Key points: |
A Simpler Regulatory System: is a key part of the process to develop a streamlined, balanced and efficient system that produces optimal results. |
Reducing the regulatory burden: initiatives include the Government’s response to the Banks’ Report and a possible system of standardised business reporting. |
Good corporate governance: is a key element in improving economic efficiency and growth, as well as enhancing investor confidence. |
Financial reporting: the recent overhaul of our financial reporting system has brought Australia to the forefront of international best practice, but we need ongoing improvements in this area. |
Australia’s influence in the region: aims to promote economic development, growth and stability within the Asia-Pacific. |
Good evening. And thank you for the kind invitation to speak with you today.
Ladies and Gentlemen, most of you here tonight are involved in the management of organisations.
It wasn’t that long ago that I was in a similar position. I am acutely aware of the many issues you deal with from day-to-day, week-to-week, quarter-to-quarter.
Tonight I want to touch on 5 key issues that I see facing Australia’s corporate community and delve in to some of the things we need to be conscious of to further advance the prosperity of Australia.
The principle areas I have decided to focus on are…the path towards a Simpler Regulatory System…reducing the regulatory burden…fostering good corporate governance…issues in financial reporting… and Australia’s influence in the region.
By any economic measure, our nation has done very well over the last ten years. Our performance has been praised by respected international institutions such as the OECD. But the real success has been seen around another great institution – the kitchen table.
More Australians are employed today than ever before…Unemployment has fallen to around 5%, its lowest level in 30 years…we as a Government can spend more on services and infrastructure because we are not having to service a $96 billion debt…and importantly our living standards have steadily improved over the last decade and now surpass all G7 countries except the United States.
Much of our success has relied upon major micro-economic reforms – particularly in the labour market and across the corporations and financial services sector.
This has created significant activity in investment in the capital markets either directly in share portfolios or indirectly through superannuation. Ultimately, this greater activity has resulted in more focus being placed on corporations because of the exposure of individuals to capital forces.
This is where Government steps in. It is my firm belief that our role involves both consumer protection and business facilitation.
This weekend’s AFL Grand Final gives me the opportunity to draw an analogy to my perception of government’s role in business.
It is our job to ensure the playing surface is in good condition, that we ensure the fans are able to get into the ground…that the players are properly registered…that there are enough umpires…that supporters, players and officials are aware of the rules.
It is not our job to have a role in coaching the teams, influencing the umpires or telling the supporters who to barrack for.
My ‘goal’ is that one day countries around the globe — will look to the Australian regulatory system for business as an exemplar of best practice.
This evening, I want to outline some of the steps I think will lead us even closer than we already are toward achieving that goal.
Model regulatory system
My ideal regulatory system is one that delivers optimal regulation.
What do I mean by optimal?
The optimal level of regulation is one that supports well-functioning markets.
Markets constantly change, which means that the optimal level of regulation is not fixed, but may itself, change over time.
Optimal regulation achieves the best balance between competing interests while minimising regulatory burdens. I’ll talk about our work in this area more broadly in a few minutes.
Optimal regulation is specifically targeted, and limited in its operation to that particular target in question.
Where government intervention is required in cases of market failure it should be as closely targeted at fixing the market failure as is possible, without adding unnecessary complexity.
This is the kind of targeted, efficient and streamlined regulatory system I want for Australia.
And this is the regulatory system which Australia deserves.
A Simpler Regulatory System
The initiative that I like to call, A Simpler Regulatory System, is a key part of this process.
AICD members would no doubt be aware that, in mid-August, I announced that the “Simpler Regulatory System Bill” would be introduced into Parliament.
This process grew out of the refinements to financial services regulation in 2005. The refinements addressed concerns about the way some aspects of the law were being implemented.
In April this year, I canvassed another range of issues relating to both corporate and financial services regulation in the Corporate and Financial Services Regulation Review Consultation Paper.
I received valuable feedback from about 80 individuals and organisations, including the AICD.
I would like to take this opportunity to thank the AICD for its input. I particularly appreciate the insightful comments on the range of company reporting matters.
