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Nick Sherry

Minister for Superannuation and Corporate Law

3 December 2007 - 8 June 2009

Speech of 28/04/2008


Corporate Governance in Today's Volatile Market Condition

Speech to Riskmetrics Group Australia Governance Conference


28 April 2008

Good afternoon. I would like to thank RiskMetrics for inviting me to speak with you today.

Firstly, I would like to acknowledge the important contribution of RiskMetrics in building strong corporate governance practices in Australia. And this conference, exploring "Accounting Shenanigans, Executive Pay, Class Actions and Takeovers" is extremely topical!

Today I would like to talk about governance in today's volatile market environment.

As you're all aware, after a prolonged period of positive economic conditions and rapid financial innovation, the international financial system is now facing some significant challenges as a consequence of the US sub-prime crisis. Australia's financial markets have also been tested.

But on the whole, our robust financial system has coped extremely well with the recent global pressures. And our market regulators have been doing a solid job in difficult circumstances.

I will outline some of these measures in a few minutes. But I can assure you that I am well aware of the need for caution before we introduce any new regulation in this area.

We must look beyond immediate events and preoccupations. We must consider the medium-term risks, opportunities, and vulnerabilities that confront corporate law.

I am committed to pursuing reform of the regulatory and corporate governance framework. Reform that is comprehensive, effective, and — above all — sustainable.

This type of reform has the potential to boost productivity and enhance the integrity of our financial markets. This is a key element in facilitating ongoing economic growth without undue inflationary pressures.

Market reform and transparency

While our regulatory system is sound, the recent turbulence in financial markets has highlighted the need for some fine-tuning to ensure the integrity of our markets.

The Government is committed to ensuring that financial markets are fair… orderly… and transparent. We can achieve transparency by ensuring that investors have access to the information they need to make informed investment decisions.

I'll give you just one example.

You may be aware that the Prime Minister recently announced that Treasury would review appropriate disclosure requirements for equity derivatives, such as Contracts for Difference.

These instruments give their owners an economic interest in the underlying securities — but not traditional legal rights such as the right to vote or dispose of the securities.

It has been suggested that these instruments enable market participants to exercise a degree of de facto control over the underlying securities, while avoiding the disclosure obligations that apply to legal owners of securities. In other words, owners of Contracts for Difference can avoid disclosure obligations under the substantial shareholding and takeover provisions.

If we ignore these tricky issues, we will never achieve a transparent marketplace.

Short selling and securities lending

I am sure that you would also be aware of the recent concern over short selling and securities lending.

At the outset, I would like to stress that short selling is an important financial tool in promoting market efficiency and encouraging true stock prices.

The specific issue that has been raised is whether the short selling rules need to be tightened to resolve any ambiguity about the obligation to disclose short sales to the market, including those effectively facilitated by borrowed stock.

In the interests of transparency, the Government will pursue legislative change to the Corporations Act to address any ambiguity around covered short selling and the requirement for disclosure.

Treasury and ASIC are currently investigating the best legislative option to address these issues.

We want to protect investors. We want to promote confidence in Australia's financial market. And importantly, as Prime Minister Rudd said earlier this month, when he addressed the Confederation of British Industry and Australian Business in London:

"We want to ensure that Australia's regulatory regime does not impose an undue burden on market participants or inappropriate barriers to foreign equity investment in the Australian market."

Corporate Governance Issues

While these issues pose an immediate regulatory concern to the Government, as I mentioned earlier, we also need to take a longer-term view.

This is why one of my most important priorities is enhancing corporate governance.

A sound corporate governance regime is fundamental to capital market efficiency. And it is critical to ensuring that the rights of shareholders, employees, and legitimate stakeholders are protected.

This is why the Government is committed to ensuring that Australia's financial system operates efficiently and effectively… that financial markets are fair, orderly and transparent… and that our corporate laws strike the right balance between promoting integrity and facilitating responsible risk-taking.

The current market turmoil has focused attention on directors' conduct and obligations to their companies. Despite this, there are no indications of systemic problems in this area.

