26 November 2010

Opening Keynote Address to the Australasian Investor Relations Association Conference 2010

Thank you Ian (Matheson, CEO of AIRA) for that warm welcome and introduction.

I would also like to thank AIRA Chairman, Mr John Hobson and the Board of the Australasian Investor Relations Association for the invitation to address your 2010 Annual conference.

As the Parliamentary Secretary to the Treasurer, I have responsibility for competition policy, consumer affairs, corporate law and financial literacy.

In my first two and a half months in the role, I have had the privilege of meeting a large number of stakeholders, representing corporate, shareholder, professional, consumer and community interests.

These meetings have been instructive as they have informed me of the range of perspectives that exist across the various stakeholder groups.

Most significantly these discussions have demonstrated to me that there is a broad consensus that sound public policy outcomes require broad consultation, rigorous analysis and effective communication.

In the area of corporate law, the discussions have also demonstrated to me the trade-offs that policy maker's face. Corporate law is an important means by which the State regulates markets and the behaviour of market participants.

In regulating markets, it is my view that the law should balance a respect for the efficiency of resource allocation that rational economic behaviour can deliver, against an acknowledgement that markets are not perfect nor do market participants always act rationally.

A strong and sustainable market economy is one that provides for the efficient and effective regulation of markets, while encouraging investment and rewarding wealth-creation.

It is against the backdrop of these guiding principles that I intend to share some of my thoughts on the importance of developing a new brand and culture of corporate citizenship in Australia.

The conference theme — a wider view of value

It is a great privilege to be asked to give the key note address at this year's annual conference, which has the theme of "A wider view of value."

Indeed, it is on this very question of how broadly we should define the notion of "value" that I want to focus some attention.

When considering a company's value or the value of an equity holder's interest in a company, we may seek to quantify "value" by reference to the share price, or any one of the various measures of profitability, yield or return on investment.

Whichever of these measures one relies upon, in all of these cases, "value" is generally held to equate with the proposition generically described as "the best interests of shareholders".

Very often we hear of this notion of "the best interests of shareholders" as if it were irreconcilably opposed to the best interests of our environment, the company's customers, or the broader community at large.

Whilst it would be naive to think that these factors are irrelevant to market perceptions of a company's performance, it is my view, and I believe that there are a growing number of companies, executives, shareholders and analysts who also agree, that we must conceive of the notion of "value" and "the best interests of shareholders" more broadly than by mere reference to any short term measures of share price, profitability or return on investment.

I believe that there are a number of factors that have coalesced to mean that it is no longer possible to conceive of the notion of "the best interests of shareholders" without having regard to questions of "reputational value" and the extent to which the conduct and leadership direction of our corporations are aligned to broader notions of community expectations.

I think this is particularly the case where the ownership interests of a company are widely held, where the corporation assumes a role of particular significance within the broader economy, where the corporation holds considerable market share and where the goods or services provided by the corporation are an important part of the consumption needs of the vast majority of households across the economy.

In these cases, I am firmly of the view that our corporate leaders must ensure that the discussions that occur around our boardroom tables, and as part of the endless series of institutional investor roadshows and analyst briefings, take into account the views that are being discussed around the kitchen tables of households right across this country.

There are many factors driving this need to redefine these notions of shareholder interest and value.

Increased participation of retail investors and compulsory superannuation

Notwithstanding the recent impacts of the global financial crisis, the last two decades has seen rapid growth in the number of listed companies and in overall market capitalisation in Australia.

The introduction of the superannuation guarantee and the associated increase in funds under management has contributed much of the growth in institutional investment in equities over this period.

Through compulsory superannuation, more and more Australians have assumed an increased exposure to movements in our equity markets as they grow their retirement savings.

But over the same period of time, Australians have increasingly turned to share ownership as a way to grow their wealth.

In the late 1980s, fewer than 10 per cent of adult Australians owned shares. By the end of 2008, that proportion was up to 41 per cent. And this figure does not even include the vast number of Australians who own shares indirectly through superannuation.

The privatisation agenda of the past two decades has undoubtedly contributed to this change. The privatisation of entities like the Commonwealth Bank, Qantas and Telstra were specifically marketed to 'mum and dad' investors who sought to secure their own private interest in the wealth of these iconic Australian companies.

These large-scale public floats, along with the growing popularity of online share trading, have helped to break down the barriers to entry into the share market for everyday Australians.

The fact that there are an increasing number of big Australian companies that have a more diversified investor base, with a larger number of retail investors, than was previously seen in the market, means that the boundaries between the interests of shareholders, customers and the broader community at large are not as distinct as may have been the case in the past.

Indeed, for many of you, the changing nature of share ownership and the increasing number of retail investors in many of our largest companies poses its own challenges from the perspective of shareholder communication and stakeholder engagement.

As more and more "mum and dad" investors pay attention to financial markets and attend the annual general meetings of some of our biggest companies, it is becoming more common for those matters being discussed around the kitchen tables of our cities, suburbs and regions to be raised with those presiding over decision making at the boardroom table.

Market share, cost of living and corporate failure

The fact that many of our largest companies are so important in supplying the goods and services that Australian households rely upon has increased the pressure upon corporations to respond to community expectations.

For example, in the areas of banking, petrol, grocery, energy and telecommunication services, we see large corporate players exercising considerable market share supplying goods and services that form a large component of the budgets of Australian households. Where families and households face growing 'cost of living' pressures and are faced with what they sometimes see as limited choice, we can see growing pressure for companies to explain their conduct and become more responsive to community expectations.

