Author: | Published: 9 Oct 2003
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Corporate collapses in recent years, from HIH to Enron, have focused the Australian public's attention on the corporate governance practices of Australia's top companies as never before.

The federal government has avoided responding to this increased attention with what it calls the "knee-jerk reaction" of implementing widespread legislative change. It has acknowledged that a one size fits all legislative solution to corporate governance would be impractical, costly and inflexible. Such a change would also be unnecessary given the high standards of corporate governance already demonstrated by corporate Australia - a fact recently confirmed by Governance Metrics International which rated the performance of Australia's blue-chip companies as strong when compared with other world markets.

Instead, the federal government has primarily adopted a principles-based approach to corporate governance. Under this approach, companies are educated about the principles of good corporate governance and are then required to disclose in their annual reports their compliance with these principles, and the reasons behind any non-compliance.


The affairs of Australian companies are regulated by a combination of legislation, common law, stock exchange listing rules, codes of conduct or standards, principles and guidelines.

In accordance with the Constitution of Australia, the federal government holds the power to legislate with respect to Australian corporations and some foreign corporations. The principal piece of legislation in this field is the Corporations Act 2001. This sets out the obligations of companies to lodge annual returns, audit their accounts, and make continuous disclosures to the market where appropriate. The Australian Securities and Investments Commission (ASIC) has responsibility for ensuring compliance with the Corporations Act.

The provisions in the Corporations Act are regularly reviewed by the federal government which in 1996 established a Corporate Law Economic Reform Program (CLERP) to perform this task. Since 1996, eight rounds of amendments have been implemented, with the provisions of CLERP 9 now being drafted for a planned implementation in July 2004.

Listed companies have a further level of regulation, in the form of listing rules issued by the three Australian market operators, the Australian Stock Exchange Limited (the ASX), the Bendigo Stock Exchange (the BSX) and the Newcastle Stock Exchange (the NSX). Of these, the ASX controls well over 99% of listed disclosing entities in Australia. The ASX Listing Rules govern the admission of entities to the official list, quotation of securities, suspension of securities from quotation, removal of entities from the official list and disclosure to the market. These rules supplement complementary provisions in the Corporations Act, and are enforceable against listed entities and their associates. The ASX monitors compliance with the ASX Listing Rules and issues guidance notes on their application. The BSX and the NSX have listing rules in similar terms.

In addition to the above, industry groups and professional associations often have their own codes of conduct or guidelines, which need to be complied with by their members.

Finally, the regulation of companies is affected and influenced by recommendations from bodies such as the ASX Corporate Governance Council and from reports such as that issued by Justice Owen as commissioner of the HIH Royal Commission.


In August 2002 the ASX Corporate Governance Council (the Council) was established to develop corporate governance recommendations which reflect international best practice.

The Council is comprised of representatives from 21 industry groups, including the Law Council of Australia, the Institute of Chartered Accountants in Australia, the Business Council of Australia and the Securities Institute of Australia.

On March 31 2003, after more than six months of debate and consultation, the Council released its Principles of Good Corporate Governance and Best Practice Recommendations.

Status of the Principles

The Principles are not legally binding on companies, as outlined above, but Australian companies are required (under ASX Listing Rule 4.10) to provide a statement in their Annual Reports disclosing the extent to which they have followed the best practice recommendations, and if applicable, their reasons for not complying. A checklist approach to compliance with the Principles is being discouraged. Instead, the Principles are aimed at generating discussion within companies as to what governance practices are appropriate for each of them. To date, companies which have failed to implement the Principles without having acceptable reasons have been judged by the market accordingly, finding themselves exposed to the embarrassment of negative criticism from their shareholders and the media. At a formal level, compliance with the Principles will be overseen by the ASX.