While the Government needs to be responsive, it is important that we do not have a knee-jerk reaction to the current market turmoil. This is why I believe in taking the longer-term view. And this is why I am committed to ensuring that we develop a comprehensive, effective, and resilient corporate governance framework that will stand us in good stead in the future.

This enhanced system of corporate governance will increase investor confidence… promote well‑functioning financial markets… reduce the cost of capital… and facilitate the most efficient use of invested funds.

This enhanced system will promote growth in shareholder and fund value. This is particularly important in Australia where we have a high level of superannuation funds invested in financial markets.

Avenues for reform

I have previously announced that the Australian Government is examining three areas of corporate governance.

The three areas are corporate offences… sanctions… and personal liability for directors. Our reforms in these areas will have one common goal — to ensure that we have a consistent and principled approach to addressing misconduct in corporate law.

The particular measures to be taken include, firstly, clarifying the standards required of directors. This will enable them to make decisions with confidence. Decisions that are in the best interests of shareholders in fast-moving and complex business situations.

Secondly, where directors fail to meet these standards, the law will ensure that the sanctions imposed are credible… flexible… and transparent.

Thirdly, I believe that it is important to look at the emerging trend for imposing personal liability on directors for corporate fault. While this may be appropriate in exceptional cases, it now appears to be the norm.

As a first step, Treasury will soon survey about 600 leading company directors to establish what is happening in the boardrooms of our leading companies.

For corporate law this is where the rubber meets the road! In assessing the case for corporate law reform, we need to focus on what's happening in the boardroom, as well as what's happening in the court room.

Regulation of credit

This afternoon, I have touched on a number of key corporate governance areas important to this Government.

The recent turbulence in the international financial services sector shows that we also need to keep an eye on the financial services market, particularly in the area of consumer protection issues.

The work of the Financial Services Working Group to simplify product disclosure statements is already well underway. Disclosure documentation is lengthy, complex and unreadable to the average investor and consumer. It may as well be in Latin for its readability. Simple, short and standard disclosure is vital to inform decision‑making and greater competition.

As well, proposals are in hand to address a number of other problem areas, most importantly the regulation of credit.

I'm sure nobody here today will be surprised to hear that, according to the Productivity Commission's draft December 2007 report, Australia's Consumer Policy Framework, credit use has risen rapidly over the last 20 years.

Residential mortgages make up the largest sector of consumer credit, accounting for an estimated 86 per cent of all consumer loans.

Yet we have no comprehensive national approach to credit-related financial services.

Credit is mainly regulated by the States and Territories through the Uniform Consumer Credit Code. Given the number of different jurisdictions, it's no surprise that current regulation is patchy and inconsistent.

Not only that, but it does not do enough to prevent undesirable behaviour, including problems with predatory lending and inappropriate advice.

Australia needs a financial services regulatory structure for the 21st century, one which provides the highest standards of prudential supervision, product disclosure and advice at a national level.

Simple, standard regulation can only be achieved at a national level by one government rather that by six states and two territories.

I am therefore pleased to be able to tell you that the Commonwealth and the States have united to turn this situation around. Together, we are committed to improving the regulation of credit in order to most effectively address these issues.

In its draft report, the Productivity Commission recommended that the Commonwealth take over all regulation of credit. Further, COAG recently agreed in-principle to the Commonwealth assuming responsibility for regulating mortgage credit and advice, with a view to reassessing the regulation of other credit arrangements in due course.

This agreement included the regulation of individuals and corporations engaged in mortgage broking activities. In other words, those areas that will have the greatest immediate impact on consumers' financial health.

To this end, the Government's latest Green Paper that details these measures will be released shortly for consultation and feedback.

Emerging Governance Issues in Financial Reporting

Turning now to financial reporting…

The current volatility in global financial markets has highlighted the importance of maintaining market confidence in the existence of a sound financial reporting framework. One that relies on transparency, accountability and disclosure.

The challenge for the Government is to ensure that financial information accurately reflects the financial health and performance of a firm… that it's relevant to investors, shareholders and the broader community… that it is delivered in a timely manner… and that it doesn't impose an onerous regulatory burden on business.

