Section 1
1.1 The Bill was introduced into Parliament on 3 December 1997. The Bill
rewrites the core company rules affecting the way a company is run and
is largely based on the Second Corporate Law Simplification Bill 1996.
1.2 The Bill redrafts and improves provisions of the Law dealing with:
- registration of companies
- company meetings
- share capital
- financial reporting and annual reports
- deregistration and reinstatement of defunct companies
- company names.
1.3 The Bill also introduces for managed investment schemes rules which
are similar to those that apply to companies in relation to members' meetings,
financial reporting and annual returns.
Place in the Corporate Law Economic Reform Program (CLERP)
1.4 The Corporate Law Economic Reform Program (CLERP) was established
by the government with the aim of improving the efficiency of corporate
regulation. This Bill begins that process by simplifying and redrafting
provisions of the Corporations Law in plain English. [1]
1.5 The next stage of CLERP, as foreshadowed to the Committee by the
Parliamentary Secretary to the Treasurer, Senator the Hon Ian Campbell,
will involve simplifying and redrafting the Law's provisions on fundraising,
takeovers, directors' duties and corporate governance:
Senator CAMPBELL,The company law economic reform program policy
document which outlines six major areas of reform that the government
will be seeking to legislate, the first four pieces of law prior to
July this year covering fundraising, takeovers, directors' duties and
corporate governance and accounting standards reform. Those pieces of
legislation we envisage will actually be available for public exposure
within the next seven days. Later in the year we will be seeking to
implement the reform of chapters 7 and 8 of the law, which regulate
the securities and futures markets. I think that exercise will actually
result in a lot fewer pages in the law.[2]
History of the Bill
1.6 In June 1995, an Exposure Draft of the Bill (the Second Corporate
Law Simplification Bill) was released for public comment. Following a
period of public consultation, the draft Bill was referred to this Committee
on 26 June 1996 by the then Parliamentary Secretary to the Treasurer,
Senator the Hon Brian Gibson AM. The Bill was at that stage a second Exposure
Draft incorporating the comments of practitioners and other users of the
Law.
1.7 The Committee's report on the draft Bill was tabled in the Senate
on 18 November 1996. The Committee made 11 recommendations to amend the
draft Bill which the government addressed in a separate response to the
Committee's report. [3]
1.8 A number of significant changes have been made to the Bill since
it was examined by the Committee. These are outlined below:
- The Bill omits the requirement for a Management Discussion and Analysis
component in the annual directors' report (formerly section 300 of the
Bill).
- The Bill is amended to retain the capacity to register new no liability
companies (section 112 of the Bill).
- The Bill permits greater use of electronic technology to convene meetings,
serve notices and lodge proxy documents as recommended by the Committee
in its report on the draft Bill (Chapter 2G of the Bill). The Bill also
incorporates several other recommendations made by the Committee.
1.9 The Bill was introduced into the House of Representatives on 3 December
1997 and was passed by the House unopposed on 4 March 1998.
1.10 On 3 March 1998 the Senate referred provisions of the Bill to the
Committee for inquiry and report by 23 March 1998. [4]
This date was extended by the Senate to 30 March 1998 and again to 1 April
1998. [5]
Submissions to the Committee
1.11 The Committee received 13 written submissions concerning the Bill.
A list of organisations and individuals that made submissions is at Appendix
1. The Committee held two public hearings on 12 March and 24 March 1998.
A list of witnesses who gave evidence to the Committee during its public
hearings is at Appendix 2.
1.12 When the Committee first considered the Bill in 1996, it had not
been introduced into Parliament. The draft Bill had already undergone
a prolonged process of consultation and public comment. The matters raised
in submissions centred on specific issues rather than the general approach
of the draft Bill, and as the Committee noted at the time, Almost without
exception, there was general support for the Bill.[6]
1.13 The Committee's 1996 report was made against the background of that
process of continuing refinement of the Bill. It was accepted that the
Bill would undergo further development by the government before a final
draft was tabled in the Parliament.
1.14 The Committee makes the same observations regarding its present
inquiry into the renamed Company Law Review Bill 1997. While the
Committee received many comments on the Bill, some critical of the omissions
in the Bill, there was general approval for the government's corporate
law reform program and in principle support for the Bill.
1.15 For example, the Australian Society of Certified Practising Accountants
and the Institute of Chartered Accountants declared that The Accounting
Bodies support the Government's Corporate Law Economic Reform program
and the thrust of the substantive reforms in the Company Law Review Bill
1997. [7] At the same time, the Accounting
Bodies recommended changes to the Bill's corporate governance framework.
