14 March 2003

"Recent Developments and Trends in Corporate Disclosure and Governance" - Address to the Australasian Investor Relations Association

CONVENOR:Welcome back to our seminar. It gives me great pleasure to welcome Senator the Hon. Ian Campbell. Senator Campbell needs little in the way of introduction. He was appointed Parliamentary Secretary to the Treasurer in December 2001 and this role has responsibility for corporate law, corporate governance and all aspects of financial services. It also has responsibility for ASIC, the ACCC and the Foreign Investment Review Board. Senator Ian Campbell will address us today on recent developments and trends in corporate disclosure and governance. He will be happy to take questions at the end of the address. Could you join me in welcoming Senator the Hon. Ian Campbell.

SENATOR IAN CAMPBELL: Thank you very much for inviting me to the forum. As I recall when I spoke to you last time, CLERP 9 was not even embryonic. We obviously had a whole range of challenges before the government. We had sort of the immediate post-Enron, WorldCom, Global, HIH, One.Tel confronting us. I think I had just had a meal with Alan Cameron who reminded me there had been no corporate collapses at all during his term as the securities commission chief. I started to wonder about how lucky I was to come back into the Treasury portfolio, having had so much fun writing CLERP, 1, 2, 3, 4, 5, 6 and 7 and basically being there at the same time as Alan was and writing policy in a relative benign environment.

To come back three years later and, as I said at a conference in Melbourne this morning in relation to insurance, I had been briefed by Treasury before Helen Coonan and I had been given our bits of the portfolio, and Treasury in a private briefing had told me that basically medical indemnity insurance and insurance was going to hit the fan any day, that Australia had become a more litigious jurisdiction than even California, where it's so renowned as a litigious jurisdiction in that area that they make movies about it, that public liability insurance was in great stress - there were basically all of these enormous stresses in superannuation, insurance, a whole lot of areas, and terrorism insurance, of course.

So when they finally broke up the portfolios, I breathed a sigh of relief coming back into a relative comfort zone of Corporations Law. But, since then, corporate governance issues have dominated the media for much of that time. I think we should, although you could get a little cynical about it, welcome the focus on the debate. The focus does come from the media in surges, depending on what's occurring in the real marketplace.

The surge of interest in corporate disclosure and corporate governance tends to breed entire classes of experts who basically know exactly how every company should be run, how boards should be structured and how everything should be disclosed. I think a few of us in this room have the right to be a bit cynical about the focus and the energy that goes into it. I think Nick Greiner was quite right: It will be far more interesting to see the product of all of the flurry of interest and excitement two or three years down the track. The real judgment of what occurs at the moment should be judged looking back in a few years time.

I may have said this last year but I will certainly repeat it because it's what drives me in this business. We need to, as far as is politically and practically possible when we look at disclosure laws and governance issues and drawing policy -- either at the Federal Government level or at the ASIC level or at the ASX level -- try to not allow the political influences and the sort of populous influences that can create stress on you at the time to influence the policy too much. You need to try and design policy that will stand the test of time.

I find great satisfaction looking back on most of the CLERP reforms that have been implemented and have now been law for coming up to five years where there's been significant success there. They have, in many respects, been very good changes that have improved the Australian corporate regulatory environment. Most importantly, and I think we shouldn't lose sight of this and Nick was trying to get us to focus on that, we should think about the benefit to the economy, the benefit to the economics of companies, the encouragement to enterprise and the benefit that creates to all Australians. You need to bear that in mind. You don't want to overregulate a marketplace and therefore stifle enterprise. We should be all about encouraging enterprise and never apologise for it.

I make the point today that, getting carried away with the corporate governance debate by putting too much focus on the exact wording of a particular rule or how you might draft a perfect re-drafting of section 300A of the Corporations Act, is not really the answer of how to derive good corporate governance or better governing of your company. I was pleased to see that Fiona Buffini, who is here from the Financial Review, ran a little line in amongst two or three media releases we put out yesterday, which was that corporate governance best practice needs to be driven by private initiative. I think Nick was saying the same thing.

