After Australian Securities and Investments Commission policy consultant Alison Champion referred to an ASIC discussion paper Heard it on the Grapevine (Company Director, December), the representatives of five interested bodies combined to lend their voices to the discussion.
This month we reproduce a letter to Champion from Lynn Ralph, Investment and Financial Services Association; Ian Dunlop, AICD; David Buckingham, Business Council of Australia; Penny Le Couteur, Securities Institute of Australia; and Brendan Egan, Securities and Derivatives Industry Association.
As representatives of key interests in Australia's capital markets, the undersigned organisations believe it is important to maintain good investor relations, integrity and confidence in our market. Therefore we strongly support the principles of continuous disclosure, as currently established under the Corporations Law and the ASX Listing Rules, as a way of ensuring that investors receive relevant information in a timely manner. However, we are concerned that proposals outlined in the draft paper Heard it on the grapevine, released by the ASIC in November 1999, while intended to be guidelines on best practice, and non-prescriptive, will in effect amount to a significant extension of legislation when there is no clearly demonstrated failure of the existing legislative regime.
Current legislative requirements The issue of appropriate disclosure was fully debated in Parliament during the Corporate Law Simplification Program, the Corporate Law Economic Reform Program, and review of the Company Law Review Act, culminating in the existing legislative regime for periodic and continuous disclosure of material price-sensitive information. The legislative regime is designed to provide all investors with access to quality information which may have an impact on their investment decisions. As recognised by the Wallis Report and CLERP 6, the emphasis is on "effective disclosure, not merely the production of information".
Guidelines on continuous disclosure We agree that investors should receive relevant information in a timely manner, but believe this is currently achieved under the continuous disclosure regime, which requires immediate disclosure of price-sensitive information to the ASX. We consider that companies and analysts view the continuous disclosure and insider trading obligations very seriously and we are not aware that the disclosure of other information via analysts briefings is resulting in inappropriate market conduct. Indeed the object of these meetings is not to exchange additional price-sensitive information, rather to provide a forum for clarification and improved understanding of information already available. If, in your view, market misconduct is occurring, we would question whether it is a result of analysts briefings, or arises from other causes. We would appreciate the opportunity to review this with you to ensure the right problem is being targeted. We feel the paper does not give sufficient prominence to the primacy of "price-sensitive information", with which companies and market participants have now had considerable experience. The paper often seems to confuse the distinction between price-sensitive information and significant information. We support the general principles in the paper regarding the monitoring and reviewing of the disclosure of material price-sensitive information during analyst briefings. Our strong view is that non-public price-sensitive information should not be disclosed during analyst or private briefings. Where there is inadvertent disclosure of material price-sensitive information, an immediate announcement should be made to the ASX and appropriate warnings provided to analysts. We consider this takes place in the vast majority of situations and support the general principles in the paper which reinforce these legal requirements.
The paper gives little weight to the way in which companies and analysts currently interact by implying that they trade on information not available to ordinary shareholders. No evidence has been put forward to show that this is the case. Rather, it is common for analysts to inform a company if they become aware that price-sensitive information has been disclosed inadvertently and not trade until the company takes action. We believe the role of analysts in seeking clarification and improved understanding and their expertise in distilling available information, has led to improved company reporting to the benefit of all shareholders. The paper states that it is not intended to be prescriptive as it is not possible to cover the many different circumstances or situations which may arise. We agree with that sentiment, but notwithstanding amendments made to the first draft, the paper remains prescriptive and appears to start from the premise that corporations and analysts do not comply with the current legislative requirements. In our opinion that view is not born out in practice as the vast majority of corporations and analysts go to great lengths to ensure current legislative requirements are met. Unfortunately abuse will never be totally eliminated, but the solution is to improve transparency of price-sensitive information, to expose abuse rapidly and for the regulator to then take rapid action. We should not to put in place prescriptive solutions that are unduly onerous, cumbersome and act as an impediment to performance for the economy as a whole.
