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Minority Report by Senator Andrew Murray
Proportional Voting for
Directors
The existing method of electing
company directors on a limited re-election pattern has been severely criticised
for being undemocratic and unrepresentative and for denying the appropriate
representation of minority interests. The current system of electing directors
facilitates the dominance of control groups and lessens the possibility of
support being expressed for particular directors. The result of this is that, for
minority interests to be considered, minorities must often rely on expensive
and problematic remedies such as recourse to the legal system, the ASX rules
and ASIC, which reduces the attractiveness of investing, reduces genuine
shareholder participation and facilitates fairly domineering managerial or
board control.
These criticisms are just too
telling to ignore.
In order to ameliorate this
situation a system of preferential voting, also described as cumulative voting,
would allow for the election of directors in which all directors would be
elected annually with each share obtaining as many votes as there are
vacancies. In the United States this procedure is mandated as best practice by
federal law for banks and for corporations in some states.
With regard to the witnesses on
this topic, most were traditionalists used to the existing system, and not
experienced with alternative and improved voting systems, as used successfully
in other countries.
The question is therefore, how
can alternative voting practices for directors be promoted and trialed?
This type of preferential voting
for directors of listed companies needs to specify that the number of directors
to be elected will be determined by the company's constitution, all directors
would retire each year, each share will obtain as many votes as there were
board vacancies and each shareholder could distribute as they thought fit all
or some of the votes available to them from their shareholding to any number of
those nominated as directors. The consequence of this optional preferential
method is that shareholders can ascribe their votes to indicate their
preference for a director or directors.
Although the Australian
Democrats believe that this system is desirable for all listed and sizeable
companies, we accept it is not appropriate to require companies to introduce
such a system.
The hearings into this matter
have indicated that company directors and bodies which represent their interest
clearly have in interest in maintaining the status quo and are resistant to
change. However in the face of such resistance, the Australian Democrats would
at least argue that this system of voting must be put as an option to directors
of a company at the earliest annual general meeting available, to decide for or
against it.
This is another part of our
governance proposals. This concerns a democratisation of companies. We believe
this advances the corporate governance envelope.
Recommendation:
That the Corporations Law
obliges listed companies to put a motion to their shareholders to consider
whether their constitution should provide that directors be elected on a
proportional basis.
Environmental Reporting
The reason that we moved to
include section 299(1)(f) into the Company Law Review Act 1998 is not
just our well-known attachment to environmental matters, but the fact that many
companies are materially affected financially in terms of environmental
situations. I think we only have to recall some of BHP's financial consequences
arising from environmental matters to be well aware of that.
Many of the submissions made to
the inquiry are unfortunately misconceived. The focus and impetus for our
amendment was not to promote greater social responsibility by Australian
corporations, but was primarily directed to alerting shareholders to the
financial risks that might attach to a company’s environmental practices.
Suggestions that the requirement would more appropriately be included in
environmental legislation are incorrect because this is an issue of identifying
material financial risk based on relevant environmental issues. It is not
about promoting a particular social behaviour, desirable as that may be.
In early 1998, the Institute of
Chartered Accountants released a discussion paper entitled “Leadership – The
Impact of Environmental matters on the Accountancy Profession”. The paper talks
about the trend toward providing information in relation to the environmental
implications of business operations.
The paper is interesting in that
it details that a majority of annual report user groups (notably shareholders
and individuals within organisations with a review or oversight function) do
increasingly demand information about the environmental performance of
Australian corporations and they seek that information from annual reports.
The ICAA publication contains
some further interesting statistics which support our case - such as:
- more than two-thirds of users seek disclosure of environmental
information in the annual report;
- less than 10 per cent of preparers see environmental reporting
as a threat to their company – that is, they are not concerned about it;
- 64 per cent of users would support an approach to have
environmental matters included in annual reports;
- 40 per cent of Australian listed corporations are now providing
some form of environmental disclosures within their annual report.