It has to be a cultural thing driven within companies. Yes, you can comply with the law; you can comply with ASIC policy directions; you can comply with best practice guides; but, ultimately, you have to develop a culture within your organisation. The vital thing about doing that successfully is not so much that you can be regarded as a good corporate governor. That's going to be important but good corporate governance is not the end; it's really just part of good performance. If you get it right, you will get the triangle between the shareholders and the board and the management, you will get that balance right, and you will ensure that the shareholders are happy to be members of your firm, members of your company, and other people will want to be members of your company and therefore buy your shares and drive the share price up.

I thought what I would do today in this relatively short time is I will try and wrap up in a total of 20 minutes. The topic I have been given talks about recent trends in disclosure and corporate governance. All of you in this room do know at least as much about that as I do. What I can do is tell you where we're at with CLERP 9 and what we have in mind post-CLERP 9. I think that's the most important thing.

Most of you know very thoroughly what was in the CLERP 9 policy paper that was released last year. It has gone through the normal diligent process that the corporate law economic reform program packages have done in the past. And that process is something we should all be proud of. Your organisation and many of you in this room have been a part of the discussions that have led to the first seven successful chapters of CLERP, which have now all passed through parliament as at last week. Many of you have been involved in not only the concepts that led to the development of CLERP 9 but also the detail and the follow-up.

It might be slightly self-serving to say this, but I think the reason we had the capability in Australia to bring pull together a Corporate Governance Council under the auspices of the Australian Stock Exchange -- growing from a initiative that I think it is fair to say, Alan, was Julian Segal's concept at ASIC under your chairmanship at the corporate governance roundtable, to actually pull that together from 21 groupings and to get the quality document that was released on Monday and put out into the marketplace was in itself a really great achievement for Australia and for what we've created here.

I think the CLERP process can actually take a little bit of the credit for that, because we did develop a sort of incentive and reward system for organisations, many of whom are represented in this room today, to bring forward ideas, debate the policy ideas that we put out as a result of those early consultations, tell us where we got it wrong and tell us where we can improve it. I think the important reward mechanism we gave to all the groups around Australia, many of whom ended up sitting around the CGC, was that they were able to see the benefit of that put into law relatively quickly.

Without casting aspersions on previous processes -- I don't seek to do that -- but the processes were a lot more ad hoc. A lot of people, for example, CASAC would put a lot of work and energy and mental effort and time into producing a reform idea. For example, the Managed Investments Bill, and then just see it sit in the too-hard basket. So CLERP did create a diligent processes that really gave a lot of sensible people a seat at the policy table. I think CLERP deserves a bit of credit for that.

CLERP 9 is going through the same process. We've had fantastic feedback - generally, most of the measures have been well-received. We will be going to cabinet shortly with the final policy proposals, which will be significantly enhanced in a number of areas. I might just talk about those, even though they are no great secret. I won't go over all of the proposals in CLERP 9 because you should know them.

The enhancements to CLERP 9 which we're considering fall into a number of areas. We're looking at the CEO, CFO sign-off on accounts, but the sign-off would be to the board to ensure we keep that relationship between the management and the board intact. I think in America they basically went to a public sign-off or a sign-off to all the shareholders. We don't think that is desirable in the Australian context.

There was strong lobbying about modifying the five-year rotation proposal for auditors that was in the original policy proposal. Rather than take that back to seven which a lot of people were lobbying for, we decided that five would be better as the rule -- for a number of reasons -- because we think it is good policy but also it matches best practice in the European zone and in the United States. But in recognition of the fact that there may be some exceptions in regional areas or for smaller firms, we are considering giving ASIC a relief power in that respect.

The other thing that we are giving serious consideration to, and I expect will be supported, is the establishment of a financial reporting panel where you can refer disputes over accounting treatments and hopefully, with the success of the takeovers panel, keep a lot of those matters that shouldn't go all the way to court out of the court.