[8] The Australian Stock Exchange (ASX) stated
that it had made a number of submissions to government on the Company
Law Review Bill (and its predecessor, the Second Corporate Law Simplification
Bill 1996) and many of the issues it raised were resolved in
ways that meet ASX's concern. [9] However,
the ASX highlighted several inconsistencies between its listing rules,
the Law as it applies to companies and provisions in the Bill relating
to voting and meeting requirements for managed investment schemes. [10]
1.16 Comments on the Bill ranged widely across the various provisions
of the Bill. These can be divided into two categories: comments on the
drafting of certain provisions of the Bill and comments as to the adequacy
of shareholder protection and corporate governance structures in the Bill.
Drafting issues
1.17 The Committee notes that where it was asked to consider specific
amendments to the Bill, in most cases the government already had received
similar representation from the same organisations during the preparation
of the Bill.
1.18 Clearly, at this stage of the Bill's consideration, the Committee
is not able to offer a definitive judgment on the merits of the drafting
issues raised and possible unintended consequences of the Bill. However,
the Committee has made available to the government all of those comments
on the drafting of provisions and the suggested amendments.
1.19 The drafting issues and matters of detail, which the Committee has
addressed, include:
the threshold requirement for convening a general meeting at the request
of members (section 249D)
1.20 Comments by the NRMA dealt with section 249D of the Bill, which
reduces the threshold number of members who may requisition a general
meeting from 200 to 100. The NRMA indicated that the current threshold
was an unrepresentative figure (about .01% of its total membership). The
lower threshold was even less representative. The NRMA stated: The
ease with which .01% of the NRMA's membership can have a Special General
Meeting called needs to be viewed in the context of the costs to the company
and, thus, to the membership as a whole, both direct and indirect, in
actually holding the meeting. [11] It
estimated the cost of convening a general meeting at $1 million.
1.21 While acknowledging the importance of procedures to enable general
meetings to be called, the NRMA stated that in the case of a large
mutual, the law should encourage members to have their grievances dealt
with at the Annual General Meeting so that the calling of a Special General
Meeting is a last resort. [12] It recommended
raising the threshold for companies with 1 million members to 1% of the
membership of the company.
1.22 In its report on the Second Corporate Law Simplification Bill, the
Committee was concerned that requisitioned meetings could be used improperly,
to propose invalid or even `frivolous' resolutions, simply to generate
publicity for the requisitioners. [13] It was
suggested that members could use their right to request a meeting for
improper purposes, without being aware that the meeting would be invalid,
and that this would cause the company unnecessary costs and inconvenience.
The Committee recommended statutory backing for the common law position
that meetings must be called for legitimate reasons:
The Bill should make clear that the power of members to requisition
or convene a general meeting should not be exercised frivolously, and
should be exercised only where the purpose of the meeting is a valid
purpose for such a meeting. [14]
1.23 The revised Bill includes a `proper purpose' test for requisitioning
a meeting (section 249Q). This provision will reinforce the limited nature
of the requisitioning power under section 249D of the Bill. [15]
the inclusion of a cash flow statement in the balance sheet of registered
foreign companies (Schedule 2 Part 4, items 296, 298, 299, 301 and 302)
1.24 The provision that amends section 349 of the Law will require registered
foreign companies to lodge a cash flow statement, in addition to a balance
sheet and a profit and loss account. These companies must lodge financial
statements with the Australian Securities Commission (ASC) at least once
every calender year.
1.25 In its submission to the Committee, Ernst & Young drew attention
to the practical difficulties of registered foreign companies complying
with this amendment:
Many registered foreign companies are incorporated in various jurisdictions
in the USA and usually have fiscal years which conclude each 31 December.
If the provisions of the Bill become effective prior to 31 December
1998, these corporations will be required to include a cash flow statement
in their lodgments this calender year but may have completed their annual
reporting without that statement being prepared. [16]
1.26 Ernst & Young recommended this requirement be deferred until
the 1999 calender year.
third party claims against insurers of deregistered companies (section
601AG)
Section 601AG of the Bill reads:
601AG Claims against insurers of deregistered company
A person may recover from the insurer of a company that is deregistered
an amount that was payable to the company under the insurance contract
if:
(a) the company had a liability to the person; and
(b) the insurance contract covered that liability immediately before
deregistration.
1.27 A person will be able to sue a deregistered company's insurer directly,
without having to first apply to a court for reinstatement of the company's
registration.
