Any Australian board directors who were hoping that political infighting in parliament would prevent real corporate governance reform received a big shock at the end of June. After much to-ing and fro-ing the legislature finally pushed through a package of reforms designed to make companies – and their directors – more accountable to investors. Key to the reforms is the requirement that the salary packages (including stock options) of directors and senior executives be revealed in annual reports.
Many of those involved in the lobbying process behind the legislative moves – on both sides – were surprised at the scale of the amendments to the corporate law. The changes followed last minute political skirmishing in parliament to ensure the passage of a revised bill and came ahead of an expected stormy period in domestic politics, coupled with the possibility of a federal election. Changes proposed by the opposition Australian Labor Party and the minority Democrats, were accepted by the coalition government to ensure the passage of the bill. The Company Law Review Bill is aimed at overhauling a range of corporate transactions and administrative tasks, as well as streamlining the rules for company registrations, meetings and financial statements.
Guarded response
Ian Dunlop, speaking on behalf of the Australian Institute of Company Directors, carefully words his response to the new regulations. While welcoming the move toward more disclosure by companies listed on the Australian Stock Exchange, he notes that many of them already detail the salary packages of their directors in their reports and fears that the new law could lead to burdensome requirements. ‘We don’t like to see this area becoming too prescriptive,’ he says.
Others have been much more positive. Ian Matheson, former director of the Australian Investment Managers’ Association (Aima) and now a director at Sydney-based IR agency Orient Capital, says the new law should allow investors to make a more informed decision on the appropriateness and level of remuneration. ‘We will see the component parts and the totality of remuneration, and how it links to company performance.’
Investor groups also broadly welcome the reforms which bring Australia more into line with best practice in other markets such as the US and UK. The new law, which came into effect on July 1, requires the disclosure of salary packages of directors and senior executives (including share options and bonuses). Detail will also be required on salary figures for each of the five highest paid employees. Previously companies were obliged only to disclose the number of directors and executives within a particular salary band and have not been required to disclose individual salaries or share option packages. Crucially, the law also requires companies to explain how (or how not) these salary packages are being tied to corporate performance. Companies will be expected to reserve a passage for detaileddiscussion of these performance related issues within the annual report.
But it doesn’t stop there. Any Australian listed company which is bound by US SEC regulations due to a presence in the States will be forced to provide the same level of information in the domestic market. A possible information gap has concerned many Australian investors in the past but the new regulations are not expected to put off other Australian companies from accessing the US capital markets since it should simply be a matter of enforcing dual release of information. Companies will also have to report on their compliance with Australian environmental legislation.
Reforms relating to annual meetings and the collection of proxy votes are also included in the bill. Companies are now required to give 28 days notice of any meeting and to increase the transparency of their use of proxy votes at shareholder meetings. Accordingly, chairmen must disclose at company meetings the number of proxy votes received, who holds them and whether they were voted for or against any resolution.
An associated piece of legislation, the Managed Investments Bill, also passed parliament in the same week, to herald the end of the traditional trustee role in managed funds. The bill, which encapsulates the notion of a single responsible entity in fund governance, disposes of trustees but allows an expanded role for custodians. The trustee industry, which has fought hard againsUp until now, most Australian annual reports have only included a page or two on the composition and work of the board of directors. They have disclosed financial assets and liabilities in voluminous detail, but revealed little of real substance on performance criteria and evaluation. Best practice reporting rules were largely limited to an Australian Stock Exchange listing rule requiring directors to establish and report on corporate governance practices along with a relatively recent accounting standard enforcing improved disclosure of various financial instruments such as derivatives.
Despite pressure in recent years from bodies such as the former Australian Investment Managers’ Association (Aima), improvement in disclosure levels has mainly been left to the discretion of each listed company. One commentator went so far as to describe Australian companies as being virtually unaccountable by comparison with their peer companies in other countries.
Lynn Ralph, executive director of the newly-formed Investment and Financial Services Association (IFSA), disagrees with that assertion but argues that Australia has taken a ‘black letter law’ approach to governance in the past. That’s clearly a situation which the conservative coalition federal government and regulatory agencies do not wish to see continue, hence their eagerness to do a deal to push through the new legislation.
The IFSA, which is the combination of several former associations: the Life Investment & Super-annuation Associa-tion (Lisa), the retail-oriented Invest-ment Funds Assoc-iation of Australia (IFA) and Aima, is promoting members’ adherence to the so-called Blue Book, a guide to approved corporate governance now in its second edition. ‘We want substance in corporate governance, not just the tick-the-box form,’ comments Ralph.
She argues that after a public flurry on corporate governance a few years ago (particularly after problems with related party transactions at supermarket company Coles Myer), a lot of work was being done in developing standards and seeking compliance.
The Australian stock market has performed relatively strongly until recently, posting double-digit returns, but such figures have concealed some calamitous underperformance at the core of the companies. One measure is in the number of chief executives of large companies who have lost their jobs as a result, directly or indirectly, of investor pressure: CSR, Amcor and Country Road have all replaced, or are trying to replace, their CEOs.
Perhaps most significantly, John Prescott, chief executive of BHP, Australia’s longtime premier company, stepped down in March in response to a share price which has plunged from A$19 to A$13 in six months. While BHP’s fall from grace can be traced to several poor decisions and some bad luck, most domestic shareholders have had no way of knowing whether market falls are the outcome of managerial incompetence or poor fortune. Much of the investor relations attention has focused on foreign investors in the UK and US.
Such situations have not helped the slim public understanding of how corporate governance should be measured – or how Australian companies can be held to account. Another contribution to the confusion has been that a year ago, the lack of a corporate investment in Asia was seen as a strategic failure; today it appears to be more of an inspired judgement.
Pundits expect the first detailed revelations of corporate salary levels to lead to a public outcry when the next set of annual reports are published. Those who have already taken the initiative know only too well the dangers of presenting such information without good public relations advice.
The CEO of the newly-listed insurer AMP, George Trumbull, took a US-inspired decision to publish full remuneration details, only to suffer some painful jabs at his personal $1.3 mn salary, and an options package worth up to another $20 mn. ‘He was pretty frank, and we hope more will follow,’ says Ralph.
Down the track, if not this year then next, companies can expect to see position papers from the IFSA on electronic proxy voting at AGMs, more frequent shareholder interaction with boards and the adoption of international accounting standards in Australia, in line with those proposed by Iosco.
The Australian Stock Exchange was also moving to improve what shareholders will read in a company’s annual report but has had its fire stolen. It had accepted federal government preferences for companies to make mandatory a management discussion and analysis section in the report. What moves from the ASX may follow the federal government’s new law are not yet known since the exchange is still digesting the legislative detail.
One thing is for certain: the scale of the legislative reforms has even surprised those on the regulatory cutting edge at the exchange. One insider comments: ‘I’d say they are all still in a state of shock.’
