14 March 2003

Address to ASIC Summer School, Sydney

I thought what I would do this morning in a relatively short speech is just to talk about where we are at with CLERP 9, the importance of what's occurring in terms of the debate on corporate governance and some of the changes that you can expect to CLERP 9 once the Cabinet makes its final consideration and the legislation is drafted.

Can I just say that it is hard for one day to go by in Australia where there is not some expert talking about corporate governance. I worry about the debate in some respects because as if it is a new discovery. It's becoming a trite a clichéd sort of debate. I worry that the shareholders themselves and the marketplace more generally have their heads filled with clichés about good corporate governance as if it is some sort of the ideal solution to corporate governance. My view is that good corporate governance has some sound principles involved in it. It ultimately comes down to the board then making sure that they are well informed about the affairs of the company and ensuring that they subject the executive to strong discipline and the shareholders are well informed in a timely manner about the affairs of the company. But I am absolutely certain having spent about 5 years looking at these issues that one size fits all is not the best approach. I am absolutely certain that black letter prescriptive law is generally not the right approach, because the tick-a-box approach has failed in virtually every jurisdiction where it is tried.

Can I say, particularly for our overseas guests, that the development of the Corporate Governance Council, which did flow from an ASIC initiative, is a very important contribution to the building of the institutional framework for policy making in Australia. I think it has turned out, so far, to be a very constructive body which I think can make a very important contribution. Can I say that the document which is going to be released will be an important document and to get those 19 or so groups sitting around a table to actually agree on a document I think will be a phenomenal achievement. It will never satisfy everyone but I think for a group that has so many stakeholders on it to get where they have got, they have certainly moved the high bar higher but could I just say I would certainly not want to see them back off from what they have done. There will be a natural tendency for the business council, the directors association and others to try and lower the bar, can I say on the record here and I think we have at least one member of the press here, that I would certainly from the Government's point of view not want to see any backing off from the iterations of the document that I have seen and certainly once it is released.

Can I say the Government will ensure that CLERP 9 has a belt and braces approach to what the corporate governance council and ASIC are doing. We will ensure that legislative provisions are there to pick up the slack. For example the problem you have got with remuneration, this remuneration debate that is going on, is that you can have a best practice guide that says how you should disclose remuneration. I believe that it should be in real time, it should be up front and it should be at the time the contracts are entered into. I think if that was the case you wouldn't have this debate that is going on about golden handshakes. If everyone disclosed all of these things, the market would be informed, there would be an informed debate about how you should be renumerate officers, directors and executives, key employees, there would be a market focus on that. It would help generate sound remunerative principles so that people were remunerated based on performance. If someone does perform well and does get paid $33 million it won't be a shock to the market and we will all be able to make an assessment about whether that person deserves that money.

I think if we do believe in a free enterprise economy, if we do believe in building enterprises, if we do believe in expanding the economy then I don't think we should be concerned about people earning considerable sums of money if they built wealth for their company and therefore the members of that company, the shareholders. I don't think Australians will begrudge people being well remunerated for extraordinary performances. For example for my own State of Western Australia I don't think anyone begrudges Michael Chaney earning nearly $8 million because he has added enormous value to his company during his tenure and he continues to perform very successfully.

So the government is faced with the problem of whether a best practice guide such as that being put out by the corporate governance council will be adopted on effectively a voluntary basis. The problem of course is the enforceability of it and that is the issue we have addressed in CLERP 9 in relation to giving ASIC an infringement penalty power. It is a very important provision in CLERP 9. I am being very heavily lobbied by business to dump that, but I have said to anyone who asks that we will not be dumping it.. It is a crucial requirement if you are going to have a continuous disclosure regime with ethics that you have a range of appropriate penalties in place. Everyday that goes by I am more committed to the importance of that measure. It's important therefore to see that if companies aren't prepared to comply with the best practice guide that there are appropriate penalties in place and I think in relation to disclosure of remuneration that it will be very hard to enforce unless you have a legislative requirement and of course under CLERP 9 we are looking very closely at appropriate provisions in the law.

There are some provisions in the law at the moment which have been ineffective for a number of reasons. Some of those provisions were put in place in the Senate on a policy on the run basis. They were literally drafted when one of the CLERP bills was on the floor of the Senate. They were not discussed with ASIC, they were never discussed with Treasury or business, they were drafted by Labor and the Democrats on the run, put into the law and have been as ineffective as I predicted they would be. The Government's reviewing that provision. The Government's reviewing the legal requirements about disclosure and we will be in CLERP 9 bringing forward some new proposals in relation to disclosure of remuneration which are thorough and enforceable and I think will lead to much better disclosure and a much more informed market place.