Significant information We have major concerns with the proposed guidelines regarding the disclosure of information which is not likely to affect investment decisions (ie which is not materially price-sensitive). While many companies may choose to disclose information beyond the legal requirements, we believe it is inappropriate for the market regulator to take action which would have the effect of unilaterally extending the scope of the existing legislative regime. This would be the impact if the current proposals were enacted. Indeed, to do so runs the risk of undermining the competitive positioning of the Australian economy. Although the paper will be issued as a guidance paper, we consider that the fact that the guidelines are published by ASIC will be interpreted by companies, directors and investors that compliance with the guidelines is mandatory. We believe the additional requirement to disclose "significant background information" proposed in the paper will create confusion in the market, particularly among those required to determine such information. In particular it will result in information overload without enhancing the quality of investor decision-making.
In recent years, the legislative trend has been to reduce the volume of material provided to investors, to ensure they receive quality information that is relevant, succinct and readable. The Wallis Report noted that "it is the quality and usefulness of information which are important, not its quantity. Excessive or complex information can be counterproductive as it may confuse consumers ..." The approach proposed in the paper is likely to trigger the circulation of a large amount of additional information of doubtful relevance to meaningful investor decision making while incurring substantial additional cost. It is contrary to the simplification trend, which has been requested by investors and endorsed by the legislature, to provide short-form annual reports, concise financial reports and short-form prospectuses. There is no guidance provided in the paper as to what constitutes significant background information. We are also concerned about potential liability for information which may be misleading if read in isolation by retail investors without the expertise of analysts or professional investors. Greater consideration of liability issues is required.
International jurisdictions We are concerned that the imposition of significantly greater disclosure obligations than required in competitive jurisdictions may have the effect of lessening the flow of quality information to the market via analysts and be detrimental to performance, undermining Australia's efforts to become a global centre for financial services. We note that the US Securities and Exchange Commission (SEC) has just announced additional rules to ban selective disclosure of "material" information. We believe that these new rules bring the US closer to the high standard of disclosure which has existed in Australia for some time. In these circumstances, to add further disclosure requirements to the Australian system, particularly when there is no evidence of a significant problem, risks imposing a regime that is out of step with major overseas markets which in turn may adversely affect our cost of capital. The regime proposed is also considerably more onerous than the one introduced recently by the Toronto Stock Exchange TSE.
Implementation At a detailed level, the paper proposes mechanisms which in many cases we feel will be unworkable. We also believe the paper contains a major omission in not addressing briefings between corporations and media, in addition to briefings with analysts. We would be pleased to discuss these detailed concerns separately. We consider that companies are prepared to pay the costs of complying with the legislative continuous disclosure regime. However, many of the proposed guidelines would impose significant additional costs on companies. Continually monitoring and updating a website, for example, is an ongoing cost substantially greater than ASIC's estimation of $3000-$4000 plus $45.00 per month for maintenance and postings. That said, we strongly support the use of new technology to improve dissemination of information.
Further consultation It is often proclaimed that Australia leads the world in various regulatory matters, the implication being that this, in itself, is a desirable objective. Australia certainly has one of the most rigid, complex and prescriptive systems of corporate law in the world and often appears over zealous in adding to that legislation. The proposals in the current paper, if enacted, would compound that problem. The real objective should be to improve corporate performance while maintaining the integrity of markets, rather than legislative and regulatory development for its own sake Further we are concerned that as a result of the guidelines, many companies may not be as willing to conduct briefings for analysts or institutions. We are already aware of a number of companies who have expressed reservations in providing briefings in light of ASIC's draft guidelines. Although ASIC emphasises in the paper that the guidelines are not intended to be prescriptive, we consider substantial amendments are required to ensure that the paper does not result in significant unintended consequences.
