Ladies and gentlemen, I am very pleased to have been invited to address you,particularly at this time.
The recent collapses of Harris Scarf, HIH and One.Tel have focussed the community's attention on issues of corporate governance and the role of the various players in the process.
The subject of corporate governance is huge and varied. Good corporate governance can mean different things to different people, but essentially it is an extended partnership between a company's board of directors and a range of other groups - it's shareholders, it's management, it's employees, the regulators, the markets and the wider community.
The Australian Shareholders Association is at the forefront of the shareholder side of the corporate governance equation.
The aim of good corporate governance is achieving the best outcome for the corporation and the shareholders as a whole. It is a tension driven by open and frank communication.
Corporate governance should be part of a company's strategy. But above all, it should be more than a document rolled out once a year and which gets paid only lip service.
This is in part why I have resisted calls for separate corporate governance boards. Some sections have called for a mandatory separate board to exercise internal governance powers, like the power of directors to appoint and remunerate auditors, adopt accounting standards etc. In my view, good corporate governance is at the heart of every successful company and needs to be integrated into the whole rather than being "handed-off" to a separate body.
However, we have not precluded the use of such structures and if shareholders and managers think this is worthwhile then the Corporations Act will accommodate this.
As I have often said, corporate governance must move away from a narrow focus based on a list of do's and don'ts towards a purposive approach based on what the board thinks the company needs from its board of directors to prosper.
I suspect that words like "responsiveness", "transparency" and "accountability" will feature prominently in the output from such an analysis.
Previously, I have spoken about board composition and good corporate governance. Boards must reflect a more complex matrix of skills, age, experience, private and public backgrounds.
I wholeheartedly believe that a broader mix of people on a company's board will enhance shareholder value.
In particular, I have been and strongly remain critical of the gender composition of Australian boards. There is no doubt that significant improvements have been made but I'm afraid its still a case of too little too late.
Earlier this week a United Nations report found that Australia had one of the lowest percentages of female senior executives in the OECD. This result should have surprised no one given that only 10% of directors in corporate Australia are women.
Less senior female executives mean that if most directors are being drawn from the managerial sector alone that there will be less female board members, perhaps more importantly it means there are fewer potential female mentors for our next generation.
If we are to improve Australia's 21st century companies then these studies emphasise the need for today's male managers to take responsibility for the current state of affairs and to mentor today's female high achievers and potential high achievers.
It must by now be obvious to the ASA and all shareholders that if your pool of senior executives is drawn from only 49% of the population then a company diminishes the quality of its leadership.
In turn this directly affects shareholder value. So, if for no other reason than shareholder value, every AGM this reporting season should have shareholders asking questions about the gender make up of the board and the senior executives of the company.
From time to time the ASA has been critical of companies that are philanthropic with shareholders funds. My very strong view is that companies in Australia must be more generous and not less generous in their interaction with the wider community.
Our Government is committed to cultivating a greater philanthropic tradition in Australia. That is why the Prime Minister has established the Prime Minister's Community Business Partnership to raise the profile of corporate social responsibility. Members of the Prime Minister's Community Business Partnership have helped develop a suite of new taxation measures designed to encourage greater corporate and personal philanthropy.
Companies like all of us are part of a wider community. They exist as a result of people, people with real needs and expectations, people that live in a community.
Companies are not just profit-generating machines. Companies cannot claim to have personality and life when it suits them then return to a vacuous haven of self servitude when it comes to their place in the wider community.
Ladies and Gentlemen, today I'd like to talk about the Government's corporate governance program. Over the last three years I have been legislating, developing, writing about and speaking to groups like you about corporate governance and today I'd like to tie our program together.
At the heart of what we've been doing is the link between corporate governance and performance, corporate governance is not an end in itself. Its about ensuring that the corporation remains an important way for people like the ASA's members to enhance their wealth.
The link between corporate governance and performance
I firmly believe that countries and companies looking for low-cost of capital and competitively priced securities will search out locations with superior corporate governance practices.
My discussions with funds managers from around the world have convinced me Australia's corporate regulation and governance culture attracts global capital to Australia.
