The Minister for Financial Services and Regulation
21 October 1998 - 26 November 2001
Address to the
Australian Institute of Company Directors
Corporate Governance and the Government:
Why Sound Governance Means Sound Regulation
27 July 2001
Ladies and gentlemen I am very pleased to have been invited to address you at this particular time.
The recent collapses of HIH and One Tel have focussed the community's attention on issues of corporate governance, and the extent to which companies should be encouraged to self regulate.
The community is justifiably concerned, and I suspect this could well result in great pressure from certain sectors for prescriptive rules and Government intervention.
The Government is very aware it's an election year and that all sectors of the community are assessing Opposition proposals against Government policy, and asking questions about the way forward.
The Government is keeping a level head, and will continue to reject policymaking based on perceived panic in the market. We will make our policy judgments in the same rational and calm fashion that responsible directors make good business decisions for their companies.
Government's Business Judgement Rule
We have always welcomed the Institute's analysis and consideration of the Government's corporate governance policy. The Institute called for the inclusion of a statutory business judgment rule back in 1996, as a response to the widespread concern among directors about the extent of their personal liability, in relation to honest, informed and rational business judgements.
After extensive consultation with stakeholders and Parliamentary debate we have delivered a business judgment rule through the Corporate Law Economic Reform Program Act. The rule protects the authority of directors in the exercise of their duties, and encourages responsible risk taking without insulating directors from liability.
Other measures in that Act clarified the director's duty of care and diligence, and of the ability of directors to delegate functions and to rely on the advice of experts when making decisions.
Poor corporate governance practices, particularly a lack of disclosure of corporate information, and a number of high profile corporate collapses in the 1980s led to an enhancement of disclosure requirements in the Corporations Law and through new Accounting standards. The Government continues to fine tune disclosure requirements.
Our philosophy has been that "sunlight is the best disinfectant" and that optimal corporate governance practices are achieved through transparency and disclosure rather than by directly adjusting the substantive rights of various stakeholders.
In fact, as an interesting aside, there is currently a debate in the United States business press on the reasons for speed of the dramatic change in the US economy recently. Whilst the underlying reasons for the US downturn may be reasonably well understood few understand why the turnaround in the second half of last year was so quick. One of the convincing arguments mentioned is that disclosure laws in the US today provide a more immediate snapshot of company performance than ever before. Therefore better and continuous disclosure rules mean that markets are reacting more expeditiously to economic developments.
HIH and One Tel
Following the collapse of HIH and One Tel some panic merchants were hopeful that the Government would panic about corporate standards in Australia and throw years of corporate regulation based on self-regulation out the window. They were wrong. Each corporate failure must take its course.
Only some of our neighbours to our north view corporate failure as a national embarrassment however Australia is a mature free market where corporate success is lauded and corporate failure is a reality. We have the traditional approach of a free market and business loss is closely linked to risk. Whilst corporate failure may have ramifications for other parties as it did for the policyholders of HIH, no one suffers more than the owners of the company who lose their money usually lock, stock and barrel.
So this traditional market facility which rewards success and punishes failure is the appropriate basis for modern corporate governance. And we don't want to repeal more than six years of consultative and painstaking corporate law reform as a response to sectional uninformed interests.
The Government's management of our business environment has been based on sound principles, including an economic basis for the Corporate Law Economic Reform Program. At the same time we have encouraged corporations to adopt appropriate governance structures so we can avoid unnecessary over regulation.
Of course, we recognise the fundamental importance of director accountability, and the Corporations Law imposes certain minimum obligations and responsibilities on directors.
However the ongoing issue for the Government is how far it should go in legislating best practice.
I think our public policy responsibility is to delineate broad parameters for the conduct of business, remove uncertainty in the operation of the Law, and clarify the rights and responsibilities of stakeholders.
Basic fiduciary duties are mandated, but the running of a business and the making of rational business decisions cannot be second-guessed by either the Government or the Courts: you know your own business best.
HIH, One Tel and a number of other collapses have sharpened corporate awareness of the importance of good corporate governance. Of course it will not prevent further business failures and I can say with absolute certainty that other businesses will fail -as they always have, but the test of our current regulatory mechanisms is how well business succeeds and not just the reasons for failure.
The Government will learn from these failures, and if it eventuates that the regulatory regime has failed, the Government will act on that finding.
But I caution against the view that we can legislate away poor corporate governance. There will always be some companies and directors that fail - whether through mal fides or irresponsible risk taking, and the law provides a range of penalties and other enforcement mechanisms where that happens.
Where a hard line is required, ASIC staunchly takes it. In 1999-2000 ASIC had 25 criminals gaoled, banned 16 investment advisers for life, and had a number of insurance brokers prosecuted and deregistered. We do not tolerate so-called "self-regulation" which is only self interest.
But bona fide self-regulation is a topic that sits at the heart of the liberal ideals in which the Government believes. I have talked about self-regulation in the area of corporate governance, and it works well generally in markets where integrity is directly measured in shareholder value.
At the end of 2000 I launched the report of the Taskforce on Industry Self-Regulation in Consumer Markets. The Government went to the last election with a commitment to develop effective approaches to self-regulation.