Globally Accepted Standards

In 2005, Australia adopted international financial reporting standards, or IFRS. Australia is one of about 100 countries that permit, or require, the use of IFRS for financial reporting purposes.

The adoption of IFRS has generated significant benefits for the Australian economy. Globally accepted standards reduce complexity for investors when making investment decisions, as they can compare the financial information of companies across jurisdictions.

However, we are aware that bodies such as the Financial Stability Forum have highlighted the need for the International Accounting Standards Board to review its current rules around "fair value accounting".

Fair value accounting measures the value of a firm's assets or liabilities based on an existing market, as opposed to a valuation based on historical costs. Fair value accounting becomes problematic when a product is thinly traded, or not traded at all, as has occurred during the recent credit crisis.

The Government supports the current work of the International Accounting Standards Board on these issues.

Improving the financial reporting framework

Earlier this year, I asked Treasury to examine a range of reforms to improve the relevance of financial reports to investors and the broader community.

This work includes developing proposals to strengthen the executive remuneration framework. The proposals will be designed to promote greater transparency, accountability and shareholder engagement.

While it's important to get these reforms right, we certainly don't intend to dictate the level of directors' salaries. The Government believes that boards are best placed to set remuneration levels within companies, and take responsibility for those remuneration levels to shareholders.

Self Managed Superannuation Funds

Governance issues are also fundamentally important for superannuation funds.

Earlier this year, I announced that the Government had started stakeholder consultations on several issues relevant to self managed superannuation funds.

The previous government, supported by us, introduced the Super Safety arrangements and extensively upgraded trustee duties, responsibilities, and education.

But these changes were not applied to the SMSF sector.

Because so many Australians will rely on self managed super funds for their retirement income, we need to ensure that SMSFs are subject to a strong governance system.

The SMSF sector is, on the whole, a robust, sound, and healthy area of the market. But a recent survey conducted by the Australian Taxation Office highlighted some problems.

The survey found that 21 per cent of participating super trustees had a "low to medium" or "low" knowledge of their obligations. Over 30 per cent of new trustees could not provide an explanation of the "sole purpose test". And over 15 per cent did not have an investment strategy.

This is a worrying state of affairs. I am particularly concerned about cases where people have been targeted by aggressive marketing tactics, and persuaded to establish an SMSF without being fully aware of their role and responsibilities, and the fees and charges they are likely to incur.

ASIC has been drawing attention to this issue through its FIDO website. The website encourages people who are considering establishing their own SMSF to consider whether they will be contributing enough assets to produce a better result than a suitable low-cost alternative fund.

It is important that financial advisers who recommend an SMSF provide effective disclosure, to ensure that people who wish to establish an SMSF are familiar with details such as the financial and time burdens, and the amount of money they will need in the fund to make it viable.


The current penalty regime for SMSFs appears to limit the ATO options for addressing non-compliance.

Generally, the application of penalties for non-complying trustee behaviour comprises the imposition of civil and criminal penalties. Penalties of this nature can be costly, time-consuming and harsh.

With this in mind, should our penalty arrangements be better targeted to achieve the intended results?

The ATO has advised me that they will continue to provide advice to support professionals and trustees through the non-binding public rulings regime.


Ladies and gentlemen, in conclusion I would reaffirm my confidence in Australia's financial markets.

They are performing solidly under pressure, and our regulatory system is sound. However, I can assure you that the Government and our regulators will continue to closely monitor the situation.

The reforms I have outlined this afternoon will allow the Australian Government to enhance the strength, transparency, and efficiency of the financial system — a system that, by any range of comparative data, is already one of the best in the world.

On a personal note, I'd like to add that, as Minister for Superannuation and Corporate Law, I take great satisfaction from being able to effect important and meaningful change — change that will benefit many Australians.

As always, the Government values the input of industry and other stakeholders on this important work. We would be interested to hear your views on the issues I have spoken about today.

Once again, I would like to thank RiskMetrics for inviting me here to speak with you today. I hope you all have a productive and enjoyable time at the conference.

Thank you.