The events of recent years, with the global financial crisis, and the unacceptable behaviour of many of the world's large corporations and the actions of governments – generally in other countries – to provide taxpayer support to some of these corporations has given rise to even greater resentment on the part of many in the community who believe that they have had to bear a disproportionate burden for bailing out those who were the source of the problem in the first place.

These considerations have, in many cases, led to an increase in distrust between consumers and large corporate interests.

Reputational risk can give rise to regulatory risk

In this climate, there is a particular obligation on corporations to behave responsibly, to manage the expectations of their shareholders, customers and the community, and to explain their conduct and the reasons why they are pursuing their corporate strategies, especially when these strategies exacerbate the 'cost of living pressures' that many in the community are already facing.

Where corporations fail to do these things and behave in ways that are not acceptable to the broader community, in a liberal democratic society, they will not only attract the reputational risk associated with consumer anger, but will also inevitably face the threat of greater regulatory intervention by democratically elected governments who must remain responsive to the needs of their communities.

Whilst regulatory intervention is never the option of first choice, where corporations seek to hide behind a narrow view of "value" and "the best interests of shareholders" they may well be acting contrary to the long term interests of their shareholders, by attracting reputational risk and the possibility of regulatory risk that this may bring.

We have seen from the recent public debate around banking services and rate increases above movements in the cash rate, how corporations engaging in behaviour that is out of step with community expectations can lead to community anger, then reputational risk and a debate around the possibility of further regulatory intervention.

Executive Remuneration

A good example of where regulatory intervention is being pursued to curb corporate practices that are out of step with community expectations has been in the area of executive remuneration.

I have responsibility for implementing the government's reforms announced earlier this year in response to the Productivity Commission inquiry.

In the coming weeks I hope to release draft legislation implementing these reforms for public consultation.

Against this backdrop of community concern, the Gillard Government's executive remuneration reforms are driven by the need to give shareholders a greater say in executive remuneration decisions, improve the capacities of boards, reduce conflicts of interest, and eliminate incentives that encourage short term, risky corporate decision making.

These proposed reforms will include a "two-strikes" test to strengthen the non-binding vote, increase transparency of the use of remuneration consultants, simplify disclosures contained in the remuneration report, and prohibit the hedging of incentive remuneration.

In addition, the Government's response includes a commitment to consult on a further proposal, not identified in the Productivity Commission report, in relation to the 'clawing-back' of remuneration in the event of a material misstatement in a company's financial statements.

These reforms will give shareholders greater say in executive remuneration and will help ensure that corporate decisions in this area will become more closely aligned to community expectations.

The market is already moving

It is of course, only fair to acknowledge that many companies have already begun to take a wider view of "value" and what is in the "best interests of their shareholders".

Some of these changes are being driven by investor demand. For example, many institutional investors are taking even greater note of how a company's reputation is playing out in the wider community and how that contributes to value.

A recent AIRA survey of institutional investors found that more than a quarter use social media on the internet to tap into broader attitudes towards a company's reputation to inform their investment decisions.

As the world emerges from the global financial crisis, corporate leaders must acknowledge that their actions are under increasing scrutiny and, to the extent that they choose to ignore the community expectations arising from this scrutiny, they may be acting against the long term best interests of their shareholders.

Many families living in our cities, suburbs and our regions have paid a price for the actions of many corporations a half a world away, and now they are looking even more closely to Australian companies to step up and lead the world in defining a new brand of corporate citizenship.

In this context, responsible practices and environmental, social and governance factors will become an increasingly important part of our business environment.

Demand for new types of disclosure

The Government has been fostering a greater awareness of responsible practices that will contribute to the long-term profitability of corporate Australia and deliver benefits to the wider community.

We are not about to mandate corporate social responsibility. This would only stifle innovative responses from business, add to costs, and ultimately be counter-productive.

However, the disclosure of non-financial information, including corporate governance, social and environmental factors, is to be commended.

The Government has shown our support for corporate social responsibility initiatives by funding the St James Ethics Centre, as well as by participating in the Global Reporting Initiative.

The St James Ethics Centre is an independent not-for-profit entity which promotes ethics in business. It also plays a role as the "hub" of corporate social responsibility in Australia.

The St James' Hub now comprises the Global Reporting Initiative, the Corporate Responsibility Index, the UN Global Compact and the Australian SAM Sustainability Index.

In conjunction with these partners, St James is working to promote responsible business practices and harmonise approaches to increase the uptake of measuring, monitoring and reporting in corporate responsibility and sustainability.

The Government is also involved with the Global Reporting Initiative, which we hope will help to promote ESG reporting without prescribing a one-size-fits-all approach.

Board diversity

The Government is also involved with work on board diversity.

I would like to briefly take this opportunity to acknowledge the work that the Australian Institute of Company Directors has been undertaking with the Government on the appointment of women to boards.

More than 70 high performing women will receive scholarships, entitling them to attend the AICD company directors' courses.

The Government is also setting a target of at least 40 per cent for the number of women on Federal Government boards. We consider that these boards will make better decisions when they are representative of the entire community.

Conclusion

We are keen to promote responsible business practices while allowing companies to develop the corporate social responsibility framework which best suits their circumstances.

As I said earlier, I believe there are a growing number of companies, executives, shareholders and analysts who also agree, that we must conceive of the notion of "value" and "the best interests of shareholders" more broadly than by mere reference to any short term measures of share price, profitability or return on investment.

Genuine community consensus is best achieved through cooperation rather than the heavy hand of State regulation.

The Government looks forward to working with you all to engage in a sensible and informed conversation about how to bridge the divide between the needs of corporate Australia in contributing to our national wealth and the concerns arising from the community's legitimate expectations of corporate social responsibility.