Thank you for the invitation to speak to you today.
This is the first speech I have given since I was appointed Parliamentary Secretary to the Treasurer in October.
I am pleased to be able to address the National Conference of Chartered Secretaries Australia on the future of corporate regulation.
As a former business executive, I appreciate the valuable contribution skilled governance professionals can make to the management of companies.
The Government recently recognised the contribution of governance professionals by requiring companies to disclose the qualifications and experience of company secretaries in annual reports.
The importance of corporate regulation
Australia’s future economic growth and development depends to a significant extent on the commercial performance of our corporate sector.
By taking risks and pursuing commercial opportunities, companies create employment opportunities, generate tax revenue and pay dividends to shareholders.
An important role of the Commonwealth Government is to provide a sound regulatory framework in which companies can operate.
Effective corporate regulation is necessary to maintain investor confidence in Australia’s companies and hence the flow of capital for new projects.
This is particularly important now that more and more Australians rely on investments in companies as a means of saving for their retirement.
It is important to remember that the main purpose of corporate regulation is to facilitate commerce and industry. It should be proportionate and well-targeted to ensure that it generates positive outcomes for the community. Excessive or poorly-targeted regulation is likely to generate negative outcomes for consumers, employees, shareholders and Government.
Importantly, company directors and officers also have an obligation to conduct their business in a way that accords with broad community standards.
The Corporate Law Economic Reform Program
The drive to improve corporate regulation has been an important part of the Howard Government’s economic reform agenda.
Since 1997, the Government has pursued a major program of corporate law reform under the banner of the Corporate Law Economic Reform Program.
The most recent instalment of this process, CLERP 9, was enacted earlier this year.
The CLERP process has modernised and strengthened Australia’s framework of corporate regulation.
I think we would all agree that the CLERP reforms have succeeded in strengthening the integrity of the system – for example, by ensuring market confidence in the reliability of financial reporting by companies.
At the same time, it is necessary to acknowledge that the reforms have sometimes been difficult to implement and have placed additional demands on companies as they have adapted to the new arrangements.
My approach to corporate regulation
I would now like to outline my approach to corporate regulation.
At the outset, I should stress my commitment to maintain Australia’s reputation as a well-regulated market, governed by a sound regulatory framework that is enforced by a competent and well-resourced regulator.
ASIC has the tools necessary to do its core job – protecting consumers, shareholders and creditors.
In discussing the future of corporate regulation, I think that it is important to recognise that our current regulatory framework ranks alongside the best in the world. We need to remember this when responding to calls for the introduction of further regulation.
It is also important to recognise that we have just been through a period of unprecedented reform. CLERP 9, the most recent instalment of the CLERP process, was only enacted in June this year.
I am therefore wary of rushing into new reforms before we have had the opportunity to see how the changes that we have already made work in practice.
This does not mean that I am not prepared to consider measures to deal with any gaps or deficiencies in the regulatory framework that are identified in the future.
A strength of Australia’s regulatory framework is that it is based on a mixture of regulation, co-regulation and encouragement of industry best practice.
This approach has worked well in Australia and I support its continuation.
Where possible, regulation should be flexible, relying more on guidelines than the red tape of legislative requirements.
An example of this approach is the role of the Australian Stock Exchange (ASX) in relation to listed companies.
The ASX has front line responsibility for maintaining an informed market in the shares of listed entities.
It also sets guidelines for good practice in corporate governance.
These guidelines have allowed the Government to steer away from imposing detailed ‘black letter’ rules and rely on more flexible arrangements that can be tailored to the circumstances of different companies.
The Government supports principles-based regulation. This is because a principles-based framework focuses on outcomes above processes.
In contrast, those on the other side of politics support highly prescriptive regulation and ‘black letter’ law.
I believe this approach would introduce unnecessary legal complexity. A heavy-handed approach to regulation can be counter-productive, encouraging people to expend their energies on corporate ‘box-ticking’ exercises, rather than complying with the spirit and intent of the law.
