21 February 2012

'Building resilience in turbulent times' - Lunchtime address to the 17th Annual ASIC Summer School

[Acknowledgements omitted]

Good afternoon, and thank you for the invitation to address the 2012 ASIC Summer School.

The fact that the Summer School has now been running for 17 years shows the ongoing value of this event for sharing information and generating ideas. And I expect that this tradition has continued over the last day and a half.

On behalf of the Australian Government, I would especially like to welcome those of you attending from overseas. I understand that we have delegates from the Asia-Pacific, North America and the Middle East. While you are here, I hope that you will find time to experience some of the wonderful things Sydney has to offer.

I recognise that I am following in the footsteps of several earlier Australian ministers with responsibility for corporations and financial regulation who have addressed ASIC Summer Schools. In 2010, my Parliamentary colleague the Honourable Chris Bowen, who was then Minister for Financial Services, Superannuation and Corporate Law, noted that the title of ASIC's 2009 summer school made a specific reference to the global crisis. He went on to say that we had not fully emerged from the shadow of the crisis, and that Australia had shown remarkable resilience in weathering the turmoil to that point.

Now, in 2012, it seems that the shadow of the crisis still looms large. In fact, at a global level there appear to be few signs that the shadow will recede any time soon.

However, the Australian economy continues to show resilience in the face of challenging global economic and financial conditions, and is expected to grow at around its trend rate - 3¼ per cent - over the next two years.

In this environment, the title of this year's conference, 'Building resilience in turbulent times' is very apt. And as the title highlights, resilience is not just a condition that exists, but is something that has to be cultivated.

The resilience of our economy can be attributed to a variety of factors.

Australia is of course blessed with a strong resources base and has benefitted from strong resource investment, growth in commodity exports and record terms of trade.

In large part, however, our resilience has been built on a number of the key reforms implemented by Governments over the last thirty years; floating the dollar, deregulating financial markets, lowering trade barriers, respecting the independence of a strong central bank with an inflation targeting brief, ensuring flexible but fair workplace laws, broadening our tax base, implementing a system of compulsory retirement savings and maintaining strong public sector finances.

Since coming to office in 2007, the Australian Government has delivered the strong economic management that is needed to ensure such fundamentals are translated into resilience.

Our policies have helped keep Australia out of recession during the worst global economic downturn since the Great Depression.

Our policies have helped deliver over 760,000 jobs and keep unemployment low, through a time when the global economy shed more than 26 million jobs.

Investors and financial institutions have demonstrated their confidence in our economy by continuing to invest in Australian businesses. This confidence owes a lot to our strong and effective institutional and regulatory environment, which encourages transparency and accountability, and our strong market infrastructure which provides for the flow of information from managers to investors.

Government must create a corporate law framework that ensures that market participants have confidence in the regulatory and enforcement regimes and are sufficiently well informed of the conduct and performance of the companies in which they may wish to invest.

On the other hand, the Government does not want to impose overly-restrictive requirements that deny corporate entities the flexibility they need to get on with the business of attracting and retaining the capital they need to create jobs and generate wealth.

We recognise that businesses want to spend more of their time innovating, competing and creating wealth and less of their time engaging in compliance. It is, however, the role of Governments and Parliaments to ensure that our regulatory frameworks are strong and inspire confidence.

We also recognise that the vast majority of businesses are responsible corporate citizens that behave honestly and ethically, and want to comply with regulatory requirements where these are designed to inspire confidence in the market.

ASIC's ability to contribute to the resilience of our economy is very much defined not only by anticipating and responding to trends in markets but also by using the proactive tools at its disposal such as education and surveillance, to help to identify and manage market risk and I am confident that the regulator will continue doing exactly that.

Of course, ASIC's ability to promote market resilience also relies on the Government's continued work addressing policy issues and making the necessary legislative and regulatory changes. With this in mind, I would like to outline some recent examples of policy developments where we have taken the initiative to ensure the continued relevance and resilience of corporate law in Australia.

Executive Remuneration

A significant part of building resilience in the Australian economy has also been about building confidence through transparency and accountability.

This is exactly the approach that we have taken with our reforms to the executive remuneration framework.

As you would be aware, the Gillard Government's new laws came into effect on 1 July 2011.

Based on the work of the Productivity Commission and an extensive policy development process that included substantial public and targeted consultation, these reforms encourage boards to engage with shareholders to justify the level and composition of remuneration awarded to executives.

These laws are intended to drive change in the boardroom, to build a new culture based on more transparency and engagement. Key elements of these reforms include new disclosure requirements around the use of remuneration consultants, changes to proxy voting rules and the prohibition of key management personnel voting on their own remuneration.

Of these reforms, the new 'two-strikes' rule has attracted the most attention.