1.28 Some doubts about the wording of section 601AG of the Bill were
expressed by the Insurance Council of Australia Ltd (ICA). To the extent
that the section does not specify insurer's rights in respect of future
claims, the ICA believes the Bill will disadvantage insurers:
The draft amendment does not specifically state that the insurer has
the benefit of all aspects of the policy that it would ordinarily have,
had the claim been made during its currency, such as exclusions, conditions
and other requirements upon the insured. Is it the intention that the
insurer will have these rights? Without such rights the insurer will
be in a worse position than the company would have been before deregistration.
ICA believes there will be prejudice to the insurer where they are unable
to investigate, or having difficulty in investigating, the subject matter
of claims where staff have dispersed and witnesses are uncontactable.
This would be particularly true if legislation is retrospective. [17]
1.29 It should be pointed out that the provision is unchanged from the
draft Bill. However, to remove any uncertainty about the wording of the
section, the ICA has suggested the following revised amendment:
A person may recover from the insurer of a company that is deregistered
an amount that was payable to or on behalf of the company under
the insurance contract to the extent that:
the company had a liability to he person; and
the insurance contract covered that liability immediately before deregistration.
In dealing with a claim from any such person, the insurer shall
be entitled to rely upon any defences the company would have had at
law against the person and any defences the insurer would have had at
law against the company (except the fact of deregistration itself).
Shareholder protection and corporate governance issues
1.30 The majority of comments the Committee received in evidence and
submissions involved broader issues of principle and the approach underlying
the Bill, and the issue most frequently raised was the extent of disclosure
that should be mandated in the Bill. Comments focussed on financial reporting
requirements, the form and content of annual directors' reports and the
right of shareholders to review a company's performance and to be adequately
informed.
1.31 The Bill's introduction into Parliament has rekindled public debate
over corporate governance standards and, in particular, directors' accountability
to shareholders. [18]
1.32 The debate has focussed on changes to the Law and proposals for
governance based reforms being considered by Parliament. Three key corporate
governance issues were identified:
- the disclosure of director's fees and executive salaries;
- the adoption of shortened company annual reports; and
- the 21 days notice of shareholders' meeting.
1.33 During the second reading of the Bill in the House of Representatives,
speakers who were following the public debate raised similar issues. [19]
1.34 This debate is reflected in the submissions and the evidence before
the Committee. The Committee's consideration of the Bill, which already
includes improvements in corporate governance recommended by the Committee
in 1996, has provided the opportunity for further discussion.
1.35 The Committee heard opposing views regarding the level of shareholder
protection and the adequacy of corporate governance structures in the
Bill. Both sides of the debate made reference to world best practice and
corporate governance models in other countries to support their assessment
of the Bill. For example, the ASX strongly opposed any prescriptive or
intrusive approach to corporate governance and warned that such an approach
posed a danger and would restrict Australian companies' ability to follow
world best practice:
ASX is not aware of any material way in which the Company Law Review
Bill reduces existing levels of shareholder and non-shareholder protection .ASX
opposes prescription in the area of corporate governance. It is not
possible to identify meaningful corporate governance practices and disclosure
that can usefully be applied across the diversity of different companies'
circumstances. And views of world best practice and international standards
change over time. Prescription would restrict Australian companies'
ability to follow world best practice as it continues to evolve And
at a more basic level, many of the measures proposed are of questionable
relevance and value in the Australian context, especially when the costs
that they impose are considered. [20]
1.36 An opposing view was presented by the newly created Investment and
Financial Services Association Ltd (IFSA) which argued that the Bill falls
short of providing an adequate corporate governance structure for Australian
investors. [21] IFSA recommended that the Committee's
corporate governance recommendations should be included in a visible way
in the Bill to enhance company disclosure and general corporate governance
practices:
IFSA is concerned at the failure of this Bill to incorporate certain
key measures, as recommended by the Parliamentary Joint Committee (PJC)
in its report on the (then-proposed) Second Corporations Law Simplification
Bill
IFSA, in common with its predecessor body, AIMA, is firmly of the view
that monitoring practices alone are insufficient to promote improvements
in Australia's corporate governance environment, or to bring Australia
into line with the growing international consensus on what constitutes
best practice in this important area.
Government has a critical role to play in promoting the principle of
disclosure as the key mechanism for ensuring accountability by companies,
and in equipping shareholders with the practical tools they need to
fulfil their monitoring and review functions.
IFSA is of the view that the Company Law Review Bill 1997 does not
adequately address these important corporate governance matters and
asks that the PJC recommend that the Bill be amended to include the
above requirements. [22]
1.37 The remainder of this report discusses broader issues raised in
the context of the debate over corporate governance standards and proposals
to amend the Bill.