We made a decision that, again, has been reported to some extent but not accurately yet. We made a decision that the review of section 300A, which was basically trying to fix up errors made on the run when a last-minute amendment was tacked on to some of the CLERP legislation at the behest of the Australian Labor Party and Democrats. Even though we warned them that putting a provision in the law without any consultation with the regulator, without any consultation with stakeholders or users was fraught, they went ahead and did that. We are still some years down the track trying to fix it up.

We had a bill called the Corporations Law Amendment Bill 2002 out for public consultation. We've received comments on that and we've decided basically to roll that legislative reform process into CLERP 9. So CLERP 9 quite properly has caught up and overtaken that review process, and CLERP 9 will involve dealing in greater detail with a beefed-up and more practical, modern corporate remuneration disclosure proposal. I've got the proposals actually before the Business Regulation Advisory Group now.

When the cabinet has concluded consideration of CLERP 9 which is, as I said very shortly, I will present to the world an updated CLERP 9 policy which will then very quickly be turned into legislation. I expect the legislation to be available for public disclosure, again, for a sensible period. The statutory period under the corporations agreement is three months for a number of the provisions and that, I think, would be appropriate. That will allow the joint parliamentary committee to look at it and still allow for the legislation to be debated and passed through the Parliament by the end of the year.

I've made the comment before that the CLERP 9 process has been, I believe, a high quality one. It contains a lot of measures that will improve the law. It will improve the quality of disclosure in the Australian marketplace. In many respects, it will see Australia move to a leadership position.

I support what Nick Greiner said about quarterly reporting. The government did look at that and rejected it as part of the discussions of CLERP 9. We believe that the continuous disclosure regime is a piece of law that marks Australia as a leader in terms of quality disclosure to investors in real time and that the CLERP 9 proposals to increase civil penalties and to give ASIC a new penalty power, although not entirely popular with the business community whom I consult with, will in the government's view be an important enhancement to that.

If I could turn to a couple of other issues which I think are particularly important in my last five minutes. The government believes that enhancing corporate governance practice should primarily be a matter of private initiative, although there are things that the law will have to handle. We have to make sure that penalties for non-compliance are appropriate but, ultimately, it needs to be driven by a business community who does believe in having an informed marketplace and shareholders who are informed about what the company is doing.

If we just purely rely on rules and law, we will be very disappointed. What the government also will be doing is progressing, for example, measures such as the CLERP 1 proposal in 1997 to move Australia towards international accounting standards by 2005. That I regard as a very important disclosure measure. It will ensure that Australian shareholders will be able to assess the accounts of companies, wherever they are, with one set of financial reporting language. It's an incredibly important initiative.

I am heartened to see that in the United States there seems to be, for the first time in a long time, very significant movement towards accepting international accounting standards for reporting purposes in the US. In fact, the SEC chairman said back in October, "If by 2005 there has been sufficient progress in the improvement and short-term convergence of accounting standards, then 2005 could become a target for the SEC to determine whether foreign private issuers in the US, which prepare accounts in accordance with ISD standards, should continue to reconcile their accounts to US GAAP." It's a bit of light and a bit of a hope. I regard it as important.

I also regard it as important in our own region. I announced at a conference of the Investment Financial Services Association recently that I want to have our government put a lot more effort into regional convergence, regional harmonisation of corporate regulation so that we can create over a reasonable period of time -- it is not something that could possibly happen overnight -- a single market for financial services and financial products in the Asia-Pacific zone, including America, China, India and Asia more broadly.

It will require an enormous amount of work. I will be producing some documents in relation to the proposal over coming months. Again, it is very important from the quality of Australia's corporate disclosure and the governance of our companies that we understand we are working in a very competitive global marketplace.

I think that if we don't get the governance structures right and we don't have them broadly accepted within the business community, then we will actually fall backwards and the cost of capital will go up. These are the vital issues that a lot of people who focus too much on the rules and on what item 7 in a particular guide says. If you don't get this regulation right, if you don't get the market perceptions right, then you will drive up the cost of capital very quickly for Australia. We want to be a leader in our region, a leader in the world and take the region with us to improve the market for enterprises who are seeking to raise capital anywhere in the world.

