The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 08/10/2003

TRANSCRIPT

THE HON PETER COSTELLO MP
Treasurer

Press Conference
Parliament House

Wednesday, 8 October 2003
12 noon

 

SUBJECTS: Corporate Law Reform, HIH, Tax, Medicare, Labor Election Advertising, Wentworth

TREASURER:

Well ladies and gentlemen today the Government is releasing a draft Bill which has sweeping changes in relation to audits, the independence of audits, in relation to disclosure and transparency in a well balanced package which will enhance the rights of shareholders and improve transparency and increase accountability.

The proposal is known as the CLERP 9 Bill. We commenced in 1997 a modernisation of Australia’s corporate law. We have already modernised accounting standards, fundraising provisions, directors’ duties, takeovers, electronic commerce, financial markets, simplified lodgements, and the CLERP program moved on to the issue of audits with the commissioning of the Ramsay Report back in 2001. As it turned out, it was a good move because at the end of 2001, there were a number of spectacular collapses internationally - Enron, WorldCom, MCI, Global Crossing – focussed attention on accounting standards, auditing requirements and conflicts of interests of auditors.

We have in this Bill taken the Ramsay Report, we have taken into account the Royal Commission into HIH, we have published a discussion paper, we have had feedback from our Business Regulation Advisory Group, we now publish the draft Bill, we will take further comment on the draft Bill through November and we wish to implement the legislation by introducing it to the House of Representatives in December.

Now this legislation should be in place by 1 July next year. There has been enormous discussion and there has been consultation with the business community in relation to this.

I want to pay tribute, particularly, to my former Parliamentary Secretary, Senator Ian Campbell, for the work that he has done on this. It’s a mammoth job and he has really done a first rate job. As it turned out he has now been promoted to glory as the Minister for Local Government, Territories and Roads and he won’t get to steer this through but my new Parliamentary Secretary, Ross Cameron, will have day to day responsibility for doing this in the House of Representatives and I will be ably assisted by Senator Helen Coonan, of course, in the Senate.

What the Bill does principally is it puts the supervision of auditors on a new basis under our Financial Reporting Council. It will give auditing standards legislative backing, it will require new independence from auditors. Companies will have to disclose the fees they have paid for non-audit services in their annual directors’ report. It introduces proportionate liability and incorporation of audit firms so that auditors will not have to bear full liability for losses out of proportion to their contribution to them. It enhances continuous disclosure.

The Australian Securities and Investments Commission will be given the power to issue on the spot infringement notices to companies where it believes there has not been adequate disclosure. Now a company can contest that in Court or it can take the on the spot fine and make good the disclosure. It puts in place requirements to rotate auditors so that auditors can’t get too close to companies. It has cooling off periods so that auditors can’t take executive positions as has happened in some of the more well known cases in Australia.

It enhances the disclosure of remuneration policies by directors to shareholders and it adopts the United Kingdom provisions by which the remuneration report for executives will be subject to a non-binding vote and shareholders will get the opportunity to comment on those remuneration policies.

Now this is a delicate package. Some people will suggest that the changes will put unwarranted restrictions on companies. Some will suggest that. We believe that these restrictions are warranted. We believe that they are necessary to enhance confidence in our markets. But it is a balanced package and it has been carefully crafted so that we believe it will be a reasonable response without going to extremes in either direction. We will commend it to the Parliament and we intend to have it enacted by 1 July of next year.

JOURNALIST:

Can you explain the position of the $1 million fines versus the (inaudible) and why you’ve not gone ahead with the sort of on the spot arrangement that was originally (inaudible)?

TREASURER:

We have gone ahead with the on the spot arrangements in relation to disclosure. It is like the on the spot traffic fine, if I could use that analogy. You can cop the on the spot fine. If you reckon you didn’t do it, you can take it to court and you can contest it. And companies will say that we should have the right to argue our case, and they can still take it to court. If they concede that there was inadequate disclosure they can cop the infringement and that will be done immediately. And the penalties in relation to that have been substantially increased as well.

JOURNALIST:

What is the estimated cost of the additional regulation to business?

TREASURER:

Look we haven’t put a dollar cost on the compliance because we think overall, if this package is put in place and well balanced, it will actually enhance business by restoring confidence. I make this point that if the package doesn’t get through the Parliament or if it is seriously changed in one way or another, Australian companies would have added difficulty raising money and having confidence, particularly in international markets. So, I think overall there will be an economic benefit from this but there has to be a careful balance and, you know, when you look at all of the work we have done, particularly that Ian Campbell has done, a discussion paper, we then had submissions, we had 60 submissions, we then went back to a Business Regulation Advisory Group, we then took into account world’s best practice, we now have a draft Bill, we will now have responses to the draft Bill, we will then introduce the draft Bill, we hope to have it enacted by 1 July. Now an awful amount of work has gone into this and it is very important I think that we keep the carefully balanced package together.

JOURNALIST:

Could you explain, Treasurer, the remuneration disclosure provisions, how much more do you (inaudible)?