The consultation process for the paper has produced several proposals that can be taken forward as legislative change through the Simpler Regulatory System Bill. I will release these proposals shortly for public discussion.
In developing the proposals I want to be clear about the underlying objectives I have had in mind.
My highest priorities have been the continued protection of consumers …minimising compliance costs for business …removing regulatory overlaps …facilitating access to capital … andenhancing the accountability of regulators.
Several of the proposals for public discussion address a range of corporate matters. These include measures to streamline a number of aspects of corporate regulation including notification processes … directors’ duties … financial reporting requirements … and fundraising requirements.
I intend to conduct round-table consultation sessions around the country to discuss the proposals in late October.
Responses to the paper and the round-table discussions will help us ensure the proposals are targeted and actually deliver the desired outcomes.
The Simpler Regulatory System Billis scheduled for release in draft form in the first half of next year.
This Bill is just one aspect of the Federal Government’s plan to further reduce the regulatory burden on business.
Response to Banks’ Report
Other initiatives to reduce red tape include our response to the Report of the Taskforce on Reducing Regulatory Burdens on Business – Rethinking Regulation, otherwise known as the Banks’ Report.
The Government agreed, in full or in part, to 158 of the report’s 178 recommendations.
As part of the Government’s response to this Report, the Treasurer announced tougher rules for making new regulation.
Gate-keeping arrangements within the Australian Government will ensure that any proposed regulation must undergo stringent analysis before it is introduced.
The Office of Regulation Review within my portfolio will become the Office of Best Practice Regulation.
Its new brief is to work closely with government agencies as they develop policy proposals to ensure that they don’t generate new regulation which is unnecessary, overly burdensome, too expensive or unduly restrictive.
As well, the Productivity Commission will undertake annual reviews to examine the cumulative stock of regulation and identify an ongoing red tape reduction agenda. This measure will include the use of the “Business Cost Calculator” to quantify, in dollar terms, the compliance cost of any proposed regulatory options.
To complement work being undertaken in response to the Banks Report, the Australian and State Governments are jointly investigating a new system of standardised business reporting.
The aim is to establish an online system which would allow businesses to report to relevant authorities in a consistent way.
This would remove the need for businesses to individually report to various government agencies at the Commonwealth, state and local levels.
A similar project recently undertaken in the Netherlands saves Dutch small and medium sized businesses over $A580 million a year.
Despite the fact that we have already made significant reductions in business compliance costs, the introduction of standard business reporting here in Australia will also yield substantial benefits.
This project has strong potential to further reduce Australian business reporting costs which have a natural flow to consumers and investors alike through cheaper products and services and the possibility of higher dividend yields.
Ladies and gentlemen, the range of initiatives I have just outlined will go a long way towards reducing compliance costs for business. And help to ensure that our regulations work on the ground the way the Parliament intended.
Our efforts to reduce red tape and make it easier to do business have been welcomed by the business community. I particularly appreciate the AICD’s support of my ongoing work to promote A Simpler Regulatory System.
I’m pleased to report that our red tape reduction agenda has not gone unnoticed internationally. Among the 175 economies included in the World Bank’s recent publication, Doing Business 2007: How to Reform, Australia’s overall ranking is 8th — that’s up from 9th in 2005.
As well, our rankings improved in four categories of business regulation monitored in the Doing Business database.
Australia is ranked as second in the world in terms of the ease with which an entrepreneur can start a new business and third worldwide for access to credit by businesses.
The improvement in Australia’s top ten ranking by the World Bank is proof that the Government’s initiatives are continuing make a good system even better.
Corporate governance
Turning now to corporate governance.
I regard corporate governance as a key element in improving economic efficiency and growth, as well as enhancing investor confidence.
Good corporate governance in a company — and indeed, across an economy — promotes market confidence. In turn, this reduces the cost of capital and facilitates the allocation of resources to their highest valued use.
We have always had an intuitive understanding of how this synergy works. But it is reassuring to see hard data confirming this.