I believe investors are willing to pay more for a company with good governance practices. Capital will not be attracted to companies, however promising, unless investors can be confident that it is sustainable. Sustainability has many elements but one of those elements is the support of the wider community and this is also a reason for greater corporate philanthropy.
Investors want: transparency and accountability. Information must be publicly available in a timely manner and management must be accountable to an informed, motivated and independent board of directors.
I acknowledge the ASA's concerns about auditor independence and your support for legislative change. You have said that auditors should be prevented from undertaking other services for their clients and that former partners of audit firms should be blocked from being directors of companies that are being audited by their former firm.
In Australia, our corporate regulation imposes substantial obligations on managers to record and disclose information about the corporation's affairs.
As the ASA recognises, a crucial element of Australia's mandatory disclosure philosophy is the role independent auditors. That is, it is their job to audit the financial report and to form an opinion about whether the report complies with the Corporations Act, accounting standards and gives a true and fair view of the company's affairs.
The auditor must also form an opinion on whether there are defects and omissions in the company that might adversely affect the conduct of the audit.
If you think of the company as a bakery, the role of the auditor is that of a health inspector. Her role is not to bake the bread, nor to test every loaf but to sample, review and verify the baking process to ensure the public can have confidence in the bread coming out of the bakery.
The changes we have introduced to the Corporations Act over recent years have substantially enhanced and clarified these obligations, including the circumstances where the auditor should report their suspicions to ASIC.
To ensure auditors can do the job we expect from them, the Corporations Act helps auditors in a number of ways, for example by protecting them from defamation. This Government has supplemented this protection by placing a positive obligation on officers to assist the auditor.
These principles establish a covenant with investors and creditors. This covenant says the auditor will remain inquisitive, sceptical, and rigorous, that the auditor will remain free from entanglements or arrangements that threaten their objectivity, that the auditors' stamp of approval means that the numbers speak the truth.
That means we must ensure that the independence of auditors is preserved and that stakeholders have absolute confidence in the integrity of the attestation of auditors.
Harris Scarf, HIH and One.Tel have raised community concerns about the effectiveness of the audit process and I perceive there has been some loss of confidence in our corporate accounts.
To help me restore public confidence, I have recently appointed Professor Ian Ramsay, from Melbourne University, to review auditor independence in Australia and to advise me on his suggestions for restoring investor confidence.
As part of this advice to me, Professor Ramsay is examining existing Australian legislation, professional requirements, and recent overseas developments, these include Security Exchange Commission's new rules on auditor independence, the European Union Commission's proposals for reforming its audit independence requirements, and the International Federation of Accountant's proposals for strengthening their Code of Ethics.
During the course of his review, Professor Ramsay has been receiving very useful input from a wide range of stakeholders, including the Australian Shareholders' Association.
Irrespective of Professor Ramsay's findings, I believe that as a matter of good corporate governance audit committees must become more actively involved in the whole audit process not just the final output.
They must be involved in every aspect of the process. This includes details like the engagement arrangements for their auditor and the terms on which consultancy work is undertaken this is so they can decide if they are happy with their independence or whether they are primarily remunerated by cross-selling consulting services or is otherwise compromised in undertaking the company's audit.
Similarly, the Committee must be involved in the company's internal audit procedure and internal auditors should be reporting directly to the Committee.
If the Audit Committee is to properly perform its role it must critically examine any matter that might have or be perceived to have an adverse impact on the integrity of the company's published financial information.
We look forward to Professor Ramsay's recommendations and if legislative changes are needed, then we will consider this option.
Independence of the Australian Accounting Standards Board
Another accounting related issue is the independence of the Australian Accounting Standards Board.
The Labor Party's misguided understanding of the existing arrangements is reflected in their suggestion that they will "restore the independence of the AASB". This is arrant nonsense. The AASB already has full independence in setting accounting standards.
The Government's reform of the accounting standard-setting arrangements was careful to preserve this independence by ensuring that the new oversight body, the Financial Reporting Council, cannot involve itself in the Board's technical activities.
The Council has power to approve the Board's standard-setting priorities, business plan, budget and staffing arrangements, to determine the Board's broad strategic direction, and to give the Board directions, advice and feedback on general policy and the Board's procedures.