Looking back on CLERP 9, I believe that we largely achieved the right balance between regulation and a market-based approach to corporate governance.
We need legislation to set out broad parameters for the conduct of business, to remove uncertainty in the operation of the law and to clarify the rights, duties and responsibilities of stakeholders.
During the Senate debate on CLERP 9, the Government successfully repelled a strong push by the Australian Labor Party (ALP) and the Australian Democrats to move about 100 amendments. Had the Government backed down and accepted these amendments, we would have introduced a far greater level of prescription into the legislation.
The ALP’s proposal to completely ban auditors from offering non-audit services would have imposed unnecessary restrictions on companies.
Similarly, the ALP’s proposal for a 4 year cooling-off period before a former auditor can work for a former audit client would have unnecessarily reduced the pool of experts with accounting expertise on which companies can draw.
Having spelled out my preference for principles-based regulation, I must acknowledge that there have been times when the Government has fallen short of this objective and produced results that are unnecessarily prescriptive in either their design or implementation.
Future challenges in corporate regulation
Looking forward, I see two important challenges for the development of the regulatory framework.
The first is the need to ensure that the CLERP reforms are operating as intended, and to deal with any areas where they are not working as smoothly as they could.
The second is the need to respond to the continuing globalisation of investment markets.
Some commentators have recently expressed concern about the level of regulation in Australia and the burden that this can place on our business sector.
As I previously mentioned, one area of concern has been Financial Services Reform. While few question the objectives or broad principles of FSR, there have been concerns about the costs incurred by financial service providers in transitioning to the new regime.
More importantly, there are also concerns that the new regime is imposing burdens on participants that are not matched off-setting benefits for consumers. For example, it has been argued that consumers are being overwhelmed with paperwork.
One of my main priorities will be to address these concerns. While I don’t believe that there is a need for wholesale change, there is certainly significant scope for refinements.
Over the coming months, the Government will work closely with ASIC to identify ways to reduce compliance costs for financial service providers as well as ways to improve outcomes for consumers.
In the last 20 years, Australian companies have been increasingly integrated into global financial markets. Many large companies source capital overseas and are listed on overseas exchanges. Foreign investors have poured large amounts of money into Australia.
While the process of globalisation will continue to produce many benefits, it will also continue to present a great challenge to the regulation of our corporate sector.
Two ways in which the Government has been responding to this development has been through the introduction of International Financial Reporting Standards (IFRS) and by seeking to establish mutual recognition arrangements with overseas jurisdictions.
Adoption of IFRS will facilitate the acceptance of Australian financial statements in overseas capital markets, thus enhancing the ability of Australian companies to compete offshore and attract the international capital that is essential for the continued growth and dynamism of our markets.
This has been longstanding Government policy and has now been advanced by the Financial Reporting Council and the Australian Accounting Standards Board.
The choice of 2005 largely reflects the decision of the European Union that EU listed companies will be required to apply International Accounting Standards Board (IASB) standards in their consolidated financial statements for reporting dates beginning on or after 1January 2005. It would not be desirable for Australia to be out of step with standards applicable in both Europe and the United States.
I am keen to ensure that the transition to IFRS runs as smoothly as possible.
Conclusion
To sum up, Australia has a well-regulated corporate sector. Recent changes have largely improved the quality of the regulatory framework.
We will continue to work on areas where the reforms have not delivered all the results expected.
Going forward, we will be working to ensure that the regulatory framework does not prevent Australian companies from participating in the global economy. While this will undoubtedly create challenges for Australian companies and regulators, it should also provide valuable opportunities for companies and shareholders alike.
The Government will closely monitor the operation of the regulatory framework to ensure that it remains appropriate in the light of future developments.
As the framework evolves in the future, we will be careful to ensure that changes do not hamper the operation of the market economy.
The continued development of a more efficient and competitive business framework will benefit the entire Australian community.