TREASURER:

Well the law will require that the most highly paid five people in the listed entity, and the most highly paid five people across the group will have full disclosure of their packages. In addition to that, there will be a remuneration report which the directors are required to put to shareholders and they will get the opportunity to vote on that in a non-binding way. This is the UK provision. Now, why do we do it that way? The theory of a company, which we think is important to keep in mind here, is that shareholders elect the directors, the directors appoint the executive. The lines of authority run from shareholder to director to executive, and that’s why we think it important that the directors still set the remuneration in relation to the employees, but we are giving an opportunity for a report back to the shareholders and for the shareholders to vote on the policy. Now, whilst it’s non-binding and this is the UK position, directors would be well advised to take notice of their shareholders. And there was a recent case in relation to Smith Glaxo Kline where a very large salary was referred back to the shareholders, the shareholders exercised a view in the UK and I think it was reconsidered.

JOURNALIST:

Will there be full details of the package or just the (inaudible) or a dollar number or?

TREASURER:

Full details of the package, these are matters to be prescribed and the prescribed matters will require full details of the package in relation to the five most senior people in the listed entity and in the group.

JOURNALIST:

Treasurer, do these reforms go far enough within the current level of disquiet among shareholders about some executive remuneration packages, I mean, you’ve certainly given some input into the process…

TREASURER:

Sure.

JOURNALIST:

But it gives them no real control, does it? I mean, does the Government rule out, you know, if the mechanism that you’ve just outlined, if it doesn’t work, would the Government go further in requiring, you know, more responsiveness…

TREASURER:

Well I’m not going to the next step before we’ve accomplished this step, obviously. But, bear this in mind, the shareholders put the directors there and the shareholders can take the directors out. And these provisions that we’re putting in place require the directors to tell the shareholders what’s going on. Now, at the end of the day, you may not be able to please every shareholder, but a company has got to run according to the majority of shareholders, and I guess that’s the point here, isn’t it? That if the majority of shareholders have confidence in their directors, if the majority of shareholders can express their views to their directors, then that’s the way that a company should be run. And as I said earlier, the theory of company, and nobody’s forced to invest in a company, is that shareholders make directors accountable, directors make executives accountable. And I think if you interfere with those lines of authority, you could actually undermine responsibility, rather than enhance it in a company.

JOURNALIST:

Would these new arrangements, for example, have let shareholders in the Commonwealth Bank, I think it was, you know, of that particular controversial package?

TREASURER:

Mr Cuffe, yes.

JOURNALIST:

They would have had full knowledge that there was that option?

TREASURER:

Yes. Yes.

JOURNALIST:

Would these provisions have prevented the scandal of HIH?

TREASURER:

I don’t believe that the HIH, if you look at the HIH Royal Commissioner’s report, you’ll find that what happened in HIH, was that for years there was under-provisioning, and the problem was exacerbated by the takeover of FAI. And I don’t think it’s right to say that HIH was a corporate governance point, I think it was an under-provisioning of insurance point. Now, I think if all of the alarm bells had been ringing properly at HIH, the Royal Commissioner said, it could have been alerted to the looming problem maybe six months earlier.

JOURNALIST:

But most people would expect auditors to pick up under-provisioning in insurance?

TREASURER:

I don’t know. Actuaries, properly instructed and reporting to the directors, but the Royal Commissioner found that there under-provisioning. There was under-provisioning for a whole host of reasons. Some of which should have been picked up but there were also in additional bad insurance losses. And in addition to that there was the FAI acquisition but look, we’ve taken the Royal Commissioner’s report on board, I’ve addressed separate press conferences in relation to that. We have moved very, very swiftly in relation to his recommendations and we’ve put APRA on a new basis. This is, this is really something that goes to transparency, disclosure, accountability and a whole host of other equally important areas.

IAN CAMPBELL:

Treasurer, the…

TREASURER:

My expert.

IAN CAMPBELL:

…the HIH recommendations and many of the legislative provisions that the Royal Commissioner recommended are included in this. For example, the audit term rotation and the cooling-off period, they were specific recommendations from that Royal Commission…

TREASURER:

Which have been picked up…

JOURNALIST:

…and get incorporated into the law through this measure.

JOURNALIST:

What, is there any outstanding recommendations from the HIH Royal Commission now given the moves on APRA and in CLERP 9.

TREASURER:

No, no.

JOURNALIST:

They’ve all been addressed?

TREASURER:

All been addressed. We have, just let me close that off, we have already enacted changes to APRA, we have picked up all of the corporate law changes in relation to that in this Bill. There were a whole host of matters that were recommended for changes by the ASX, and we have referred those to the ASX, but they were within the province of the ASX. There were some changes that were recommended in relation to auditing standards and we’ve referred those to the bodies. There were some changes for State governments. For example, the Royal Commissioner recommended State governments abolish their taxes on insurance products. That hasn’t occurred yet, but I would recommend that change to the States.

I’m sorry, are there any other…

JOURNALIST:

Treasurer, do you anticipate that these disclosure provisions will have an effect of keeping a lid on multi-million dollar packages for executives?