These powers operate at a broad level to help ensure the Board is accountable to stakeholders in the standard-setting process.
The new arrangements ensure that the Board is responsive and efficient without being captured by any one interest group. If anyone seriously believes that the Board's technical independence is being compromised, I would like to know about it. Every indication, however, is that it is not.
As you know the Board is currently developing standards for the valuation of options, and accounting for financial instruments, issues that the ASA has raised as areas of concern.
The Government relies upon the independence and competency of the Board to achieve standards that may be relied upon by the whole community.
Better resourcing independent directors
Independent directors have long been recognised as an essential part of good corporate governance practice. Independence brings objectivity to a board's deliberations, helping resolve the agency problem that is at the heart of the corporate governance issue.
There is often a useful tension between non-executive directors and management, as non-executive directors seek to bring their objectivity to bear.
But what resources and support are available for such directors to avoid having to rely on management for their information?
The best support is that provided by organisations such as your own, the AICD, IFSA, and others. You all have different slants, and client bases, but you provide excellent resources and guidance for non-executive directors (and indeed all directors) to obtain information from non-affiliated sources.
My Government's reforms have given investors renewed protection, while simplifying laws and allowing companies to get on with what they are good at, that is making money for shareholders.
But that's not enough. Experience has taught us that even with a regulator as vigilant and well resourced as the Australian Securities and Investments Commission, there is no substitute for vigilant boards and vigilant shareholders.
I believe that people can only be vigilant when they have real and meaningful information and adequate time and skill to their tasks. A number of recent corporate governance surveys have recognised the growing demands placed on the time of non-executive directors.
I think that Australian companies need to carefully consider whether they should increase the remuneration of their non-executive directors and also limit board members' other commitments.
In some cases, particularly corporations undergoing rapid change or in a downward cycle, it might be a case of it being better to do a few things well than many things badly.
The conduct of meetings
While there is a push from some members to regulate the conduct of meetings, the Government does not think regulation is the answer. There already exists a body of common law rules regarding meetings, and if these are not being adhered to, I suspect that this is largely through a lack of understanding of legal obligations and rights.
I believe the ASA, and shareholders generally, can be on the front foot here and pull boards up where there has been an apparent non-compliance with legal requirements.
Shareholders do have rights and powers, ranging from asking questions of directors at meetings, or bringing legal action if appropriate (for example through the new statutory derivative action), to even convening meetings to discuss director misconduct and to dismiss directors.
I understand that the AICD and the ASA are working together to update their joint publication "A Guide to the conduct of meetings". I commend this project and undertake to lend my support to the wider dissemination of this material.
This last item brings me to an essential aspect of shareholder democracy: the ability of shareholders to requisition a company meeting.
Shareholders requisitioning company meetings
At the end of last year I announced a proposal for a "square root rule", where the number of shareholders required to requisition a company meeting under the Corporations Act is the square root of the total number of shareholders in the company.
This would replace the existing 100 member requirement that may be open to misuse by disgruntled individuals seeking meetings for non bona fide purposes.
The Government has developed this proposal to strike a balance between individual member rights and the desirability of companies to get on with the business of increasing shareholder wealth, without being micro managed by a fringe number of shareholders with no real economic interest in the company.
The Labor Party criticised our proposal on the basis that for widely-held companies the number of members required under the rule would be significantly above the 100 member threshold.
It has been suggested that we amend our idea to require a 'cap' of 500 members and a 'floor' of 100 members. This would mean that the rule would operate within the range of 100 to 500 members. It has also been suggested that members be required to a have minimum economic interest in the company based on a 'marketable parcel' of $500.
We are very open to ideas - we want the best solution.
We accept the 'cap' and 'floor' proposal has merit - the application of the 'square root' rule to large companies may, in some specific cases, result in an onerous threshold difficult to satisfy, though as a general rule it would seem to be very fair and sensible in its operation.
The Government has consulted relevant interest groups on the minimum economic interest proposal especially on the concern that it could involve a difficult and potentially expensive valuation exercise to determine the market value of shares, and would not apply easily to companies with non-standard capital and voting shares.
A satisfactory solution has not been found to these issues and the Government proposes to proceed with the 'square root proposal', with the 'cap and floor' modification only.