Recent evidence is provided in a research report prepared by Goldman Sachs JBWere, titled Good Corporate Governance = Good Investment Returns.
The report found that the companies which were rated highest against ‘Board Skills’ … ‘Overall Board’ … ‘Audit’ … and ‘Remuneration’ outperformed other companies. Conversely, the companies which rated lowest under each of these categories underperformed.
The report found that investing in companies with good corporate governance would have improved returns by over 10 per cent, relative to a passive market return.
Not surprisingly, the report also found that companies with good corporate governance ratings were less likely to report results below market expectations.
So the question is — what are we doing to promote good corporate governance and how can it be improved?
The Government has taken a considered approach in this area, commissioning reports on corporate social responsibility, directors’ duties and sanctions in corporate law.
I’d like to speak in more detail about two specific reforms which may be of particular interest to AICD members.
The first is the issue of derivative liability for corporate conduct.
There are currently over 300 pieces of legislation across Australia which impose criminal derivative liability on company directors and others.
Directors can be held personally liable for corporate fault in areas such as environmental protection … occupational health and safety … hazardous goods … and fair trading.
This is by no means an exhaustive list, but it does highlight the diverse range of legislation operating across Australia with which directors and other company officers must comply.
In many cases, directors are exposed to prosecution despite the fact that they may not have been in a position to prevent a breach of the relevant regulations. As well, differences in approach across jurisdictions may make it difficult to determine exactly what a person’s exposure is, and how best to manage this.
CAMAC, the Corporations and Markets Advisory Committee released its report on this issue earlier today. It makes several useful recommendations for the Australian and State and Territory Governments to consider.
I believe that there is scope to significantly reduce the compliance burden through a review of these provisions.
I look forward to addressing the recommendations, along with my State and Territory counterparts, in the near future.
The second corporate governance issue I would like to talk about this evening is the removal of the so-called 100-Member Rule, which as you know currently enables 100 members or shareholders of a company to call an extra-ordinary general meeting.
Our proposal is to abolish this rule which is overly prescriptive and imposes unnecessary costs on business which come straight out of shareholder’s pockets.
There is overwhelming support for this removal; however under the constitution the Commonwealth relies on the referral of powers form the States and Territories through the Corporations Agreement to effect such changes to the law.
As a result we need the agreement of a majority of States and Territories to get the necessary approvals to actually change the law.
To date, the only stakeholders opposing the removal are the State and Territory Attorneys-General.
The Ministerial Council for Corporations (MINCO), which I chair, is comprised of each of the State and Territory Attorneys-General.
I put the issue to a vote at the last MINCO noting the support for the removal was received from AICD, CSA, Australian Shareholder’s Association amongst many others, but still the State and Territory Governments refuse.
The proposed Bill which covers this issue incidentally also contains a number of major provisions to enhance shareholder participation at general meetings.
Tonight I again want to take the opportunity to be very clear regarding this matter. I want to reiterate that I am fully committed to seeing this change implemented and will continue to strive to gain agreement from the State and Territory Governments who continue to stand in the way of much-needed corporate governance reforms.
In relation to this issue, I am with shareholders and business – we want this Bill through the federal parliament as soon as possible.
Financial reporting
I would now like to turn to our work on the financial reporting front.
The recent overhaul of our financial reporting system, through the CLERP 9 reforms, and the adoption of International Financial Reporting Standards, has brought Australia to the forefront of international best practice.
It has also contributed to ensuring sustained confidence in the integrity of our capital markets.
We have made significant progress, but we cannot afford to be complacent.
I spoke earlier of my vision for achieving A Simpler Regulatory System. As I have said on many occasions, I strongly believe that excessive regulation, including unnecessary disclosure requirements, will only stifle the growth and productivity of Australian companies. This is why the proposals paper to implement A Simpler Regulatory System will outline ways to minimise the financial reporting burden on companies.
For example, I am aware that some firms have expressed concern over the current financial reporting requirements for large proprietary companies.
Under the Corporations Act, the thresholds for defining a “large proprietary company” have not been adjusted since the test was introduced in 1995.