General Management Discussion and Analysis (MD&A)
1.38 Previous drafts of the Bill contained a general management discussion
and analysis provision. This provision required the inclusion of narrative
information on financial statements in the annual directors' report (section
299 of the Second Corporate Law Simplification Bill 1996). The
requirement for a directors' report discussion and analysis or
MD&A applied to companies, registered schemes and disclosing entities.
1.39 When the Committee considered the draft Bill, shareholders' groups
endorsed the introduction of this provision. [23]
It was also supported by the Group of 100 and the Accounting Bodies. In
addition, the Committee recommended retention of section 299 unamended.
[24] However, in responding to the Committee's
recommendation, the government favoured a voluntary approach to providing
a MD&A:
While the Government believes that proper reporting to members is an
important responsibility for companies it considers that the approach
proposed by the Committee is not appropriate at the present time. In particular
it considers that the provision of a management discussion and analysis
to members should be a matter for companies to decide. [25]
1.40 The MD&A requirement has been omitted in the Bill in favour
of a requirement to discuss in general terms information relating to a
company's operations and activities. This change was strongly opposed
by the Securities Institute of Australia which stated the omission was
contrary to international trends set by major capital markets, such
as the United States, Canada and the United Kingdom and leaves Australian
users of annual company reporting at a disadvantage. [26]
The Accounting Bodies also expressed surprise at the withdrawal of this
requirement without discussion with any interested groups.
[27] They, together with other key organisations,
including IFSA, the Securities Institute of Australia and Corporate Governance
International recommended the reinstatement of the MD&A requirement
in the Bill:
The D&A would help users of financial reports to understand a company's
performance, financial position and future prospects. The Accounting
Bodies believe that the absence of a regulatory framework for D&A
disclosure in Australian company reports is a significant shortcoming
in the quality of financial reporting to users, especially as this form
of reporting is required or encouraged in other major capital markets,
such as the United States, United Kingdom and Canada We do not
believe that the Bill's approach, that is, allowing the provision of
a D&A to be voluntary is appropriate. Although directors can incorporate
interpretative information on the financial statements, our observations
indicate that among a cross-section of companies of different size this
type of information is not generally reported. [28]
1.41 A different view on the need for a MD&A requirement was presented
by the ASX which noted that a form of management discussion and analysis
reporting was already required under the present Corporations Law requirements
for directors' reports. [29] The ASX made the
observation that management discussion and analysis in the annual reports
of Australian companies was comparable with or better than that by companies
from other jurisdictions, which require a MD&A. [30]
It cautioned the Committee in adopting a legislative approach to prescribing
the form and content of a MD&A, particularly as no guidelines had
been produced.
1.42 Mr William Crosby, National Manager, Listings, Australian Stock
Exchange, elaborated further on the ASX's written submission at the Committee's
public hearing:
Mr Crosby,The first issue I said that I would talk about was
the proposal to incorporate management discussion and analysis reporting
in annual reports. We think this is a bit of a furphy to some extent,
because there are already detailed statutory requirements for directors'
reports. They are required to report on things that have happened and
on things that might affect the company in the future. Those provisions
are in the Corporations Law in sections 304 and 305 at the moment. There
are proposed provisions in the new bill that go very much to the same
issue in clause 299.
If you take the next step and say, `We are talking about what is actually
being reported,' and if you compare Australian reporting with most jurisdictions,
including jurisdictions like New Zealand and Hong Kong that say that
they require management discussion and analysis reporting, the standard
of disclosure in Australia is at least as good as and probably significantly
better than reporting in those jurisdictions.
There is a G100 group working on providing some informal guidance,
some non-statutory guidance, on that sort of disclosure in Australia.