TREASURER:

If there is shareholder resistance, yes, yes. I think the consequence of this is that companies will have to disclose. Shareholders who do not believe these executives are worth it will make their views known to the directors, and I think we will put a lid on it, yes. In the unlikely situation that the shareholders say, well, we’re very happy with this, or you know, we think that person is so good and will make the company share price so high, that we approve it, well it would continue.

JOURNALIST:

Some senior executives argue privately that disclosure in fact pushes up packages, the amounts in packages.

TREASURER:

I’ve heard them argue that, and then they should be very happy with all this disclosure shouldn’t they, because it will be elevating their salaries.

JOURNALIST:

…inaudible…

TREASURER:

I’m not doing it for that reason by the way. I’m sorry, yes…

JOURNALIST:

Treasurer, just on another matter, Britain’s top tax man is going to be speaking today about tax morality and how really we all should be looking at the amount of tax we pay as a badge of citizenship and, you know, changing tax minimisation to a shameful attitude.

Do you think that Australians do need to change their attitude to the amount of tax they pay and look at it as a badge of citizenship?

TREASURER:

Look my view on tax is this, tax is what is required to deliver social services, defence and security. And I think people understand this, hospitals don’t grow out of nowhere, age pensions don’t come out of thin air, the Australian Defence Force, you know, doesn’t run on generosity, they’re fine men and women but their salaries have to be paid and their tanks have to be bought and the fighters have to be maintained.

IAN CAMPBELL:

Not to mention roads.

TREASURER:

And my attitude towards tax is that we have to collect enough tax to give people decent social services to secure the realm, to protect them against threats, to maintain our soldiers in the field, and to balance our budget and if after we’ve done all of that we can cut taxes, and that is what we aim to do, that is what we did in this year’s Budget. You know, we funded Iraq, we funded the response to Bali, we funded health services and pensions, and drought relief, at the end of the day we had a balanced budget, our budget was in surplus, we reduced taxes. That is the principle that we abide by.

JOURNALIST:

Do you have any funds to restructure the Medicare package?

TREASURER:

Look, I think the Budget Forecast for this financial year, this is the point I was at pains to try and make on the Final Budget Outcome, that was an outcome for 30 June 2003. We are now in a financial year to end 30 June 2004, I think the forecast is a little over $2 billion. Now, since the Budget, some things have gone against us, drought, we are spending more on drought, we have troops in the field in the Solomon Islands, which wasn’t factored into that Budget. We have some expenses which were not made last year which will carry over this year. So, it is quite a tight budgetary situation. Now within all of the demands that come on us, we will try and make wise decisions. Now, our principles are these, we will fund adequate decent social services, we will maintain the troops in the field, we will secure against terrorism, we will try and balance our budget.

JOURNALIST:

Does that still leave money for tanks?

TREASURER:

Well, we will consider all of these requests when they arise.

JOURNALIST:

Treasurer…

TREASURER:

I’ll take two last questions. Yes, Louise.

JOURNALIST:

Would you be happy if Labor campaigned at the next election, a vote for the coalition is a vote for Peter Costello? Mr Howard has not put a time limit on his retirement.

TREASURER:

Well, they campaigned on that basis at the last election, they ran TV ads at the last election, so they can do what they like. I am not going to advise them on tactics or techniques because I am seeking to beat them as it turns out.

JOURNALIST:

What do you think about Mr Howard not putting a time limit on his retirement?

TREASURER:

Look, you know my view on leadership, and there is no point in me going over it again.

JOURNALIST:

On executive remuneration guidelines, in the past companies have not disclosed the conditions under which executives share options have been issued or under which they are exercised at times. Will they all be required to be disclosed?

TREASURER:

In relation to prescribed matters they will be. We will be taking up that in relation to prescribed matters. The trouble has been, can I just say particularly in relation to options, one of the problems in the past is how do you value an option. An option is a right to buy a share at a certain price, but the value depends on the share price moving from day to day, and so it has been a very interesting question, how do you value an option? A right to buy a share at say, $2, a share price might be $5 one day, six months later maybe $6, what is the value? So, you just take a historical slice and try and put a value on them, it can move quite a lot in short periods of time. Now, the view I put in relation to this was that we would follow the International Accounting Standards Board, and that is what we are doing, and we are going to be one of the world leaders in relation to that. We had the head of the IASB come to see me quite recently in relation to that, we say to them, you work out the methodology and we will follow it.

JOURNALIST:

Mr Costello…

TREASURER:

Now, this is really the last question.

JOURNALIST:

…what is your attitude to the Wentworth battle? Would you care to give your support to your colleague Mr King, or are you glad to see an open contest there?

TREASURER:

Look, Peter King, yes is a valued colleague, and I recently did some work with him in the Wentworth electorate, having said that, as long as the rules of the Liberal Party are followed, people are entitled to challenge. But the rules should be followed in the letter and the spirit, and I think it is important that people have confidence in our rules, I think that is the big point here, that our rules should be such as allow fair contests on merits…

JOURNALIST:

Do you feel they are not being followed?

TREASURER:

…and if the rules do allow a fair contest on merit, and they are followed in the letter and the spirit, then it is up to the preselectors to make their decision accordingly. Thank you.