The Government has sought the best solution to this problem in good faith, and I call on Opposition in the Senate to respond in kind and meet us half way.
Removing barriers to retail participation
An essential element of the corporate governance equation is the ability and willingness of shareholders to get the best performance from directors and managers.
Last year I made it quite clear that I was not satisfied with the level of activism of institutional investors in exercising their voting rights. In the time since, surveys by Computershare and IBSA have indicated an increasing commitment by a larger number of companies and trusts to enhance their relationships with the investment community.
If I can quote Mr Ian Matheson, Managing Director of Computershare Analytics, who said
"The sentiment remains consistent that innovations will improve the flow and quality of information to investors and the broader market, with the majority of respondents believing that the added cost of new technologies is of benefit to shareholders."
The Government is dedicated to working with business to help them use technology in improving investor relations, and the business community in turn is enthusiastic about using technology to promote increased investor interaction.
In this regard, and although the concept is still in its early stages, we have been observing practices of the United States and the United Kingdom in their increased use of technologies to facilitate investor participation.
There are a range of issues that both business and Government will need to consider.
These are medium and technology neutrality: this means the regulation should not mean that companies are restricted in their ability to use whatever form of communication best suits their needs.
There have also been some concerns about possible legal uncertainties regarding authentication and consent issues. Lastly, there will be questions of how and who? How will the technology be developed and who will provide the services?
Regarding "who", I understand that the system in the US, for example, involves company web issuers providing electronic services to other companies via the Internet. Such services include webcasting, electronic voting and disclosure of SEC filed information.
On the question of "how", I am keen to see market-based solutions developed in Australia. The beauty of a competitive model to answer the need is that it allows for a range of offerings, from "no frills" to "bells and whistles" packages.
To push things along I am very pleased to announce that Professor Elizabeth Boros, from Monash University, an accomplished expert in this field, will be working with Treasury to advise me if there are any legislative or regulatory impediments to the wider adoption of electronic voting systems.
I believe that technology can change the way companies interact with their shareholders. I look forward to the ASA's participation and input in this process.
Although the Computershare and IBSA survey indicated a vast improvement in institutions and companies in using technology to develop better corporate governance, it was noted that the retail end of the market still needed improvement.
In March, I asked ASIC to convene a meeting to look at ways of encouraging retail investors to be more active in the companies in which they invest. The specific areas I have urged this group to consider are simplifying the process of voting; whether anything would be achieved by compulsory voting for asset managers; the role of the custodian in voting; Webcasting; and simplifying notices of general meetings to make them more consumer friendly
I understand that participants at the meeting have already considered a number of these issues, but still have some way to go in determining concrete measures that can be taken up by industry.
I am looking forward to the proactive solutions that industry itself will develop in this regard.
I am aware that the US Securities Exchange Commission has recently taken a very active interest on the potential conflicts of interest that investment analysts may face.
This issue is also of great relevance for the Australian marketplace. Analyst independence has significant implications for the integrity of our markets and on the fairness and objectivity of advice provided to investors.
For these reasons, I am keeping a close eye on developments in the United States. The SEC alert urged investors not to rely solely on analyst recommendations when deciding to buy, sell or hold stock.
Basically, analysts are making recommendations about the performance of companies that, in many cases, their firms and broking houses also work for. In other cases, the firm or the analysts may themselves own shares in the companies that they are making recommendations about.
In recent months, these practices have, quite rightly, attracted intense public scrutiny in the US. The SEC is currently examining possible methods to deal with these potential conflicts of interest, and I am monitoring these developments closely.
I am aware of the work that the Securities Institute is doing to develop best practice guidelines for independent research and I look forward to the release of these guidelines.
I am concerned that independent broker research is seen as a slave to corporate interests. That all too often independent analysts have been accused of being too slow or too unwilling to criticise corporates because of other client relationships. Some commentators have even gone so far as to suggest that "the research is rendered meaningless."
Dovetailing our regulation with the major financial markets.
Well, if we've heard it once, we have heard it a million times: "globalisation". Indeed, it is now so much a fact of life that Australia is part of, and must operate within, the global economy, that it has become (as it must), a part of our mind set.