ASX is participating, and it strongly supports that project. We would
say that until that sort of self-regulatory regime, that sort of peer
pressure regime, has had a chance to be tried then we would seriously
question the value of introducing a statutory requirement, especially
one,as was the one proposed in the committee's earlier report,that is
reasonably prescriptive about the issues that must be dealt with. [31]
1.43 Similarly, the Group of 100 Inc, which represents senior accounting
and finance executives, did not favour detailed and prescriptive
legislative requirements for directors' report discussion and analysis
as to content, presentation and style. However, the Group of 100
suggested the Bill include a broadly defined framework for
MD&A reporting. Although it acknowledged that a MD&A may be of
limited usefulness in small and medium size companies and the requirement
to do so could be regarded as onerous by their directors, these concerns
did not apply in respect of listed entities. The requirement for a MD&A
would also improve the quality of directors' reports:
While it has been argued that the existing directors' report requirements
are adequate, experience has demonstrated that, in the absence of a framework
and guidance or the need to satisfy overseas listing requirements, the
overall quality of such reports is not high. [32]
1.44 Other comments on MD&A reporting included:
- that the adoption of a MD&A style report should be seen in the
context of the harmonisation in financial reporting and accounting standards
advocated by the government in the Corporate Law Economic Reform Program
(CLERP) Paper No. 1: Accounting Standards, 1997; [33]
and
- that a statutory MD&A would be an essential and more accessible
component of the director's report for investors, who will not need
to search through the whole annual report to find key information. [34]
Notice of meetings
1.45 Section 249H(1) of the Bill provides, as a general rule, that at
least 21 days notice must be given for all members' meetings. [35]
This extends the current 14-day minimum period to 21 days. [36]
The minimum period was extended, as the Explanatory Memorandum notes,
following suggestions by shareholder and investor bodies that a 14-day
notice period was insufficient, particularly where the company had institutional
or overseas shareholders. [37]
1.46 In its consideration of the draft Bill, the Committee examined the
proposed 21-day notice period with particular reference to the enfranchisement
of foreign investors who, it was suggested, owned or managed 60 per cent
of Australian equities. [38] The Committee
concluded that extending the period further by seven days to 28 days would
involve little additional inconvenience to listed companies and was a
more realistic time period. Section 249H(1) of the Bill is unchanged.
1.47 Shareholder groups and their representatives strongly favoured extending
the period to 28 days and referred to the Committee's earlier recommendation
for extending the minimum period. A 28 minimum period was also endorsed
by IFSA, which noted the logistical difficulties involved in complying
with the 21-day notice period. [39] Other comments
supporting an extended period included the following:
- in practical terms, the benefits of technology are not currently available
to allow the electronic service of notice of meetings within the 21-day
period as envisaged in the Bill; [40]
- for most listed companies the minimum notice period is already 21
days. This is because they very often need to seek shareholder approval
by special resolution for some items of business. Only a further seven
days notice would ensure due consideration to proposals which require
specialised and independent advice or further research; [41]
- application of the extended period would be consistent with international
best practice of 28 to 30 days notice; [42]
- the process and mechanics of proxy voting is such that for institutional
investors and particularly overseas investors the 21-day period is an
inadequate timeframe to exercise their voting rights; [43]
and
- impediments to the exercise of shareholders' rights can affect overseas
confidence in the Australian equities market. [44]
1.48 On the other hand, the evidence from the ASX raised real concerns
about the impact of extending the minimum notice period to 28 days. The
ASX indicated that its listing rules require shareholder approval for
a range of transactions; for example, an issue of securities (in excess
of the 10% limit) in exchange for the acquisition of an asset (listing
rule 7.1), the acquisition and disposal of assets to related parties (listing
rule 10.1) and a disposal of a major asset to an entity to become listed
(listing rule 11.4). The ASX stated that a 28-day minimum notice period
could effect the outcome of a transaction (which may ultimately have been
approved by shareholders) or even place the ASX in a position where it
allowed the transaction to proceed without an opportunity for shareholders
to approve the proposal.
1.49 Ms Deborah Hambleton, National Companies Counsel, Australian Stock
Exchange, told the Committee:
Ms Hambleton, One of the proposals, I understand, is for a notice
period for all meetings to be for 28 days. We think that is too long
and we anticipate that if companies had an opportunity to comment on
this they would express the same view. The law is now going to recognise
notices of proxies being provided by fax and electronic means. As mentioned
previously, that is going to be at the option of the company and the
member to take up that option.
We think that commercial transactions have a limited window of opportunity.
In a number of cases our listing rules will require approvals in order
for commercial transactions to proceed. For example, listing rule 7.1
requires approval for issues of securities over 10 per cent of the company's
capital. We are concerned that if you move to 28 days one issue that
is going to arise for us is that companies may be seeking waivers from
those sorts of rules. Alternatively, if we refuse to give a waiver,
then they may be missing that window of opportunity for a commercial
transaction. So we have concerns about the proposal that the notice
should be extended not just from 14 to 21 but to 28 days. [45]
Disclosure of director remuneration and senior executive salaries
1.50 An issue which reflected the tone of the debate over corporate governance
practices and the approach of the Bill, was the extent of disclosure of
directors' remuneration and whether specific information on remuneration
matters should be included in the annual directors' report.
1.51 The ASX told the Committee that disclosure of the details of director
remuneration beyond that presently required would not add to the information
for the making of investment decisions and doubted the value of detailed
remuneration disclosure:
Mr Crosby,The second issue I will address is directors' remuneration.