The principles of good corporate governance

The Council has established 10 principles of good corporate governance. These principles are as follows:

  • Lay solid foundations for management and oversight;
  • Structure the board to add value;
  • Promote ethical and responsible decision-making;
  • Safeguard integrity in financial reporting;
  • Make timely and balanced disclosure;
  • Respect the rights of shareholders;
  • Recognize and manage risk;
  • Encourage enhanced performance;
  • Remunerate fairly and responsibly; and
  • Recognize the legitimate interests of stakeholders.

Twenty-eight best practice recommendations underlie and give substance to the principles set out above. The most relevant of these principles are the recommendations to:

  • formalize and disclose the functions reserved to the board and those delegated to management;
  • structure the board so that a majority of the board is independent directors;
  • have a chair who is an independent director;
  • ensure that the roles of chair and chief executive officer (the CEO) are not exercized by the same individual;
  • establish a Nomination Committee;
  • require the CEO (or equivalent) and the chief financial officer (the CFO) (or equivalent) to state in writing to the board that the company's financial reports present a true and fair view, in all material respects, of the company's financial condition and operational results and are in accordance with relevant accounting standards;
  • require the CEO (or equivalent) and the CFO (or equivalent) to state to the board in writing that:
    - the CEO and CFO's statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board; and
    - the company's risk management and internal compliance and control system is operating efficiently and effectively in all material respects;
  • disclose the process for performance evaluation of the board, its committees and individual directors, and key executives;
  • provide disclosure in relation to the company's remuneration policies to enable investors to understand:
    - the cost and benefits of those policies; and
    - the link between remuneration paid to directors and key executives and corporate performance; and
  • ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders.

Review of the Principles

To ensure the Principles stay at the forefront of what is considered to be best practice, the Council has established an Implementation Review Group (IRG). The members of the IRG were announced by the Council on August 7 2003, and are all independent of the Council. The IRG members represent executive and non-executive directors, institutional shareholders, fund managers, company secretaries and CFO's.


Audit Committees

Companies which at the beginning of their financial year were included in the ASX All Ordinaries Index are now obliged, under ASX Listing Rule 12.7, to have an Audit Committee during that year. It is expressly stated in the rule that the composition, operation and responsibility of that Audit Committee will be governed by the Principles.


The ninth chapter of CLERP is now being drafted, as noted above in the section on Australia's regulatory regime. The exact wording of the CLERP 9 legislation has not yet been released, although a draft is expected to be released in the near future to both the public and the Joint Parliamentary Committee on Corporations and Securities. However, the federal government has confirmed that three of the recommendations have been finalized. The first of these amendments makes it mandatory for the CEO and the CFO to certify the accuracy of financial statements to the board before the board resolves to accept the financial statements. Secondly, CLERP 9 will include a requirement for the lead engagement and review partners of a company's auditors to rotate every five years. This period will be able to be extended to seven years, at the discretion of the ASIC. The last confirmed amendment will require analysts to manage conflicts of interest in order to ensure their independence.

Continuous disclosure

Listed companies in Australia are subject to both continuous and periodic disclosure obligations. Failure to comply with the continuous disclosure obligations gives rise to both civil and criminal liability. These obligations are principally set out in ASX Listing Rule 3.1 with corresponding provisions being located in Chapter 6CA of the Corporations Act.

Listing Rule 3.1 states that "once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell ASX that information". Section 677 of the Corporations Act clarifies that information is likely to have a material effect on price or value if the information would, or would be likely to, influence persons who commonly invest in securities.

To be excused from compliance with ASX Listing Rule 3.1, a company must establish that:

  • a reasonable person would not expect the information to be disclosed; and
  • the information is confidential and ASX has not formed the view that the information has ceased to be confidential; and
  • done or more of the following applies:
    - it would be a breach of the law to disclose the information; or
    - the information concerns an incomplete proposal or negotiation; or
    - the information comprises matters of supposition or is insufficiently definite to warrant disclosure; or
    - the information is generated for the internal management purposes of the entity; or
    - the information is a trade secret.