Could I turn finally to the issue of governance. I think there has been a very healthy focus on the issue, although it needs to be broadened. There are a couple of things that need to be done in relation to governance in the financial services sector. We've had a massive focus on how companies are governed and the rules that they comply with. One of the things that has created some asymmetry, however, is that we have superannuation funds, particularly industry super funds, lecturing company boards on how they should govern themselves.

I think it is now time for the government and industry generally to look very closely at how super funds are governed and how you could ensure there is clear feedback mechanisms between the members of those super funds and the people who govern those funds -- in a situation where the members of funds in many cases do not have the choice of voting with their feet if those funds perform badly, the feedback mechanisms for poor performance by super trustees and particularly industry funds are very perverse. I think we have a system that is basically designed to fail unless there is significant reform there.

The government is committed in the first instance to giving citizens who are in a fund to the right to change fund if they, on their own assessment, decide that that fund isn't being well-run or doesn't meet their needs. The Labor Party and the Democrats have decided not to help us in that regard. Accepting that political reality, the very least that people who care about corporate governance can do is ensure that the members of those funds have a clear understanding of the responsibilities of the trustees; they understand how the trustees are appointed; they have a say in how they are appointed and, dare I say, even give them a vote on it. I believe that's a very important area that has been ignored for at least the past 10 or 11 years.

Finally I do think we need to ensure there is maximum contestability within the marketplace for corporate control. I firmly believe that looking at marketplace pressures for improving the incentives for good governance of companies are still well worth considering in Australia. I believe that, for example, reform and further liberalisation of Australia's takeovers law should be very much on that agenda. Thank you very much for having me here today. I think I have just about stuck to the schedule. I'm very happy to field some questions.

QUESTION: Senator Campbell, could you just say a bit more about where you think there is a need for reform in takeover legislation and regulation?

SENATOR IAN CAMPBELL: The mandatory bid rule is one that we put up in 1998, I think it was, which got knocked off by the Labor Party and the Democrats in the Senate. We basically worked up a compromise proposal which we thought would make all but a few people relatively happy. The Democrats said they would support it early on and then I think did some sort of deal with the Labor Party in relation to some other amendments, and it was defeated. But they did, to Andrew Murray's credit, say they were attracted to the idea and they would give it a few years to make an assessment about whether they should go back.

I think we've now had enough time for the Democrats to have a look at it again. There has been a lot of work by the takeovers panel and by the Securities Institute to try to come up with a compromise proposal that will keep the broad takeovers community happy. I'm not convinced that the compromise that has been proposed, which actually allows a cooling-off period once an agreement has been made, actually gets us to where I'd like to go.

I think the concept generally should be that, if a bidder makes an agreement with another shareholder to buy effectively a controlling stake, the same consideration should be given to all other shareholders. That's the follow-on rule, pure and simple, as it works in the United Kingdom, for example. I think that would be a significant improvement in Australia.

A lot of people don't agree with me -- I respect their views. This is not before the government at the moment, but there are a range of other amendments that the takeovers panel are suggesting we should put in place as a tidy-up after a few years of their operation. I think they are minor housekeeping matters virtually. But I'm not unattracted to a review of even the threshold. It's been 20 per cent for a long time. No-one has challenged whether that is a good level or not. It is lower than many other jurisdictions. But if you are looking at takeovers reform, it wouldn't be bad to look at some of those fundamentals. Peter will give me a nod and a wink if I am wrong but I don't think the threshold has been looked at since the mid-1980s. I think 20 per cent actually works quite well. I don't think it's broke, so most people would say don't fix it. But I don't think it would be bad to actually review that. I'm happy to basically take people's opinions on it.

It is a very important part of corporate regulation. You need to get it right. You need to make sure that it is in harmony with what happens around the rest of the world. But you also need to recognise that the Australian marketplace is very different to most jurisdictions just because of geography and where we are. You have an interesting curve if you plot the sort of market captured by our top companies through to our lowest companies and the fact that we have a business community in Brisbane, Sydney, Melbourne, Adelaide, Perth and Hobart all with slightly different features -- you can't naturally pull something out of the city of London and graft it onto Australia. But you can look at the fundamentals and try to pick the best bits and adapt it to Australia. I think the takeovers panel has been a good example of that.