Our position is this: that no disclosure comes without cost. We are
not the ideal people to tell you the cost to a corporation of making
disclosure of precise details of which directors get which remuneration.
The Institute of Company Directors, or someone like that, would be much
better placed than we are to explain it to you. They say that it does
come at a cost and we accept what they say.
The question is: what is the benefit? Is it information that is actually
of use to investors and creditors of companies, which is what annual
reports are about? We really question at the margin from what we have
now, which is banded disclosure, detailed disclosure of allotments of
securities and other incentive arrangements to directors, whether there
is value being added for investors in requiring detailed disclosure.
We just do not think the case is made, so we do not support a requirement
to have line by line disclosure of directors' remuneration. [46]
1.52 The sources of disclosure requirements for director and executive
remuneration are section 300 of the Bill and Accounting Standards. The
Accounting Bodies advised the Committee that accounting standards were
revised to make these consistent with the Corporations Regulations. Moreover,
it was stated that the AASB Accounting Standards were the more appropriate
vehicle for disclosure of director remuneration:
The Australian Accounting Standards Board has revised its Accounting
Standard AASB 1017 Related Party Disclosures to incorporate
the relevant requirements of the former Schedule 5 to the Corporations
Regulations. [47]
More generally, Accounting Standards 1034 Information to be Disclosed
in Financial Reports has been developed to replace Schedule 5.
Consequently it is more appropriate for the AASB through Accounting
Standards to deal with disclosure requirements concerning remuneration,
and remove the detailed requirements in section 300. AASB 1017 already
requires summarised information about options and shares held by directors.
AASB 1028 Accounting for Employee Entitlements requires
disclosures about ownership-based remuneration schemes for employees.
[48]
1.53 Submissions from Corporate Governance International, IFSA and the
International Corporate Governance Network advocated the inclusion of
the details of directors' remuneration in the annual directors' report
as recommended by the Committee in its report on the draft Bill. The Committee
had recommended:
disclosure of the quantum and components of the remuneration of each
director of the company and each of its 5 highest paid executives, including
the existence and length of any service contract for the CEO. [49]
1.54 In evidence to the Committee, Mr Ian Matheson, Governor of the International
Corporate Governance Network, referred to the benefits for shareholders
of greater disclosure of remuneration details:
Mr Matheson,The last point is in relation to remuneration disclosure.
I know that the committee recommended positively in this regard in its
report on the bill and that the government did not accept that recommendation.
Many members of the International Corporate Governance Network have
expressed dismay both to me and to the government that this particular
proposal was not picked up. I would like to remind the committee that,
from an investor's point of view, the disclosure of remuneration details
is not a voyeuristic sort of exercise. It is purely that in this country
shareholders are required to vote on resolutions for the granting of
options and also to approve the increases in the aggregate level of
remuneration to non-executive directors.
Shareholders in this country are being asked to vote on these two remuneration
related matters in the absence of complete information. I would also
say to the committee that, perhaps, like parliamentarians,dare I say
it,company executives and directors are being paid in many forms these
days, not just in salary but in other ways like options, bonuses, long-term
incentive schemes, et cetera. The reality is that some of these options
schemes can add, for example, between five and 150 per cent onto the
reported value of remuneration as reported in the bands in the annual
report. I believe that the remuneration disclosure and the failure of
the bill to pick up on the committee's recommendation has led to much
dismay in the investment community. I think it would relieve a lot
of companies of a lot of agro that occurs at their annual general meetings
particularly by small investors who take exception to the granting of
hundreds of thousands of options, in some cases, where they are being
asked to do so on the basis of incomplete information. If shareholders
are being asked to make an informed determination about whether they
should approve a scheme or not, then I would suggest that they are being
asked to do so currently on the basis of very incomplete information.
[50]
1.55 However, the ASX did not believe any other proper purpose
could be served by mandating further disclosure in this area. It
added:
In any case, there seems no reason why detailed disclosure of remuneration,
if it were introduced, should not also extend to other groups that raise
money from the public, such as managers of collective investment schemes.
[51]
1.56 The Committee notes that section 300 of the Bill requires the disclosure
of all options that are part of director and senior company executive
remuneration. These options can form a substantial component of the remuneration
package. Specifically, the Bill states:
300 Annual directors' report specific information
(1) The directors' report for a financial year must include details
of: (d) options that are:
(i) granted over the unissued shares or unissued interests during
or since the end of the year; and
(ii) granted to any of the directors or any of the 5 most highly
remunerated officers of the company; and
(iii) granted to them as part of their remuneration;
1.57 The Explanatory Memorandum to the Bill advises that this requirement
takes into account the widespread use of employee share schemes,
the operation of existing ASC class orders and the need to provide information
to shareholders about the most significant employees of an entity.