ASIC plays an important role in providing guidance for compliance with the Corporations Law and vigorously enforcing that law. Accordingly, while we support the underlying principles behind the paper, we believe that the paper as currently drafted needs to be substantially reworked in light of our concerns expressed above, not least to carefully examine the implications of the recent SEC and TSE initiatives in this area. Careful consideration should also be given to the appropriate body to issue any guidelines, and their interaction with the current ASX Listing Rules, to avoid guidelines becoming de-facto legislative requirements. We would welcome the opportunity to discuss our concerns at your convenience. CEO COLUMN - FEBRUARY 2000
The big issue for the new decade Over the last two years much of AICD's research and policy resources have been devoted to pursuing reform in the Corporations Law and tax arenas. Notwithstanding some disappointments, substantial progress has been made in both areas and it is important that we now achieve effective implementation as the benefits of these reform programs to community, business and government will be substantial. Change is never easy, particularly on the scale now proposed. However, whilst there may well be short-term difficulties, for example in implementing tax reform, we must keep in focus the far more significant and ongoing long-term benefits of the new tax system. With these major initiatives in place, AICD Policy Committee Chairmen and National Council took the opportunity prior to Christmas to review the priority issues now confronting AICD as we enter the new decade. A summary of some of these issues is given on Page (?). All are critically important to the role of the director, but arguably the big issue which is likely to replace Corporations Law and tax as the major preoccupation of community, government and business in the immediate future is the environment.
This is occurring on several fronts. Communities and leading business organisations have long been concerned about the negative impact of human activity on the environment. This manifests itself at the micro level for example, with urban pollution and road congestion, and at the macro level with issues such as salinity, land degradation and, increasingly, climate change. The pressure for sustainable development has already lead to a substantial improvement in environmental performance. Leading organisations are strongly committed to measuring their performance against the triple bottom line of financial, environmental and social parameters. However, whilst environmental performance per unit of production has improved markedly compared with earlier decades, population pressure and economic growth mean that the absolute impact of human activity on the environment continues to increase dramatically. Many will argue, along with Bob Carr, Premier of NSW, that we are now well past the point where the global commons of land, air and water could absorb the impact of human activity without irreversible damage. Others take a more optimistic view that population pressures are abating as economic prosperity spreads and that technological and social solutions can be found to the problems which now confront us.
The climate change debate is the first real attempt to address the commons problem at the global level. Much of the debate thus far has been conducted in fairly sterile and predictable terms around the threshold technical questions of whether global warming is a reality, and whether it arises from man-made or natural causes. These are important issues and continuing research is needed to establish the facts. However, to a large extent the science is becoming irrelevant as climate change has been taken up as a community and political concern. Community concern is often driven more by the obvious environmental impacts people encounter on a day-to-day basis than by the macro scientific debate. At the same time, as response measures to climate change have been investigated, triggered by the Kyoto Protocol, innovative organisations are recognising greater opportunities for improved environmental performance than previously envisaged. Typically these opportunities rely heavily on new technology with rapid dissemination of information and are economically viable in their own right, irrespective of the outcomes of the Kyoto process.
We are at a watershed where the reactive command and control measures of national or international environmental policy, imposed by government, may well be overtaken by proactive, market-based solutions as the range of opportunities broaden and become better understood. For this change to be effective, environmental externalities will have to be fully accounted for. Thus the full environmental impact of any economic activity will have to be quantified and costed in investment decisions. This is a quantum leap from the world we are accustomed to, but is likely to be the only solution to our more intractable problems, and is a key to community acceptance and corporate credibility. For example, the reduction of road congestion will only really be addressed once the full cost of road utilisation, including the pollution it creates, is sheeted back to the user by way of user charges. Politically difficult but increasingly necessary given the extent of congestion in major cities worldwide!. The adoption of the triple bottom line raises a range of questions beyond the immediate addition of environmental and social reporting. For example, the performance of organisations thus far has been assessed primarily in terms of profitability, which also forms the basis for taxation. But what parameters should be used to assess environmental and social performance and should such performance, or the lack of it, contribute to the taxation base?
Answers to these questions have the potential to fundamentally alter the framework of corporate activity, with wide-ranging impact on the law, accounting standards, taxation etc. Hence the importance of taking an holistic view of these issues rather than the piecemeal approach, discipline by discipline, we have adopted in the past. Our policy committees have recognised that an holistic approach must be a priority for the future. Climate change is arguably the issue which will trigger many of these changes. AICD looks forward to continuing to improve member awareness of this critical issue, focussing on the implications for organisations and the role of the director in meeting these challenges.
Core policy issues for 2000
Late last year the National Council met with the chairmen of each of the AICD's national policy committees to review 1999 activities and consider possible core policy issues for the year 2000. As acknowledged by national president Dick Warburton at the AICD Christmas cocktail party, the National Council congratulated the committees for a very successful year in actioning an enormous range of matters of concern to directors. Members can see some of the fruits of this labour by searching the Policies and Submissions page on the AICD website.
