Transparency accountability and vigilance ASIC

Sunday, 01 September 2002


    What is corporate governance and ASIC’s role in it? ASIC chairman David Knott* illustrates with some cases in point.

    By the end of the 1990s, corporate governance was seen by some parts of the business community as somewhat irrelevant, – a response to the no longer relevant excesses of the 1980s. Many years of sustained economic growth, and Australia's remarkable survival of the financial crisis in Asia, led to a period of complacency about corporate governance. What was underestimated was a new outbreak of management greed, and the many commercial pressures that influence management and boards to focus on short-term pay-offs. Motivations of financial gain and competitive advantage, given sufficient opportunity and a lack of adequate accountability, almost inevitably resulted in business excess and abuse. We therefore need to view good corporate governance not as a fad, or a mantra to be invoked when convenient; but rather as an essential and enduring component of any sound economic and regulatory system.

    So what is corporate governance? Corporate governance is one of those concepts that most people instinctively understand, but find difficult to quickly and simply articulate. There are a number of definitions of the term; and a plethora of codes or guides describing best corporate governance practice.

    A recent study of corporate governance codes, commissioned by the European Union found that there are 35 codes just in the 15 member states of the EU. Every member state of the EU, except Austria and Luxembourg, has at least one code. The United Kingdom has 11 of them. Since the Asian financial crisis, similar work has flourished throughout our region. For example, Malaysia, the Philippines, Singapore and, recently, China have all developed corporate governance codes. The EU study found a substantive convergence in the published materials, both in the definition of, and the principles pertaining to, good corporate governance. Most definitions of corporate governance refer to two things:

    • the mechanisms by which corporations are directed and controlled; and

    • the mechanisms by which those who direct and control a corporation are themselves supervised.

    In Australia, the decision by the ASX to lead a review of its governance guidance for listed companies – and to require all listed companies to explain any divergence from that guidance – is a major step forward. There will be considerable market pressure on companies to meet the guidelines and this will in turn reduce the need for more prescriptive measures.

    Nevertheless, self-regulation won't alone adequately address all the issues exposed by recent corporate failures. Some law reform will result from the Government's CLERP 9 program. The challenge will be to get the right mix between essential core standards (which should be legislated) and supplementary principles of best practice (which are best addressed through the ASX or other self-regulatory mechanisms). But let's keep corporate governance in perspective. It is not a fail-safe means to prevent business failure. Good governance is, of itself, no assurance of corporate success, any more than corporate failure necessarily implies poor standards of governance. Our limited liability system is based on the premise that failure alone is not culpable, and that risk is to be acknowledged and shared – some businesses will always fail, due to myriad factors. However, corporate governance – viewed not as merely a legal ritual to manage directors' liabilities, but as a living economic dynamic, integrated into the business – can help build a solid foundation to create wealth and protect shareholder interests.

    Corporations should strive to achieve a culture of governance; and resist the temptation to give formal, rather than substantive, compliance to the principles of good governance. That is one of the positive features about the recent initiatives of the ASX. Nor should we assume that corporate governance is of relevance only to individual companies and their shareholders. The interventions of President Bush in America and the recent speech of our own Prime Minister highlight the reality that there are underlying issues of national interest involved.

    ASIC's role in corporate governance Earlier, I mentioned the importance of accountability in maintaining governance standards. Recently, this aspect of ASIC's responsibility has kept us rather busy. We embarked two years ago on a deliberate strategy of being more visible in our enforcement activity. We believe that without visible enforcement, regulation can never be fully effective. To date, we have combined a range of administrative, civil and criminal actions to bring accountability to offenders. Some examples include:

    Harris Scarfe: criminal charges against former CFO, Allan Hodgson, resulting recently in a six-year jailing.

    HIH: civil penalty proceedings against former directors Rodney Adler, Ray Williams and Dominic Fedora. All were found to have breached their duties as directors under the Corporations Act. Adler and Williams were banned from being involved in company management for terms of 20 years and 10 years respectively. They were held jointly liable to pay compensation of more than $7 million. And the court imposed substantial pecuniary penalties (fines) in each case.

    One-Tel: civil penalty proceedings have commenced against certain former executive directors, seeking similar remedies of banning, fining and compensation. In this case, we are claiming compensation in excess of $75 million.

    NRMA: an action we commenced against a company chairman Nick Whitlam because we consider that he improperly discharged his duties as chairman. The Court has found in our favour and imposed a five-year ban and fined him $20,000.

    Adler, Williams and Whitlam have either appealed or indicated an intention to do so. We have many other cases on foot – almost 200 in fact – which frequently include issues of failed governance. Of course, our role in promoting good governance extends considerably further than enforcement. We also have important regulatory responsibilities. Foremost among those are the areas of disclosure, the operation of exchanges, the regulation of audit and the licensing of intermediaries.

    As a company director... In light of the above, now, more than ever, company directors need to understand and act on:

    • The importance of transparency and disclosure. When there is a true commitment to both, it is very difficult for dishonesty to take root. While companies cannot divulge trade secrets or commercial strategies prematurely, it is critical that transparent processes are in place for decision making at all levels.

    • The importance of accountability to external stakeholders and within our own workplaces.

    • Finally, vigilance. Vigilant defence of what we individually know to be right is our only real safeguard against the insidious erosion of institutional values which are taken for granted.

    * This article is based on recent speeches by ASIC chairman David Knott, including the inaugural lecture to the Monash Governance Research Unit. The complete text of the lecture is available from the publications page of


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