As well, the introduction of IFRS has had the potential to increase the level of financial disclosures required.
The proposals paper which we be released shortly will seek comments on many of the issues relating to financial company reporting.
As I mentioned earlier, optimal regulation is balanced regulation.
This is just one example of how we can strike the right balance between, on one hand, maintaining the integrity of our financial reporting system and, on the other hand, ensuring that companies are not unnecessarily burdened with financial reporting obligations.
I’m also aware that the requirement to provide every shareholder with a hard copy of an annual report each financial year imposes significant printing and distribution costs on companies.
This is why the proposals paper will suggest mechanisms for making annual reports available on company websites, and require hard copies to be sent only to those investors who request them. This proposal was agreed to by the Government in its interim response to the Banks Report.
This proposal will reduce costs for companies while ensuring that shareholders continue to have timely access to annual reports.
Again, I think this demonstrates the commitment to striking the best balance for all stakeholders.
These are just a few examples in the forthcoming proposals paper of ways to improve the reporting obligations of Australian companies for the benefit of all.
In addition, these proposals will ease the regulatory burden on Australian business… simplify financial reporting requirements… and ensure that Australian businesses can get on with the job of being successful and creating jobs.
Australia’s influence in the region
Ladies and gentlemen, as you would be aware, next year Australia will host the 14th APEC forum.
As part of the commitment to host APEC in 2007, the Treasurer will host the APEC Finance Ministers’ Meeting in August next year.
This is a great opportunity to maintain the momentum of delivering the policy results of previous years, by helping emerging economies to advance their own reforms. And in doing so, further deepen and integrate strong, viable financial markets within our region.
The Finance Ministers’ Meeting is also an opportunity to showcase Australia’s continuing emergence as a hub for regional economic and regulatory guidance.
In particular, we want to develop a menu of policy options from which emerging economies can draw in developing and implementing their own financial sector reform agendas, in line with their individual circumstances.
The menu will pool the experiences of member economies and international agencies to assist emerging economies to undertake their own reforms.
We also want to identify capacity-building needs and priorities, to assist emerging economies and international agencies to develop future programmes.
Our work through APEC will build on several initiatives Australia has undertaken in our region to promote the adoption of international best practice regulation and supervisory regimes.
For example, over the last year Australia has led initiatives with APEC and partner organisations designed to improve insolvency systems in Asia.
Australia has also hosted, jointly with New Zealand, an Asia-Oceania forum on International Financial Reporting Standards.
In July this year, Australia highlighted the need for good corporate governance in public and private institutions in our presentation at an APEC workshop on financial sector reform.
Australia is also working on the ground in Papua New Guinea, Solomon Islands and Nauru.
In Papua New Guinea, Treasury plays a leadership role in the economic and public sector reform component of the Enhanced Cooperation Program.
Around 28 Australian officers are deployed across PNG’s economic and public sector reform agencies, including six Australian Treasury officers in the PNG Treasury.
These people are working with PNG counterparts to — among other things — strengthen macroeconomic forecasting and fiscal planning capabilities and improve the operation of state-owned enterprises.
As part of the Regional Assistance Mission to the Solomon Islands, there are currently 17 officers deployed to the Solomon Islands Department of Finance and Treasury under the Financial Management Strengthening Program. Their brief is to re-establish and improve the financial management practices and systems within the Solomon Islands Government.
As part of the package of assistance Australia offered Nauru under the fourth Memorandum of Understanding between our two countries three officers from the Treasury and the Department of Finance and Administration are working to drive reforms to promote economic development in that country.
In these ways, Australia is working with our Pacific neighbours to promote economic development, growth and stability within our region.
Conclusion
Ladies and gentlemen, our vision for Australia’s regulatory system is a streamlined, balanced and efficient system that produces optimal results.
I believe that the reforms I have spoken about this evening have set us on the right path toward achieving this vision.
I hope the issues I have touched on today have been of interest to you and I look forward to an active, dynamic and creative relationship with the AICD in the future.
Thank you.