But what does globalisation mean for regulation? I know that ASA members often push for more regulation, especially in the face of perceived market failure. But I think we can agree that the market model economy works best.
Companies know their own business best, and generally should be left to make their own business decisions. This Government is unashamed in its support of freely operating market forces - our public policy responsibility is to delineate broad parameters for the conduct of business, remove uncertainty in the operation of the law, and clarify the rights and responsibilities of stakeholders.
But sometimes regulation is required, and in the global market place we want not only the best regulation, but also what is seen to be the best regulation. And that is what this Government does.
New Corporations Act
As you would be aware the most significant hurdle to the Government's wider reform agenda has been uncertainty over Australia's Corporations law following the Wakim and Hughes decisions in the High Court.
I am happy to say that that uncertainty has now been resolved, with the start of the new Corporations Act on 15 July 2001.
Claw-back of directors' bonuses
Focussing specifically on corporate governance issues, where do the Harris Scarf, HIH and One.Tel collapses leave us? There is to be a Royal Commission into the issues coming out of these failures and ASIC is also investigating the various players.
But in the meantime there is something we can do.
We know there is considerable community concern about the level of benefits paid to directors of companies that ultimately become insolvent, leaving everyone involved with them in the lurch.
To this end the Prime Minister has announced that the Government will be amending the Corporations legislation to allow bonuses paid to directors in the lead up to a company failure, to be reclaimed.
The bonus will then be paid through the liquidator to the company's employees, creditors and ultimately the shareholders (if there are funds remaining). The Government will amend the Corporations law to implement this change in the near future.
In addition, last year the Government took steps to increase the protection for unpaid employee entitlements by amending the Corporations legislation. The amendments included a new offence that penalises anyone who deliberately avoids payment of employee entitlements.
ASA Wish List
Ladies and gentlemen, the Government knows that the ASA is doing its best for shareholders, and appreciates the efforts you make on policy input.
I know you have an extensive "wish list", if I can call it that, and a fair few of those issues I have already addressed.
Where regulation requires tightening up, we will do it.
A couple of things on your wish list are that legislation should provide that an organisation might be appointed as a proxy, and that the valuation of options be explicitly required.
I am pleased to confirm here that the Government proposes to amend the Corporations Act to allow a body corporate to be appointed as a proxy, and to specifically require the valuation of options.
As mentioned, the independent standard setter, the Australian Accounting Standards Board, is developing a new standard for the valuation of options. This standard will usefully complement the Government's proposed amendment.
The ASA has also expressed concern on accounting for financial instruments in general. In this regard, the Board has been actively involved in developing a comprehensive internationally supported draft accounting standard on financial instruments, to replace existing international accounting standards on the subject.
This standard is extremely important to market transparency and the Government is keen to see that work completed, so that a settled international position can be reached. This will avoid Australia being out of step with what is occurring overseas.
Ladies and gentlemen, the Government's priorities for corporate Australia have always been, and remain, free market focussed.
Unnecessary intrusion in the market is bad for business, and bad for shareholders.
Owning shares and being involved in issues of corporate governance is not about the interests of the trade union movement, its not about a hobby to fill in spare hours, its not about narrow, elitist agendas.
It is about creating wealth for Australians and this Government is very focussed on that outcome.
This Government has delivered for Australian shareholders.
It has been this Government that has been the party to bring you one half the capital gains tax you paid when Kim Beazley was last on the Treasury benches.
It is this Government that totally removed stamp duty on trading in shares.
It is this Government that reduced corporate tax from 36% to 30% increasing the dividends paid to all shareholders.
It was this Government that now permits low-income holders to get the full benefit of franking credits paid to them.
And last but by no means least it was this Government that ended Labor's $10 billion black hole, that put this country back on a secure financial foundation.
This has meant lower interest rates for Australian companies and an unparrelled environment for growth.
Companies are an essential part of our national landscape, and as such, they have an obligation to the people in their community, and to the people that are their shareholders.
We want to provide the framework so that they can satisfy the needs of both these key groups. If we can do that, then I know we will have achieved our aims.
Thank you for the opportunity to speak to you today.