Published figures have indicated that just over 100 ASX-listed companies have had a strike recorded against them. The proportion of companies receiving a strong 'no' vote under the new system has remained relatively consistent with the experience of previous years under the non-binding vote approach.

It has been encouraging to see most boards working, in the spirit of these laws, to improve engagement with their shareholders over executive pay. Shareholders rightly expect boards to not only listen to their concerns over pay but to respond to them, and I commend those boards that have worked hard to engage with their shareholders and win support for their remuneration policies.

On the issue of the number of companies that had recorded a strike, Business Council of Australia president Mr Tony Shepherd was recently quoted as saying:

"These latest figures demonstrate that the vast majority of Australian companies are obviously performing in line with shareholder expectations because they have not had a remuneration strike recorded against them."

Mr. Shepherd is correct of course. However, there have been a number of figures in the business and director community who have chosen to ignore and in some cases, openly defy the wishes of their shareholders.

This has been disappointing, however, these companies will still have the opportunity to improve their engagement with shareholders ahead of the next AGM - and I encourage them to embrace this opportunity and avoid the consequences that flow from a second "no vote" and possible spill resolution.

On executive remuneration, the Government has sought to chart a sensible, evidence-based, middle path through what is inevitably a very sensitive and emotive public debate.

In fact, Australia has been an international leader, with other jurisdictions now looking at implementing similar reforms.

In the United Kingdom, the same discussions we were having three years ago about the need for an effective policy response are only starting to be seriously progressed now. Some of the ideas being put forward are very familiar - transparency around the appointment and use of remuneration consultants; driving a cultural change that links pay with performance; and giving shareholders more power to have a say, even though the UK proposals are heading towards a single binding shareholder vote on pay policy - something we decided against in Australia.

We will continue to monitor the progress of reforms in other jurisdictions and will be closely watching the experience with the binding shareholder vote if that is what is adopted in the UK.

Further reforms

Building upon the reforms we have already implemented, it gives me great pleasure to announce today the next phase of our reforms to Australia's executive remuneration framework.

Today I am announcing that the Government will progress amendments to the Corporations Act 2001 to require listed companies to disclose to shareholders through the remuneration report the steps they have taken to clawback bonuses and other remuneration where a material misstatement has occurred in relation to the company's financial statements.

In this situation, if the company has not clawed back any remuneration, the board will be required to provide a detailed explanation to their shareholders - something which could be referred to as an 'if not, why not' requirement.

In a situation where a company has decided to clawback remuneration, the company will also be required to explain the reasons for doing so.

If shareholders are unhappy with the company's actions, they would be able to use their powers under the 'two-strikes' rule to vote down the remuneration report and potentially spill the board.

This is our response to the work that we have done through a detailed discussion paper and consultation with stakeholders and it reflects the general view expressed through that process that the best way to tackle the issue was not by a prescriptive legislative requirement but by increasing transparency and accountability and empowering shareholders so they can act where they are not satisfied with how a company has responded to their concerns.

These reforms put the onus on listed companies to make sure they have provisions to clawback bonuses and other pay from executives if there has been a material misstatement of a company's financial statements.

Clawback provisions in executive contracts are already being adopted by many listed companies and these reforms will ensure that shareholders are able to have a say about the efficacy of those provisions.

In addition to the clawback provisions, I am also announcing today the Government's response to the recommendations made by the Corporations and Markets Advisory Committee (CAMAC) in their April 2011 report on executive remuneration.

The Government proposes to progress recommendations 1, 7, 8 and 9 made by CAMAC, which involve:

  • requiring companies to set out in their remuneration report a general description of their remuneration governance framework (CAMAC recommendation 1);
  • requiring the disclosure of all payments (including entitlement payments, severance payments and post-severance payments) for key management personnel upon their retirement from the company, regardless of whether those payments were provided under a contract of employment (CAMAC recommendation 8);
  • requiring that the remuneration report disclose, for each key management personnel, crystallised past pay, present pay and future pay (CAMAC recommendation 9);
  • requiring that the remuneration report disclose any options that have lapsed in the current financial year and indicate the year(s) in which they were granted. There will be no obligation to include a value for the lapsed options nor to disclose the percentage of the value of remuneration that consists of options as this can already be deduced in other ways (CAMAC recommendation 7).

I note that as part of its report on executive remuneration, CAMAC considered whether to replace the current legislative architecture with a principles-based or other simplified legislative reporting regime. CAMAC decided against recommending this, highlighting that 'this is not the time to undertake major changes given the introduction of the two-strikes rule'.

The Government agrees with CAMAC on this point, and believes that it is important to ensure that recent reforms are bedded down. However, that said, we should not rule out moving towards a principles-based legislative architecture at some point in the future if a convincing case is made.

