unrestricted access to company records and information.
Directors may obtain independent professional advice at the Company’s expense on matters arising in the course of their board and committee duties, after obtaining the Chairman’s approval. The Board Charter requires that all directors be provided with a copy of such advice and be notified if the Chairman’s approval is withheld.
It is the board’s policy that any committees established by the board should:
• Be entitled to obtain independent professional or other advice at the cost of the Company, unless the board determines otherwise.
• Be entitled to obtain such resources and information from the Company including direct access to employees of and advisers to the Company as they might require.
• Operate in accordance with terms of reference established by the board.
The board appoints and removes the Company Secretary. All directors have direct access to the Company Secretary and, through the Chairman, to the board on all governance matters.
A. BUSINESS CONDUCT AND ETHICS
Embedded within the Board Charter is a directors’ Code of Conduct (“Code”) of which the following is a summary:
• Directors must act honestly, in good faith and in the best interests of the Company as a whole at all times.
• Directors have a duty to use due care and diligence in fulfilling the functions of the office and exercising the powers attached to that office.
• Directors must always use the powers of the office for a proper purpose.
• Directors must recognise that their primary responsibility is to the Company’s security holders as a whole but should, where appropriate, have regard for the interests of all stakeholders of the Company.
• Directors must not make improper use of information acquired as a director.
• Directors must not allow personal interests, or the interests of any Associated Person, to conflict with the interests of the Company.
• Directors have an obligation to be independent in judgement and actions and to take all reasonable steps to be satisfied as to the soundness of all decisions taken by the board.
• Confidential information received by a director in the course of the exercise of director’s duties remains the property of the company from which it was obtained and it is improper to disclose it, or allow it to be disclosed, unless that disclosure has been authorised by that company, or required by law.
• Directors should not engage in conduct likely to bring discredit upon the Company.
• Directors have an obligation, at all times, to comply with the spirit, as well as the letter of the law and with the principles of this Code.
• Directors have an obligation to ensure that the continuous and periodic disclosure requirements as set out in the ASX Listing Rules are adhered to at all times.
The policy also includes detailed guidelines for interpretation of the principles of the Code.
All senior employees are governed by terms of employment, into which the relevant principles detailed above are embedded.
B. TRADING IN COMPANY SECURITIES
The Company has put in place a securities trading policy and procedures strictly prohibiting the Company’s employees and associates from purchasing or selling shares in the following periods:
1. From 31 December (each year) until the next business day after announcement of the half-yearly financial results of the Company to the Australian Securities Exchange (“ASX”);
2. From 30 June (each year) until the next business day after announcement of the annual financial results of the Company to the ASX;
3. From the last day of each month until the next business day after announcement of the Net Tangible Asset (“NTA”) results of the Company to the ASX; and
4. Any other “black-out period” notified by the Company Secretary.
Trading at other times is permitted unless there is price sensitive information known to directors and staff. Furthermore, no trading is permitted until first notified to and considered by the Chairman or in his absence another non executive director, to ensure that such trading will not give rise to allegations of insider trading.
A. AUDIT COMMITTEE FUNCTION
Detailed terms of reference for the Audit Committee have been adopted. At present, the Audit Committee does not meet the requirements of the ASX Recommendations because it contains an executive director. The board believes that due to the extremely small scale of the Company and clear transparency and simplicity of accounts that the Audit Committee can function adequately in its current composition. In the event that the Company increased in scale to a significant degree, the composition of the Audit Committee would be addressed.
The Audit Committee responsibilities are:
• to review the adequacy of systems and standards of internal control with emphasis on risk management, financial reporting procedures and compliance;
• to review proposed announcements of financial results, financial statements, management questionnaires and external audit reports in advance of the board;
• to receive any information it requires from management;
• to report its findings and recommendations directly to the board; and
• to provide a direct link from the board to the external auditor; the nomination of the external auditor and reviewing the adequacy of the scope and quality of the annual statutory audit and half year audit review.
The Audit Committee meets separately with the auditors as required from time to time to discuss the audit reviews and reports, to ensure that there are no outstanding issues and to assess the auditor’s continuing independence.
At the date of this statement, the members of the Audit Committee are Jonathan Sweeney (Chairman of the Audit Committee) and Campbell McComb.
Full compliance with the ASX Recommendations (requires three members including an independent Chairman) will not be achieved unless the board resolves to appoint an independent director/Chairman. The directors do not believe there is any advantage in appointing additional directors at this time.
The Audit Committee seeks to ensure the independence of the external auditor. The policy on auditor independence applies to services supplied by the external auditor and their related firms to EQF. Under the policy on auditor independence, the external auditor is not to provide non-audit services under which the auditor assumes the role of management, becomes an advocate for the group, or audits its own professional expertise. EQF has a very limited number and scope of permissible non-audit assignments. In addition, the external audit engagement partner and review partner must be rotated every five years.
