Introduction
Good morning, and thank you Tara for that kind introduction.
Before I begin, I would like to thank Chartered Secretaries Australia for inviting me to deliver the keynote address this morning.
The theme of this conference, "One World – The Global View of Governance", is very apt.
The global financial crisis highlighted just how interconnected the world's economies have become. The crisis also highlighted the challenges of governance and regulation in such a globally intertwined corporate environment.
We have all seen these interdependencies in action. Problems in one part of the world can reverberate on the other side of the globe, sometimes even within hours.
Today, as the aftershocks of the GFC manifest themselves in overseas markets, this interdependency also extends to the standards, principles and regulations we apply to our systems of governance.
More than ever, effective and consistent governance at the global level has become a significant issue for regulators, as the international community works together to eliminate the likelihood of another financial crisis.
G20 and Global Governance
Many of the governance issues facing the global economy have implications for domestic market participants, reflecting the reality of a worldwide market for goods, services and production. This means that national governments need to work together to provide the global governance architecture that supports these markets, just as they do in their national economies.
International forums such as the G20 recognise the importance of effective global economic governance.
Several international organisations, such as the International Accounting Standards Board and the Financial Stability Board, are reassessing their own governance frameworks.
The world is a global market and many Australian companies are competing on the international stage. Global integration, including international shareholdings and governance, raises specific regulatory challenges. Best practice global governance can only be achieved through effective international cooperation. The G20 has been actively participating in efforts to ensure that the framework of consistent global governance suits an interconnected, globalised world. Of course, one of the current key challenges is ensuring that European leaders quickly and effectively resolve the underlying debt issues within Europe, so that the rest of the world can assist them through the IMF.
Australia is an active participant in the forums in which these conversations are taking place, including the OECD, the G20 and the IMF. In these contexts, the Australian Government reaffirms its commitment to strengthening the global financial system. Trust, transparency and good corporate governance structures will play key roles in restoring confidence in global markets.
There is a raft of governance issues that must be addressed if we are to make the world a place where the opportunities of a global economy translate into jobs and prosperity for as many people as possible.
Accounting Standards
One of these issues relates to accounting standards.
As part of its response to the GFC, the G20 concluded that competing financial reporting systems create many problems. These include wasting the efforts of accounting standards-setters, increasing opportunities for regulatory arbitrage, and a lack of transparency, which was shown to be a key contributor to the GFC. The crisis also highlighted issues surrounding the disclosure of risk, including the materiality of non-financial factors in risk assessments.
As companies compete internationally for funds, the call for one set of global accounting standards has intensified. International Financial Reporting Standards, or IFRS, are designed to meet these demands.
The more countries that sign on to the IFRS framework, the greater the capacity for cross border comparison by investors. Already having embraced IFRS, Australian companies are in a competitive position compared to companies in other developed economies who may not have yet made this transition. Over time, this may lead to more opportunities for Australian companies to raise capital from abroad or even list overseas.
While this has not been without its challenges, the International Accounting Standards Board and the US Financial Accounting Standards Board are still working hard to achieve the goal of a single set of high quality global accounting standards.
The G20 also called for several improvements to the governance of the global accounting system. The IFRS Trustees and IFRS Monitoring Board are working on reviews to this end, although from Australia's perspective, we believe that the International Accounting Standards Board system is well governed.
Integrated Reporting
While the issue has not yet made it to the G20 agenda, integrated reporting is beginning to gain some momentum.
Integrated reporting is an example of a global initiative that is currently generating a great deal of interest. The International Integrated Reporting Committee has recently been established to pursue action on integrated reporting.
The Committee considers that integrated reporting demonstrates the linkages between an organisation's strategy, governance and financial performance and the social, environmental and economic context in which it operates. By reinforcing these connections, Integrated Reporting can help business to reach more sustainable decisions and enable investors and other stakeholders to understand how an organisation is actually performing.
The Committee also recommends that an Integrated Report be published as the organisation's primary report, equivalent in most jurisdictions to an annual report.