Some of the core policy issues for 2000 discussed with national councillors include the following:
1. Limited Liability - the lack of understanding of this critical concept and the dangers to the economy of its erosion under current legislative changes.
2. Cross Vesting and the Wakim High Court Decision. - the urgent need to revert to a national rather than state-based corporate law framework.
3. The Role of the Regulators - the concern at the blurring of the distinction between legislation setting and its regulation.
4. Reform of the Political Process - the need to address the difficulties caused by "last minute" Senate amendments and party political "horse-trading" in the legislation setting process, particularly after extensive prior public consultation.
5. Governance of Government - the need to address the unchecked explosion of business legislation which is increasing costs, adversely affecting performance and reducing benefits to the community. 6. Self Regulatory Governance Mechanisms - the need to encourage self regulation and trust, built on appropriate disclosures rather than externally imposed legislation and regulation.
7. Harmonisation of Multiple Regulatory Regimes - encourage an holistic approach to ensure consistency, avoid conflicts and overlaps and provide certainty in business legislation across the fields of accounting, tax and law etc.
8. "Triple Bottom Line" - the evaluation of corporate performance against not only financial but also environmental and social benchmarks.
9. The Future of the Corporate Form - the legal, consumer, shareholder and broader social and ethical implications of a change in the role of government vis--vis corporations in satisfying social expectations.
10. Employee Entitlements - balancing the protection of employees' entitlements on the collapse of their employer company against the financial interests of the other stakeholders including shareholders, creditors and the broader economy.
11. Corporate Groups - inputting to the current review of the legal, accounting and taxation treatment of companies within a group structure.
12. Remuneration Issues - providing a directors' perception on the current debate: for example legal disclosure, accounting standards on quantification (especially with regards to options), governance link to performance enhancement, social/ethical implications of wealth disparities within companies and in the society generally.
13. Environment and Taxation - explore the linkage between environmental performance and taxation mechanisms.
14. The Review of Business Taxation - provide the directors' perspective on the current consultation and implementation processes.
15. Voting Procedures and the Role of the AGM - the need to use technology to better satisfy the changing roles and expectations of shareholders, both institutional and individual, in the meeting and voting aspects of corporate governance.
Many of the above issues are multi disciplined, requiring expertise from numerous of the AICD policy committees (eg law, accounting and financial, tax and economics, industrial relations, corporate governance and environment). This implies even greater coordination between these committees than we have achieved to date.
With some three months until Company Directors Conference 2000 at Coolum on Queensland's Sunshine Coast, things are beginning to heat up again in more ways than one. This is the time of year when the conference truly begins to take shape, anticipation for the May program building across the nation. With the conference brochure hot off the press, we've managed to arouse a good deal of attention, both in style and form. This year's theme, "A Renaissance of Global Opportunity" is set against a backdrop of Raphael's fresco "The School of Athens" - its colour and perspective promising delegates enrichment of the highest kind. As for content, we're able to boast an excellent array of high-profile speakers from Australia and overseas who lend modern tones to Raphael's concept of the philosopher. Canadian novelist, essayist and historian John Ralston Saul will be one of the main speakers. Last year at universities in Sydney and Adelaide, Dr Ralston Saul's lectures won wide acclaim for their thought-provoking analysis, and were televised nationally.
Biographical details of Dr Ralston Saul, and all other conference speakers are available on our website www.companydirectors.com.au. Even more exciting however is that for the first time in the history of the AICD, conference delegates will be able to register online, securing their place at the "School of Coolum" on May 11 and 12. Tempted? Don't miss out as the conference is strictly limited to 500 places. See you on the Sunshine Coast.
Life fellowship for Sir Arvi Parbo
Frank Blount, former head of Telstra, addressed Victoria Division members at a December luncheon. Mr Blount's talk, Managing in Australia, stimulated much discussion and interest. At the same luncheon, AICD national vice president Elizabeth Alexander presented Sir Arvi Parbo with honorary life fellowship of the AICD, in recognition of his outstanding contributions to business and society.
The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.
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