In addition, the Government proposes to progress a number of other changes, which involve:

  • relieving certain unlisted entities from the obligation to prepare a remuneration report, which will significantly reduce the regulatory burden on companies that are not subject to the 'two-strikes' mechanism; and
  • inserting disclosure requirements relating to related party transactions into the Corporations Regulations, as these disclosure requirements will be removed from the accounting standards from 1 July 2013.

There will be further consultations regarding how elements of these changes will be implemented and draft legislation to enact this suite of reforms is expected to be released for public comment in the latter half of 2012.

We want a resilient, transparent and accountable corporate sector and a shareholder base that is confident that it can actively participate in the market and have its concerns over performance and pay addressed and I look forward to working closely with stakeholders as we progress these reforms.

The future of the AGM

Of course, the responsibility of building resilience is not confined to governments, directors and executive management.

As our executive remuneration reforms suggest the Government believes that shareholders, as the owners of companies, also have an important role to play. They can do this by ensuring that managers put due emphasis on the long-term resilience of their companies in the face of changes in global conditions, technology and consumer preferences. The Annual General Meeting of a company is perhaps the best-known mechanism through which shareholders have, at least in theory, the opportunity to hold management to account.

Last December I tasked CAMAC with investigating and reporting on proposals to boost the relevance of AGMs and their effectiveness in facillitating shareholder participation. CAMAC will review the role that new technologies can play in expanding participation in AGMs by making it easier for shareholders who cannot be physically present at the AGM to watch proceedings in real time via live streaming, and to ask questions and cast votes on resolutions during the AGM in a way that takes account of statements and arguments made during the AGM.

The challenges posed by globalisation, for example through increased direct share ownership by foreign interests with a lower likelihood of being able to attend AGMs in person, adds urgency to the need to address these issues.

Giving those shareholders who are not present in person at an AGM a way to engage with the issues considered at an AGM and to participate in voting should spark shareholder interest both at the time of the AGM and more generally.

Another proposition that has emerged in recent years is the possibility of separating the deliberative and voting components of the AGM. This is an interesting concept and acknowledges that under the current AGM model a large proportion of votes are cast before shareholders are given the opportunity to participate in the deliberative processes of the AGM. I would be very interested in seeing CAMAC address such issues as part of its report.

In contemplating the future of shareholder participation, I expect CAMAC to consider the role that ASIC may be able to play, for example by establishing best practice guidelines for AGMs and monitoring their use.

Reforms to modernise and harmonise insolvency

We are all well aware that, while the Australian economy has demonstrated resilience, some sectors have been experiencing a more challenging commercial environment than others. Uneven conditions caused by global economic uncertainty, the high Australian dollar, and cautious household spending have been impacting on parts of our economy.

Even in an economy where growth is strong and unemployment is low, it is inevitable that some businesses will fail, causing financial distress for creditors, debtors, consumers and employees.

Sound laws governing insolvency and administration help to minimise this distress, by providing the best opportunity for those businesses to be rebuilt, and by providing clear ways forward for individuals and businesses who find themselves in financial difficulty.

These laws work best when they are underpinned by effective frameworks which help to keep down the costs of insolvency administrations, to improve recovery rates and minimise the losses experienced by credit providers. This leads to a positive impact on the cost and availability of credit to business and consumers.

In December last year, the former Attorney-General and I jointly released the proposals paper, A modernisation and harmonisation of the regulatory framework applying to insolvency practitioners in Australia. The paper followed extensive consultation with stakeholders on a broad range of policy options which the Government released for discussion in June 2011.

The paper sets out a significant package of reforms that will deliver more power to creditors, aiming to improve value for money for recipients of insolvency services, bolster the regulation of insolvency practitioners, and improve the checks and balances within the system. In particular, reforms to the way information is distributed to creditors and a new right for creditors to remove a practitioner without applying to Court will empower creditors to better look after their own interests.

While creditors will be given new tools, ASIC will continue to play a key role in promoting confidence in the insolvency system. That is why the Government has announced an additional $11.4 million to strengthen ASIC's surveillance of the industry and discipline of practitioners.

The Government is confident that the result will be a framework for insolvency regulation that promotes a high level of practitioner professionalism and competency, enhances transparency and promotes increased efficiency in insolvency administration.


An audience like this one, which includes people who play different roles in different organisations operating in different jurisdictions, has a great breadth of experience. Yet you all share a common understanding of the magnitude of the challenges being faced across the globe in these turbulent times. And I trust that you also share a recognition of the role that each one of you can play in building and maintaining effective, dynamic and ultimately resilient markets.

Building resilience in turbulent times is a collaborative effort, which involves Government, regulators and stakeholders working together. As a member of the Government, I look forward to working with ASIC and all stakeholders to ensure that Australia continues to have a strong and effective institutional and regulatory environment which fosters confidence and maintains Australia's position as a dynamic, innovative and growing economy.

In conclusion, I'd like to thank ASIC for all its work in staging this Summer School, and I trust you enjoy the rest of the day.