Policy Update - Inside Your Institute

Friday, 01 August 2014


    A monthly review of the Australian Institute of Company Directors’ policy and advocacy team’s key projects and issues.

    A number of recent federal government inquiries have a direct impact on the director community and the regulatory environment in which it operates. We have provided a summary below on the status of these inquiries and our views on their areas of focus.

    Financial system inquiry

    The Financial System Inquiry, which was established to lay out a blueprint for the financial system over the next decade, issued its interim report in July.

    Our comments to the inquiry focused on issues relating to the corporate governance arrangements of financial institutions - not on matters relating to prudential regulation.

    To this extent, it was pleasing to note that the inquiry’s interim report reflected many of the concerns we raised in our submission.

    Particularly pleasing was the extensive commentary in the report relating to the blurring of roles between the board and management. This is something we have long been concerned with and we explored it in detail through our publication Mind the Expectation Gap.

    Specifically, the inquiry observed: “Prudential requirements on boards should be reviewed to ensure they do not draw boards into operational matters.” It also noted: “Substantial regulator focus on boards has confused the delineation between the role of the board and that of management.”

    The inquiry also raised questions about the costs and benefits of regulation. Once again this is consistent with views we have expressed to government through our white paper Towards Better Regulation. The inquiry is seeking further information to “support conclusions that the regulatory burden is relatively high in Australia compared to other jurisdictions”.

    The next step of the inquiry is for interested stakeholders to provide feedback and commentary on the interim report by 26 August. We will prepare and lodge a submission to the inquiry on behalf of our members and keep you informed via our website and through future updates.

    Freedoms inquiry

    Attorney General George Brandis QC has requested the Australian Law Reform Commission (ALRC) to inquire and report on Commonwealth laws that encroach upon traditional rights, freedoms and privileges.

    In undertaking this reference, the ALRC has been asked to consider commercial and corporate regulation, environmental regulation and workplace relations laws that, for example:

    • Reverse or shift the burden of proof.
    • Apply strict or absolute liability to all physical elements of a criminal offence.
    • Deny procedural fairness to persons affected by the exercise of public power.

    This is particularly relevant for the director community because there are still a number of laws across the country that reverse the onus of proof in circumstances of director liability. Despite some significant progress in this area over the past few years, we argue as a matter of principle that there is no justification, ever, for the onus of proof to be reversed. Directors should have available to them one of the most fundamental protections afforded by the common law, namely the presumption of innocence.

    Terms of reference for this inquiry were issued in May with the next step being for the inquiry to release an issues paper for consultation and feedback.

    Performance of ASIC

    Mid last year, the Senate referred an inquiry into the performance of the Australian Securities and Investments Commission (ASIC) to the Senate Economics References Committee.

    Following significant consultation and public hearings, the committee released its final report on 26 June 2014.

    While much of the subsequent media coverage and political discussion have focused on matters involving Commonwealth Bank Financial Planning, we did not make any specific comments on this matter.

    The committee also made a series of recommendations, including that ASIC’s operations should be funded by industry levies. The committee said: “The good work that ASIC has done in a challenging environment has been recognised. Even so, there is a need for ASIC to become a far more proactive regulator ready to act promptly but fairly. ASIC also needs to be a harsh critic of its own performance with the drive to identify and implement improvements.”

    Our view remains consistent that any deficiencies in ASIC’s performance and effectiveness are more likely to be caused by a lack of adequate funding and resources to allow ASIC to fulfil its role as a corporate regulator. ASIC’s role as a regulator has been increased significantly over time and its resources have been reduced and stretched as a result.

    Subsequently, ASIC is often placed in a difficult position due to the unrealistic expectations of the government, media and general public. There seems to be a general misunderstanding as to what ASIC can reasonably achieve as a regulator.

    We continue to present this view to relevant members of the federal government.

    Honest and Reasonable Director Defence

    As you may have seen in John Colvin’s CEO report this month, we will shortly release our proposal for the insertion of an Honest and Reasonable Director Defence into the Corporations Act 2001.

    The upcoming public release of our paper explaining the proposed defence is the culmination of efforts by the policy team, including lengthy consultation with our Chairmen’s Forum, policy committees, division councils and corporate law experts. We thank our members for their contribution to this important initiative.

    The paper will be released this month on our website.

    We will then continue to advocate on this issue with governments and policymakers and law officials across the country.

    Disclosures in the annual report

    With reporting season upon us, organisations are currently in the process of preparing their annual reports and directors need to be particularly careful when considering any disclosures in this document.

    These considerations should include how the International Integrated Reporting Framework and ASIC’s Regulatory Guide 247, Effective Disclosure in an Operating and Financial Review, impact the decisions they make on what to include and not include in the report.

    The International Integrated Reporting Framework released last year defines an integrated report as “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term”.

    ASIC’s Regulatory Guide provides guidance to listed entities in complying with the requirements of Sections 299A of the Corporations Act. Among other things, Section 299A states that the directors’ report must contain information that members of the listed entity would reasonably require to make an informed assessment of, among other things, “the business strategies and prospects for future financial years of the entity”.

    What both of these have in common is the encouragement of forward-looking disclosures to provide information about the future prospects of the organisation.

    Given the potential for personal liability, directors should be aware of the inherent risk associated with any forward-looking disclosures within their report.

    The liability regimes in the Corporations Act and the ASIC Act (including the provisions relating to misleading and deceptive conduct) apply whether the statement as to a future matter is a forecast (quantitative information) or any other type of information (qualitative information). Any statement which includes a forward-looking element if not made on reasonable grounds is at risk of causing a contravention of the relevant provisions.

    We have recently finalised a guide, in consultation with the Reporting Committee, which will help members compare and contrast the International Integrated Reporting Framework and the Operating and Financial Review.

    This guide is now available on our website.

    Acknowledging Stuart Grant’s contribution

    Earlier this year, Stuart Grant FAICD resigned from our organisation and the Reporting Committee as a result of ill health.

    Stuart has been a director since 1959 and was invited to join the then Accounting and Financial Advisory Committee (now the Reporting Committee) in 1976 by Sir Robert Crighton Brown. Stuart has the distinction of being the longest serving member of the Reporting Committee.

    During his time with the Reporting Committee, Stuart was an active participant in developing submissions, preparing and reviewing training material and publications. He served as a member of many task forces including one that developed the Shareholder Friendly Report. He also served as our representative on the ASIC Accounting Liaison Committee.

    Stuart’s contribution to the organisation and specifically the Reporting Committee will be sorely missed.

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