[52] Section 300, however, does not require
remuneration details to be included in the directors' report if these
are included in the company's financial report.
1.58 The Committee accepts the current approach taken in the Bill but
recommends the government consider whether more detailed disclosures are
required and whether they should be disclosed in the directors' report,
in the context of developing legislative proposals under the CLERP Program,
Directors' Duties and Corporate Governance.
1.59 Many opposing views were put to the Committee concerning corporate
governance reform and the adequacy of shareholder protection in the Bill.
Because of the current debate over corporate governance standards and
the degree to which all previous drafts of the Bill were subject to scrutiny
and comment, the Bill has understandably aroused keen and intense interest
from users of the Law, regulators and shareholders. Consideration of the
Bill, which will in the Committee's view improve corporate governance
practices, has provided the opportunity for an informed parliamentary
debate of these issues.
1.60 In terms of the corporate governance issues discussed in this report,
some members of the Committee are concerned that the Bill does not sufficiently
address the major concerns of national and international investors, institutional
investors and shareholders groups. These concerns were raised in debate
during the second reading of the Bill and may again be raised when the
Bill is debated in the Senate. [53] The areas
of concern to shareholders, both large and small, relate to the disclosure
of financial information, including details of director and senior executive
remuneration, annual director's report to shareholders, the minimum notice
period for members' meetings and voting procedures at meeting.
1.61 The Committee welcomes the approach of the Bill in regard to the
use of electronic technology for communication between companies, their
shareholders and regulatory bodies. The Bill does not impose, nor should
it, an obligation to use electronic forms of communication but rather
the Bill facilitates its greater use to improve the flow of information
in the market.
1.62 The Committee's report includes a number of drafting issues, which
the Committee suggests might be further considered by the government.
The Committee recommends that, subject to any minor drafting or technical
amendments, the Bill be passed in its current form.
Senator Grant Chapman
Chairman
Footnotes
[1] This is illustrated by the fact that the
Bill will reduce the size of the current Law. The Bill replaces around
95000 words of text with 54000 words.
[2] Senator the Hon Ian Campbell, Committee
Hansard, 23 March 1998, CS31-CS32. See also the Treasurer's Press Release
No. 28, 17 March 1998 Business Law Reforms to Boost Jobs and Economic
Development.
[3] The government response was tabled in the
Senate on 18 November 1997. See Hansard, Senate, 18 November 1997,
P8849-P8854.
[4] Hansard, Senate, 3 March 1998, P153.
[5] Hansard, Senate, 30 March 1998, P1053.
[6] Parliamentary Joint Committee on Corporations
and Securities, Report on the Draft Second Corporate Law Simplification
Bill 1996, November 1996, p 7.
[7] Australian Society of CPAs and The Institute
of Chartered Accountants in Australia, Joint Submission No 4, p 1.
[8] Australian Society of CPAs and The Institute
of Chartered Accountants in Australia, Joint Submission, p 10.
[9] Australian Stock Exchange, Submission No
2, p 1.
[10] Australian Stock Exchange, Submission
No 2, pp 2-5, Detailed Submission in Support of ASX Submission.
[11] NRMA, Submission No 1, p 2.
[12] NRMA, Submission No 1, p 2.
[13] Parliamentary Joint Committee on Corporations
and Securities, pp 16-18.
[14] Parliamentary Joint Committee on Corporations
and Securities, p 18.
[15] See Corrs Chambers Westgarth, Submission
No 13, p 3.
[16] Ernst & Young, Submission No 5, p
1.
[17] Insurance Council of Australia Ltd, Submission
No 10, p 1.
[18] See for example the recent articles Some
black letters over company law, AFR 8/1/98, p1; Directors
must lay cards on the table, AFR 5/1/98 p 17; Disclosure
doubts in new reports, SMH 7/1/98 p 11; Case for more
corporate freedom, AFR 13/1/98, p 11. Supporting the changes
proposed in the Bill, Mr Richard Humphry, Managing Director of the Australian
Stock Exchange, argued that Australia is very successful in attracting
international equity investment our attractiveness depends on far
more substantial factors than whether or not annual reports attach specific
salaries to the names of directors, or whether notices of meeting are
issued 21 or 28 days in advance - not that these are necessarily insignificant.