QUESTION: ... The issues of the fining regime that you touched on before because that's obviously something that the community and today's topic is all about.

SENATOR IAN CAMPBELL: I would need an enormous lot of convincing -- that hasn't taken place to date -- to back off from it. The government's is very committed to it; the Treasurer is very committed to it; and I would be very surprised if that wasn't in the draft legislation. I think as Nick has said previously about the application of the new listing rules in relation to correcting markets, how successful it is and whether it is as bad as the detractors think it is will, in some respects, depend on how it is applied. How the ASX and ASIC work on it.

I won't just say, "Trust ASIC. David Knott is a good bloke. He won't abuse it." No-one will accept that. But there are some safeguards in there which aren't highlighted by the detractors. There has to be a hearing before ASIC imposes the penalty. If the company is absolutely certain that they are on the side of the angels, then they can go where they would otherwise go anyway and that's to a court and have it dealt with in that manner, which is what would happen anyway.

I always say that the reason for having it is that if you've got -- who has got dogs in this audience? You can tell the dog lovers. When they're puppies and they dig a hole in the garden, if you discover the hole a few hours after the hole has been dug and berate the dog, the dog doesn't know why you're berating it. What happens at the moment is that the potential breach occurs and the reaction occurs -- poor old Western Mining Corporation had this fight with ASIC over whether they had breached the law and the result was a lose/lose for everyone. It was a lose for Western Mining because it was an issue that dragged on for months and months. Finally ASIC write a letter saying, "We still they're guilty but we can't create enough proof to convict them." So Western Mining still have the issue unresolved and, from ASIC's point of view, they haven't been able to enforce the law. It's a dud for everybody.

I think having a realtime process of imposing a penalty, with the safeguards of still being able to go to court anyway if you're absolutely certain you're right, is better than what we've got from both points of view. But to answer your question, the government is highly unlikely to change its view on that. I would be severely embarrassed if they did.

QUESTION: Can I just ask a quick extension on Rob's question. I realise the regime ... place? Is it likely to be extended? At the moment the way the proposal is worded it refers to the continuous disclosure regime. I am wondering whether or not it will be extended to compliance under the corporate governance and the way in which those disclosures are managed by companies?

SENATOR IAN CAMPBELL: No, that is not the a proposal that was put to me.

QUESTION: Do you have a specific proposal that you have in mind about reform of governance in super funds?

SENATOR IAN CAMPBELL: No, I don't, but Helen and I have asked Treasury to prepare an options paper for us to basically look at those issues. They are things that haven't really been looked at from my understanding. I don't have responsibility for that issue -- it's primarily Helen Coonan's -- but I've got responsibility for the disclosure side. I also have a responsibility for ensuring we have a good financial services system and ensuring that the investment mutual fund side of it is well-governed, world competitive and has some contestability to it. It is a very important thing. Helen, the Treasurer and I have held discussions on this issue. We believe that reform in this area is very desirable.

So the first step in that process is to get Treasury to provide an options paper to us, which we've done recently. It might be CLERP 13 or 14. I'm working on CLERP 10, 11 and 12. We will get CLERP 9 nicely bedded down.

It is actually quite a good cue for me to say that the Government believes that continuing reform in this area is very important. We obviously have to do reform in a way that brings the community with us and that doesn't impose too much of a compliance burden and that people can actually get on with business knowing that the law is relatively certain. I have made it clear to people in the business community and in the professional community that we're very interested in continuing to improve the corporate legislative and regulatory environment in Australia for the very reasons we established CLERP in the first place, and that was that we want to make this a world's leading edge place to do business. We obviously don't think we've got there yet. It's a continuing improvement process. We want to keep improving the domestic economy to make us a powerhouse in the region and obviously around the world. Thank you.

CONVENOR: Thank you very much, Senator. We really appreciate your time. We're really honoured to have you here to talk about governance changes, CLERP 9 enhancements, interesting developments between the private initiatives and government regulation. I know you have a very busy schedule. Thank you very much for taking the time out to come and join us.