Our commitment is to promote efficient and competitive markets, and that happens when business is encouraged in responsible and entrepreneurial risk taking.
It was the Prime Minister, in the Government's "more time for Business" statement in 1997, who said the Commonwealth was keen for industry to take ownership for developing self-regulatory mechanisms.
Consistent with the Prime Minister's approach, I have developed our strategy of self-regulation around the principle of consumer sovereignty.
Freely operating competition between firms, and self-regulation in appropriate circumstances, will have optimum results in terms of price and quality for consumers.
The principle of economic survival of the fittest operates in all competitive markets, including for corporate governance. Companies with poor corporate governance practices can only expect to do poorly in business - consumers will vote with their feet. Ultimately, it is consumer sovereignty that gives business its motivation.
In response to the Taskforce's findings, the Government is drafting practical guidelines based on the principles flagged in the report to help develop self regulation schemes
The Government continues to highlight the Taskforce's findings to policy makers to encourage government agencies to give serious consideration to self-regulatory options as an alternative to regulation.
New Corporations Act
Where regulation is the right way to go, we need the best regulation.
As you would be aware the most significant hurdle to the government's wider reform agenda has been uncertainty over Australia's Corporations law following the Hughes decision in the High Court.
That uncertainty has been resolved, with the commencement of the new Corporations Act on 15 July 2001.
Financial Services Reform Bill
The long awaited Financial Services Reform Bill, which amends the Corporations Act, has passed through the House of Representatives and is due for consideration by the Senate in the next sittings.
This Bill is one of the most significant changes to financial services in Australia. Our financial services industry is one of the most dynamic and innovative sectors of our economy.
A global market has led consumers to expect better service at less cost. They want greater returns on more diverse investments.
The Government is responding by backing Australia's ability in financial services. We believe the Australian financial service industry can respond to increasing consumer needs and through the Financial Services Reform Bill we are putting in place a regulatory regime to meet those challenges.
This is an area that requires regulation to support it, and we believe the Bill is the optimum model for maximising consumer satisfaction and therefore maximising returns to the industry.
The Bill delivers the third installment of the Government's Wallis Inquiry.
The Labor Party Opposition has suggested that Wallis has "failed" due to the HIH collapse alone. I have made the allusion before that this conclusion is tantamount to draining Sydney Harbour because a boat sank. It is intellectually dishonest for the Labor Party to express its support for the Financial Services Reform Bill whilst decrying the recommendations of the Wallis report which they supported in Parliament in 1998.
The Bill is based on the premise that it is no longer possible for different institutions, services and products to be regulated under separate frameworks.
It harmonises licensing, disclosure and conduct regulatory frameworks for all financial products, markets and service providers.
The Bill will bring the regulation of the financial services industry in line with current developments in the industry. Importantly it will prepare the Bill for the challenges of the future.
The collapse of HIH and One Tel are going to throw up wide range corporate governance related issues. Not only will directors' duties and liabilities are at the forefront, but also the question of auditor independence.
The Government has recently appointed the Professor Ian Ramsay from Melbourne University to undertake a review of auditor independence in Australia. As part of this review he will examine existing Australian legislation, professional requirements, and recent overseas developments including the Security Exchange Commission's new rules on auditor independence in the United States, the European Union Commission's proposals for reforming its audit independence requirements, and the International Federation of Accountant's proposals for strengthening their Code of Ethics.
As part of this process Professor Ramsay is consulting with interested stakeholders. I would be very pleased if any members of the audience here today would like to bring their views to the attention of Professor Ramsay.
Professor Ramsay will be providing me with his views and the Government will consider its position.
It is important to note that there will be no knee jerk populist reaction to recent events without careful consideration of the implications. Reviewing the role and activities of auditors is a difficult job but public sentiment is such that we must be satisfied that positive change enhances consumer and business confidence.
As I said at the beginning, AICD has always been a very valuable and helpful stakeholder in business law reform and the Institute's efforts are appreciated. I particularly note the Institute's good work in self-regulation, including the Code of Conduct Guidelines and the extensive educational programs for directors. These initiatives help directors to help themselves and they deliver a better business environment.
The Government starts from a position of self-regulation, but where regulation is required we will develop the best model for the whole community.
So what do my opponents offer?
Well the Labor Party is the Party of both high tax and more regulation.
For example nearly two years ago I called on institutional investors to vote more regularly at company general meetings. In response the Labor Party said voting should be compulsory in law.
As a result of my calls voting seems to have improved markedly although as the AGM season approaches we will get a better feel. But simply responding with more regulation is overkill.
Similarly, in banking the Government is committed to delivering better services to consumers through the banks better reacting to their customers concerns. The Labor Party announced that it wants to re-regulate banking by raising a bank tax to pay for forced banking services. Of all the areas of a free market the area where one should tread most cautiously is in banking regulation. The Labor Party has a bad history with banking and I think over-regulation may be a dangerous path to walk.
Ladies and gentlemen, the Government's priorities for corporate Australia and have always been and remain free market focussed. We reject unnecessary intrusion into the market.
We support self-regulation in corporate Governance practices but we must step in and regulate when it is necessary.
At the end of the long day we want you to make a profit and over regulation and bad regulation are bad for business.
Thank you for the opportunity to speak to you today.