Compliance with the continuous disclosure obligations is primarily overseen by the market operators, as they have the ability to receive and disseminate materially price-sensitive information to the market, monitor fluctuations in share prices that may be the result of insider trading, and remove from their official lists those entities that breach their listing rules regarding continuous disclosure. The ASX can also request information from companies (under ASX Listing Rule 3.1B) in circumstances where the ASX considers that there is or is likely to be a false market in an entity's securities.

It is the role of the ASIC to make sure the market operators monitor and enforce their respective listing rules. The ASIC also has the role of pursuing civil or criminal actions against any entities or persons which the market operators have identified as being in breach of the listing rules. From March 11 2002, the continuous disclosure provisions were reclassified as civil penalty provisions as part of reforms implemented to the Financial Services Reform Act 2001. As a result, if a court declares that an entity has breached its continuous disclosure obligations, a pecuniary penalty of up to A$200,000 (US$128,000) per incident (under section 1317G of the Corporations Act) can now be imposed. The ASIC sought the imposition of civil penalties for the first time in April 2003, in the case of ASIC v Southcorp Limited, which is before the Federal Court of Australia. The standard of proof for a civil penalty case is only to establish that a contravention occurred on the balance of probabilities. In contrast, if the ASIC brings criminal proceedings for a breach of section 674 of the Corporations Act (which sets out the continuous disclosure obligations contained in the listing rules), then the evidence must establish beyond a reasonable doubt that a breach has occurred. If this is established, the court can then punish a natural person with a fine of A$22,000 and/or imprisonment for five years, and an entity with a fine of A$110,000. The ASIC can also seek an adverse publicity order (under section 1324B of the Corporations Act) against contraveners.

It is anticipated that the CLERP 9 reforms will change the ASIC's status from a back-stop regulator to the market operators to the primary enforcer of continuous disclosure in Australia. The relevant CLERP 9 reforms are the following proposals:

  • to increase the maximum pecuniary penalty against an entity for breach of its continuous disclosure obligations from A$200,000 to A$1 million. This proposal is in response to criticism that A$200,000 does not represent a sufficient deterrent to large companies with million dollar profits;
  • to allow the ASIC to seek civil penalty orders (rather than just compensation orders under section 1325 of the Corporations Act) against individuals, who are involved in the contravention by an entity of its continuous disclosure obligations. It is proposed that such a penalty would be capped at A$200,000;
  • for persons to bring compensation actions against either the entity or any other person involved in the contravention of the continuous disclosure obligations, regardless of whether or not ASIC has sought a declaration of contravention; and
  • for the ASIC to be given the power to issue an infringement notice against entities that have in its opinion contravened the continuous disclosure obligations. This proposal would allow the ASIC to impose penalties without the need to institute court proceedings. The proposed process is for the ASIC to hold a hearing to determine whether a breach has taken place. The entity will be allowed to attend that hearing and make an address. If the ASIC concludes that a breach has taken place it can then issue an infringement notice against the entity. The penalty to be paid under the infringement notice is anticipated to be materially lower than any amounts that a court can choose to impose. Payment of the penalty will not be deemed to be an admission of liability or an admission that the entity has breached the Corporations Act. If an entity chooses to dispute the infringement notice then the matter will be referred to a court to determine afresh whether there has been a contravention. The court can either confirm the penalty proposed by the ASIC or dismiss the matter. Some features of this proposal, notably the dual role of the ASIC as investigator and decision-maker and the inability of courts to impose a different penalty, have been criticized by commentators such as the Australian Law Reform Commission. Accordingly, it is likely that some changes to this proposal may be made before CLERP 9 is implemented in July 2004.


With the introduction of increased disclosure of corporate governance issues to the market, Australia has taken a significant step towards ensuring that investors will continue to trust and have confidence in the governance practices of Australian companies.

Gilbert + Tobin
2 Park Street
Sydney NSW 2000
Tel: +61 2 9263 4000
Fax: +61 2 9263 4111