The International Integrated Reporting Committee is currently consulting on this topic. Its discussion paper, Towards Integrated Reporting – Communicating Value in the 21st Century, considers the rationale for Integrated Reporting, offers initial proposals for the development of an International Integrated Reporting Framework, and outlines the next steps towards its creation and adoption. The paper is designed to encourage input from all those with a stake in improved reporting, including producers and users of reports.
I would urge interested parties to consider the discussion paper, which is available online at www.theiirc.org. The deadline for submissions is 14 December.
To date, Australia's approach to corporate social responsibility reporting has been not to mandate any one system. The emergence of the IIRC has not changed this.
However, we are aware that stakeholders hold different views on this topic. Many other governments, including the European Commission, are moving to mandate at least some aspects of corporate social responsibility reporting.
For Australian companies operating internationally, it is becoming important that there is some consistency to these reporting requirements and that they are well road-tested for users and producers alike.
In taking their governance and reporting obligations seriously, it is important that Australian companies think hard about how to best report on these issues and express their views to Governments.
Executive Remuneration
If we turn our attention to how the international mood for improving governance has manifested itself in Australia, a prime example is the Gillard Government's reforms to the executive remuneration framework.
The new laws, which came into effect on 1 July this year, were based on the recommendations made by the Productivity Commission in its 2009 inquiry into executive remuneration.
I take this opportunity to thank the CSA for its close engagement with the Government as we worked through the finalisation of the executive remuneration legislation at the start of this year.
The Productivity Commission found that generally the framework in Australia was quite strong but that some refinements could be made to our framework to improve accountability and transparency while maintaining our international competitiveness.
The Government has been consistent in arguing that executive pay decisions should continue to be the responsibility of the board and that executives who bring value to a company should be appropriately remunerated for their work.
In developing and implementing our reforms, however, the Government has been equally as committed to the principle that remuneration decisions should be as transparent as possible and boards should be accountable to shareholders for these decisions.
The Productivity Commission noted that some of the concern among shareholders and the broader community about executive remuneration packages resulted from an apparent disconnect between the remuneration being awarded to some of our company executives and the performance of their companies.
Central to these reforms is the Government's desire to see a change in boardroom culture - one that encourages greater engagement with shareholders and ultimately greater accountability.
At the heart of these reforms is the 'two-strikes' test.
Under the 'two-strikes' test, shareholders can vote to spill a board and force fresh elections if there have been 'no' votes of 25 per cent or more recorded against the remuneration report at two consecutive annual general meetings. The spill resolution requires more than 50 per cent of the vote.
The 'two-strikes' test has been the subject of much attention during its first AGM season in operation.
It is a matter of public record that a number of companies have now recorded their 'first-strike' during this AGM season. Let me make it absolutely clear, however, that the success of these reforms should never be judged simply by the number of strikes being recorded.
The real test of these reforms will be whether they bring about cultural change in the way in which our boards are engaging with their shareholders. And on this front I think there is already some early evidence that cultural change is occurring.
As I have noted previously, there are those who opposed the introduction of the test during the policy development stage and, even now that the law has changed, there are still some who take the view that it is not necessary to give shareholders a greater say on executive pay decisions.
Over time I believe that the 'two-strikes' test will ultimately receive the same degree of acceptance within the director community as the old non-binding vote eventually did.
In fact, I think that there are some positive signs for shareholders in the actions of some of our leading company directors who are showing a willingness to embrace the spirit of our reforms.
Mr David Crawford, one of our most respected directors, recently told the Australian Institute of Company Directors that it was fair for the community to be concerned about executive remuneration because it had increased significantly as a business cost.
But importantly, Mr Crawford also made the observation that:
"...boards are going to have to communicate much earlier than the issuing of the notice of meeting."
I welcome Mr Crawford's comments which reflect an understanding of the Government's policy intention; that these reforms improve the level and culture of board engagement with shareholders.
A company's approach to executive remuneration and shareholder communication helps define the perceptions of how they operate as a company and the culture that they foster.