The external auditor annually confirms its independence within the meaning of applicable legislation and professional standards.
B. FINANCIAL STATEMENTS ACCOUNTABILITY
EQF’s executive management team is required to state to the board, in writing, that the Company’s financial statements present a true and fair view, in all material respects, of the Company’s financial condition and operational results and are in accordance with relevant accounting standards.
In the 2010 financial year, the executive management team has provided a statement to the board in writing in respect to the integrity of the financial statements and the efficient and effective operation of the risk management and internal compliance and control systems.
The board has always been very conscious of its disclosure obligations and has adopted a detailed continuous and periodic disclosure policy. Disclosure obligations are also contained in the Charter for the Board of Directors.
All directors and the Company Secretary are responsible to ensure that disclosure policy is adhered to. The executive management team works with the Chairman in dealing with media contact and any external communications.
Current and archived news items announced by the Company are available free of charge at www.asx.com.au.
EQF provides a review of operations and financial performance in the 2010 Annual Report which includes the company’s financial statements. Results announcements to the ASX, analyst presentations and the full text of the Chairman’s address at the Company’s Annual General Meeting are lodged with ASX and available at www.asx.com.au.
The board is committed to ensuring that the security holders are at all times provided with information sufficient to allow effective monitoring of the Company’s performance by means of:
• the Annual Report which is distributed to security holders (at their election);
• the Half Yearly Report;
• periodic reports and special reports when matters of material interest arise;
• the Annual General Meeting and other meetings called to obtain approval of any board action as required; and
• Continuous disclosure.
The directors’ Code of Conduct and the Charter for the Board of Directors both support this principle.
The Company’s auditor is required to attend the Annual General Meeting and be available to answer any questions the security holders may care to ask in respect to the audit of the financial statements of the Company.
A. OVERSIGHT OF RISK
The Board of Directors is the ultimate sponsor of risk oversight within the Company, but does so in a manner which reflects the transparent nature of EQF’s systems. The Company pays significant attention to risk as a consequence of its activities which involve dealing in financial assets. As a consequence of the core activities of the Company, EQF deliberately assumes a level of risk of capital loss, the quantum of which is regularly discussed and debated by the board. Through the reporting of the executive management team, the board is able to monitor the level of interest rate, asset concentration, capital, reputational, credit and overall financial market risk being assumed by the Company.
The Audit Committee Terms of Reference include a requirement for the Committee to review and monitor the risk management practices and activities of the Company. Also, the risk management responsibilities of the board and management are dealt with in detail in the Charter for the Board of Directors.
B. IMPLEMENTATION OF RISK MANAGEMENT SYSTEMS
The Company has developed a series of internal and external controls which govern the Company’s material business risks. These controls include, but are not restricted to a compliance officer who provides training in respect of certain risk assessment procedures on a quarterly basis to all employees and regular reporting to the Board of Directors.
The Company has not appointed a specific internal auditor. The Company does not have a Risk Management Committee due to its small size and scale of activities, but the Audit Committee has a mandate to review and monitor the risk management practices and activities of the Company.
C. ACCOUNTABILITY
In the 2010 financial year, the executive management team has provided a statement to the board in writing in respect to the integrity of the financial statements and the efficient and effective operation of the risk management and internal compliance and control systems.
As part of the process of approving the financial statements, at each reporting date the executive management team provides a statement in writing to the board on the quality and effectiveness of the Company’s risk management and internal compliance and control systems.
The board has also received statements from the executive management team certifying that, having made all reasonable enquiries and to the best of their knowledge and belief:
• the statements made in relation to the financial integrity of the financial statements are founded on a sound system of risk management and internal compliance and control;
• the system of risk management in operation at 30 June 2010 implements the policies adopted and delegated by the board and was operating effectively; and
• the systems relating to financial reporting were operating effectively in all material respects.
Further, the board received the relevant declarations required under section 295A of the Corporations Act 2001 and the relevant assurances required under recommendation 7.3 of the Second Edition of the ASX Recommendations.
The duties and responsibilities of a Remuneration Committee are detailed in the Charter for the Board of Directors. The full board handles those duties and responsibilities at this time and ensures that the remuneration practices of the Company are fair and reasonable and structured to encourage enhanced performance. Full details of the remuneration quantum and structure for key personnel is contained in the Remuneration Report within this Annual Report.
Directors Remuneration
Suitable remuneration for executive director will be approved by the board.
The maximum aggregate amount of non executive director’s fees must be approved by the company in a General Meeting. Non executive directors do not receive bonus payments nor retirement entitlements other than superannuation.