Could I just go to some of the other areas of CLERP 9 where I will be looking at some further enhancements. There has been concern for example around the policy decision to give legislative backing to audit standards. I think many people in the accounting profession have challenged us by saying these are very subjective standards, they are very hard to put in legal language and again I have been asked to reconsider that policy. I have reconsidered it and I reaffirm that the government will give legislative backing to audit standards. The policy in CLERP 9 said that we would give legislative backing to the core standards. I was urged to review that because some people said it was hard to determine what's core and what's not core. I have reviewed it and we will in fact be giving legislative backing to all of the standards and we will do that in a diligent fashion. My view has been that you should be able to give audit standards the same force as accounting standards and the way I intend suggesting to Cabinet that we do that, is that we effectively make the audit standards disallowable instruments in the same way as accounting standards are.

Can I say there are also concerns raised about the proposal to have a five-year rotation of auditors because of the size of the Australian marketplace and you may recall that the original working party on audit independence recommended five years. Professor Ramsay's report overturned it and said we should make it seven. CLERP 9 came back and said no, five is in line with international best practice and we are throughout all of this trying to harmonise as much as we can internationally and so we have five years. I think there are, however, some genuine concerns about regional areas and smaller market places and so forth where five-year rotation may be not desirable. In all of these things we are trying to get a good regulatory outcome for shareholders and so what we are looking at at the moment is to give ASIC -- and I sure David will be really pleased to hear this -- ASIC an exemption power. We looked at big/small tests and whether we should make it different for smaller companies and larger companies, but I think they are always fraught so what we have decided to do is give ASIC a power to relieve companies.

Could I say that in relation to the debate around CEO/CFO signoffs,I was never a fan of that because in America it was a signoff to the shareholders and I think one of the things we have got right in Australia is keeping lines of responsibility within companies quite clear. I think one of the great reforms this government put in place was in fact the Managed Investments Act which made amongst other things a very clear line of single responsibility, doing away with the broken lines of responsibility under the previous managed investments scheme legislation. My concern with the CEO/CFO signoff was that if you bypass the board you are actually relieving the board of some duties and what we are considering is that there be a CEO/CFO signoff but that will be a signoff that is made to the board so that you keep in place that line of responsibility of the executive to the board and the board to the shareholders..

Also as many of you in ASIC know, we have been very keen to address the issue of analyst independence which of course has caused major problems particularly on Wall Street, but it is not to say that we are immune from those problems here in Australia. It is very important when people receive advice about their investments they know that advice is independent and is based on good information and it isn't biased by some form of coercion within the organisation. CLERP 9 had a look at this. I have had another very close look at the issues and how you can improve the law in the regulatory environment around us and we will be proposing some further measures within the law which will give ASIC, I think, a far clearer piece of legislation to hang any policy guidance off. There will always be conflicts of interest in these stockbroking houses and merchant banks. I don't think you can get around it. What you do need to do is ensure that people who run those businesses manage those conflicts and ensure that where there are conflicts or potential conflicts they are properly disclosed, and so the law and the ASIC guidance that flows from that law will be improved, will be made more onerous and made far more clear.

We are also looking at a proposal to establish a financial reporting panel along the lines of the United Kingdom's model. We are also looking closely at the detail of how the financial reporting council will work as a public oversight body and we will be talking to ASIC about that as well.

I hope to get CLERP 9 to Cabinet within the next few weeks. Obviously the Government is very busy with important international security issues at the moment, but I am keen to keep CLERP 9 on schedule and I would like to see the draft legislation out in this half of the year and the legislation to be passed by Parliament in the second half of the year.

Could I conclude by saying that CLERP 9 won't be the end of corporate law reform in Australia. I have already started work with treasury officers and other stakeholders in developing a further number of chapters in the CLERP program. There is still a lot of work to be done to ensure that we keep improving Australia's corporate regulatory environment with a view to making this a world-renowned place to do business with, a well informed market place with high levels of participation and a place that is very welcoming to international capital. I think the ultimate aim of all of this is to ensure that people can invest with the confidence and that they know that they are going to do so in a well regulated environment where they are well informed of what is happening to their money.

I am also very determined this year to make sure that takeover reform takes place in Australia. I said last year and I will say it again this year: the takeover law in Australia is not working as effectively as it should do. I pushed in the first round of CLERP reforms for a mandatory bid rule, or a follow on rule. If we can ensure that shareholders have the benefit of more offers for their shares, that if existing boards know that there are vultures swooping overhead and that bad corporate governance and bad business management will not survive for very long because better managers and better directors are looming and lurking and waiting to swoop at vulnerable companies, then I think that's a good thing,. A very important part of the debate that's gone missing over recent months is that a mandatory bid rule or at least reform in that direction would in fact create a more vigorous market for control.

Thank you again David for having me here today. ASIC's respect within the community from my perception has risen over the last few years. I think this year has been a particularly good one and I am very pleased and proud to have ASIC as part of my portfolio.