Communicating with shareholders on remuneration and beyond, should be seen as an important part of a board's activities because of its inherent impact on company value.
Reforming the AGM
Traditionally, one of the key vehicles for shareholder engagement has been the company Annual General Meeting. While it may be true to say that the introduction of the 'two-strikes' test has led to some renewed interest in the AGM, there are still many who raise questions about the effectiveness of the AGM as a means of encouraging shareholder engagement.
I think there is a strong case for us to review whether the AGM, in its current form, continues to best serve the interests of companies, their shareholders and other market participants.
There may be opportunities for us to learn from some of the approaches and experiences of other jurisdictions around the globe, particularly as an increasing number of companies are listing on more than one exchange.
I think there is some scope for a consideration of how technology might be better employed to support the effectiveness and maintain the relevance of the AGM. Such a consideration will include a discussion of the use of webcasting, online engagement and electronic voting.
There are currently no legislative impediments to the use of electronic voting and indeed some of the larger listed companies have already adopted it.
I would like to congratulate the CSA for their advocacy among companies and for the guidance they have published. I have no doubt that the take up of electronic voting will continue as technology further develops and companies progressively amend their constitutions to allow this form of voting at their AGMs.
There are also predictions of companies voluntarily moving towards annual board elections, something that is currently mandated for companies listed in the United Kingdom. I welcome these discussions because they show that directors are increasingly willing to subject their performance to the regular scrutiny of shareholders. This would provide an additional layer of transparency and accountability and would demonstrate a strong desire to genuinely engage with shareholders.
Another proposition that was highlighted by the CSA in 2008 was the possibility of separating the deliberative and voting components of the AGM.
This is an interesting notion 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.
With these points already being canvassed in the public discourse, I think that it is timely for the Government to also undertake an examination of these issues.
I am pleased to announce today that I will be making a referral to the Corporations and Markets Advisory Committee (CAMAC) to consider the future of the AGM.
I will be releasing the terms of reference later today, but I am certain that you will all have a range of valuable insights and I encourage you to participate in the CAMAC inquiry and I look forward to your submissions into this process.
The Role of the Director – The Centro Decision
In having a discussion about governance and how Australia is positioned in the global context, I am often presented with the issue of directors' duties. On the one hand, I have some stakeholders arguing that we need more obligations imposed on directors so they can be held accountable for the consequences of their decisions on investors, employees and the broader community. On the other hand, I have other stakeholders who put to me that the obligations already placed on directors threaten our international competitiveness.
In a world in which confidence in corporate governance structures has been shaken, I think that here in Australia we have standards for director accountability that are appropriate and promote transparent decision-making.
Arguably the most significant judicial case for directors this year has been the Centro decision.
While I understand that the instinctive response for some stakeholders was to point to the Centro decision as further evidence that the modern day director is forced to navigate a regulatory minefield, I think that a more balanced view should recognise that this decision has largely reaffirmed the need for directors to be accountable for the decisions that they take.
It confirmed that directors need to turn their minds to their obligations regarding the approval of financial reports.
To this end, it found that directors need to have an understanding of the company's economic environment, its business operations and how the company is run.
Implicit in this is that directors need a certain level of literacy and competency when it comes to reading financial statements in order to be able to comprehend the company's financial position and properly discharge their responsibilities.
I believe these findings are in line with what would generally be considered reasonable and appropriate prerequisites for a company director, not only in Australia but globally.
The Centro decision also offers a timely reminder that an important associated duty of directors and officers is the obligation to appropriately document decisions that are taken – and to ensure that minutes of board deliberations and relevant records are sufficient to reflect the decisions taken by the board.
Conclusion
Ladies and gentlemen, I know we all understand that the world needs effective governance if we are to prevent future financial crises.
In the aftermath of the GFC, this is the right time to ensure that we work towards achieving global consistency in financial reporting, greater transparency and accountability in our own domestic regulatory frameworks and more effective international systems of governance.
Once again, thank you for giving me the opportunity to speak with you today. I trust that you are having a productive and thought-provoking conference and I look forward to continuing to work closely with you all into the future.