Mr Humphry advocated greater corporate freedom saying that By and
large, the balance in Australian corporate regulation appears to have
shifted too far towards a prescriptive and intrusive approach and
the degree of our apprehension about easing corporate regulation may well
be excessive. On the other side of the debate, criticism of the
Bill came from the Australian Shareholders' Association (ASA) and the
Australian Investment Managers' Association (AIMA) which believe that
corporate governance standards will be diminished. Mr Paul Murphy, Acting
Executive Director of AIMA, advocated changes to the Bill to provide,
at minimum, the basic protections of investor interests and rights
which would include the requirements to disclose voting results,
to give at least 28 days notice of meetings, and to disclose compensation
policies and links to performance. The ASA pointed to the stewardship
of Burns Philp and Crown Ltd as examples of the need for tighter corporate
governance and greater market disclosure.
[19] See Hansard, House of Representatives,
4 March 1998, P274-P282, P302-P307. A further issue involved the possible
taxation consequences of the changes to share capital.
[20] Australian Stock Exchange, Submission
No 2, pp 2-3.
[21] IFSA membership covers those institutions,
which previously belonged to the Australian Investment Managers' Association,
the Life Insurance and Superannuation Association and the Investment Funds
Association.
[22] Investment & Financial Services Association
Ltd, Submission No 3, pp 1, 4.
[23] Parliamentary Joint Committee on Corporations
and Securities, p 32.
[24] Parliamentary Joint Committee on Corporations
and Securities, p 34.
[25] See Hansard, Senate, 18 November
1997, P8853.
[26] Securities Institute of Australia, Submission
No 8, p 1.
[27] Australian Society of CPAs and The Institute
of Chartered Accountants in Australia, Joint Submission, p 1.
[28] Australian Society of CPAs and The Institute
of Chartered Accountants in Australia, Joint Submission, p 1.
[29] See sections 304 and 305 of the Law.
[30] Australian Stock Exchange, Submission
No 2, p 7, Detailed Submission in Support of ASX Submission.
[31] Mr William Crosby, Committee Hansard,
12 March 1998, CS11-CS12. Other participants in the Working Party convened
by the Group of 100 are the Australian Institute of Company Directors,
the Securities Institute of Australia, the Business Council of Australia,
the Australian Society of CPAs and The Institute of Chartered Accountants
in Australia.
[32] Group of 100 Inc, Submission No 6, p 2.
[33] Group of 100 Inc, Submission No 6, p 1.
[34] Corporate Governance International, Submission
No 7, p 4.
[35] A longer minimum period of notice may
be specified in a company's constitution; or meetings may be called at
shorter notice if the requisite majority of members (all members for an
AGM and members with at least 95% of the votes in other cases) agree beforehand.
The Bill also recognises that a notice of meeting may be given by fax
or electronically (section 249J(3)) and allows a company to receive a
proxy document by fax or electronically (section 250B(3)).
[36] The Bill also removes the distinction
between notice periods for different types of resolutions.
[37] See Explanatory Memorandum, para 10.26.
[38] Parliamentary Joint Committee on Corporations
and Securities, pp 19-20.
[39] Investment & Financial Services Association
Ltd, Submission No 3, p 1.
[40] Corporate Governance International, Submission
No 7, p 6.
[41] Corporate Governance International, Submission
No 7, p 6.
[42] Corporate Governance International, Submission
No 7, p 7.
[43] Mr Ian Matheson, Committee Hansard, 12
March 1998, CS2.
[44] Mr Ian Matheson, Committee Hansard, 12
March 1998, CS3.
[45] Ms Deborah Hambleton, Committee Hansard,
12 March 1998, CS12. See also Australian Stock Exchange, Submission No
2, p12.
[46] Mr William Crosby, Committee Hansard,
12 March 1998, CS12. See also Australian Stock Exchange, Submission No
2, p 3.
[47] Schedule 5 of the Corporations Regulations
requires disclosure of the total income of directors of a company and
disclosure of the number of directors whose total income falls within
each band of income of $10,000. Schedule 5 also requires the disclosure
of the number of executives of a listed entity whose total income falls
within each $10,000 band of income after $100,000 and the total income
of all such executive officers.
[48] Australian Society of CPAs and The Institute
of Chartered Accountants in Australia, Joint Submission No 4, p 2.
[49] Parliamentary Joint Committee on Corporations
and Securities, p 35.
[50] Mr Ian Matheson, Committee Hansard, 12
March 1998, CS5-CS6.
[51] Australian Stock Exchange, Submission
No 2, p 3.
[52] Explanatory Memorandum, para 13.35.
[53] Hansard, House of Representatives,
4 March 1998, P274-P277.
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