Getting corporate regulation right Compliance versus business performance

Centre for Governance Excellence and Innovation roundtable discussion (October 2014), Comments on regulation
Australian Institute of Company Directors (video), October 2014

As the fundamental source of income and growth in our economy, a thriving business sector is the wellspring of prosperity for Australia. To improve the living standards and wealth of all Australians it is therefore essential that governments provide the right environment for business.

Regulation is necessary to help ensure that business, the economy and society operate appropriately, effectively and efficiently. Efficient regulation can support better corporate performance and reduce the risk of systemic failures. However, regulation that is inappropriate or unnecessarily burdensome increases the cost of doing business in Australia, reduces productivity and international competitiveness, and impedes economic growth.

Prescriptive responses taken by parliamentarians, regulators and courts have led to directors spending more time on corporate compliance and related activities, and less time on strategy, entrepreneurship, risk management, and organisation performance.

For information on Australia’s regulatory framework and critical components of regulatory reform, please see Company Directors’ discussion paper, “Business deregulation: A call to action”.

The regulatory environment was discussed at Company Directors’ recent roundtable to launch the Governance Leadership Centre. The participants considered that regulatory compliance and non-value adding work are inhibiting directors from focusing on the real business issues, including strategy and performance. Jerry Maycock, Chairman of AGL, commented: “We are hired as directors to take measured risks for investors and earn returns better than they can get by putting their money in the bank. And that’s the fundamental point – we’re there to take measured commercial risks to earn better returns and that’s getting lost in the plethora of [regulatory] constraints. He considers that the balance needs to shift back to “intelligent risk taking with a commercial focus”.

Kevin McCann, Chairman of Macquarie Group, commented “I don’t think the tide [of corporate regulation] is going out. I think the tide is still coming in”. For the top 20 ASX-listed companies, “the regulatory overlay for directors is going up every year. There is no deregulation in that space at all and there’s not going to be”.

John Colvin, former CEO of Company Directors, said that it is important to consider whether regulation will save companies from difficult circumstances in the next big downturn. He said that history has shown that “if you are in the tsunami, no amount of regulation is going to save you”.

Deregulation is part of the Federal Government’s policy platform. On 22 October 2014, the Prime Minister announced the Government’s plans to remove nearly 1,000 pieces of legislation and regulations, totalling 7,210 pages. The Government will continue to designate two Parliamentary sitting days each year as red tape repeal days. The Government has estimated that changes from the 2014 red tape repeal days (in March and October) will save individuals, businesses and the not-for-profit sector over $2.1 billion.

As the Government seeks to reduce red tape, it is important that it bears in mind longer term considerations. For example, the decision to dismantle the Corporations and Markets Advisory Committee (CAMAC), which operated in conjunction with Treasury as a key body developing legislative reforms affecting companies, may have the unintended consequence of increasing red tape in the long term. This is because there will no longer be a cost effective, highly experienced and independent body considering improvements to the corporate law in Australia.

John Colvin commented at Company Directors’ recent roundtable that “It’s axiomatic that you’re going to have to set up another body like CAMAC”. He said that CAMAC had developed the specialist expertise to deal with corporate law reform questions and had enough independence to function at arm’s length from both government and the private sectors. For further information, please see Company Directors’ submission to the Federal Treasury opposing the abolition of CAMAC.