A common theme of critics of
Section 299(1)(f) is that it is inappropriate because on this thinking other
social values should be included, such as health and safety. Such analogies
are not apposite. Just to give one example, the Kyoto agreement itself
requires investors to attend to major financial risk arising from environmental
considerations.
Recommendation:
That section 299(1)(f) of the
Corporations Law remain in the law.
Alternatively
That Section 299(1)(f) be
amended to ensure there is no doubt that disclosure is directed to exposing
financial risk.
Disclosure of Information
Filed Overseas.
The arguments outlined in the
Majority’s report in favour of retaining this requirement are very persuasive.
The benefits of this requirement in terms of international harmonisation of
disclosure standards far outweigh the cost that might be incurred in complying
with the requirement.
Evidence received by the
Committee did not suggest that compliance with this provision since its
introduction had imposed an onerous burden on any company.
Recommendation:
That section 323DA of the Corporations
Law remain in the law.
Reporting of Proceedings
The Australian Democrats are in
agreement with the Australian Law Reform Commission that this kind of
disclosure is critical to investor confidence.
A number of witnesses raised the
question - why are provisions of the Corporations Law and Trade
Practices Act 1974 accorded special status? Rather than being an argument
against the inclusion of a disclosure provision such as this, it may be an
argument in favour of extending the reporting of proceedings to all proceedings
against the company for significant alleged breaches of the law.
The Australian Democrats would
be supportive of a proposal to require companies to appraise their shareholders
of all proceedings against the company for significant alleged breaches of the
law, not simply those relating to the Corporations Law and the Trade
Practices Act 1974.
Recommendation
That the Corporations Law
require companies to report any proceedings instituted against the company for
any material breach of the Corporations Law or Trade Practices Act
1974.
alternatively
That the Corporations Law
require companies to report any proceedings instituted against the company for
any material breach of any law.
Notice of Meetings
The Australian Democrats have
supported a 28 day notice period when that issue has been the subject of
inquiry during two previous inquiries (Company Law Review Bill 1998 and Draft
Second Corporate Law Simplification Bill 1996). We continue to do so for the
same reasons.
However our intention was that
the 28 days be a maximum and not a minimum, and it may be helpful to look at
amending the 28 day provision to ensure that that intention is secured.
Disclosure of Proxy Voting
The Australian Democrats support
the disclosure of proxy votes. Our reasons for that support are set out in our
minority report to the inquiry into the Company Law Review Bill 1998.
Corporate Governance Board
Company directors have extensive
powers regarding the management of the company's business and internal
organisation. Some of these internal management powers, which may be termed
'corporate governance powers', include : the power of directors to decide their
own remuneration, to appoint and remunerate auditors and other experts, adopt
any accounting practices they see fit within accepted accounting
standards, nominate themselves for re-election and fill casual vacancies for
directors, to initiate changes in the corporate constitution and to control the
conduct of shareholder meetings and voting procedures (Corporations Law, Schedule
1, Table A).
Directors also possess the
powers to themselves manage conflicts of interest with related parties.
The number and extent of these
powers has led some commentators to argue that existing practices on unitary
boards unacceptably concentrate power with directors to pursue self-interest.
It also provides them with absolute power to manage their own conflicts of
self-interest.
There are significant
deficiencies in this method of controlling companies, and of ensuring full and
objective accountability to shareholders. There is a substantial body of
research and literature on this subject, and a number of countries have
variants of this idea of a corporate governance board.
A sure way to increase the
independence and accountability of Boards is to have two Boards, a main board
concerned with managerial and operational issues, and one concerned with
limited and specific governance issues. The former should quite properly
continue to be the senior board and have directors elected relative to shareholdings,
but to protect minorities, minimise conflict of interest issues, avoid Board
`capture', and ensure accountability, the latter needs to be elected by shareholders.
In listed companies a separate
Board should exercise these internal governance powers, leaving the main board
directors to concentrate on the management of the company's business
operations, while the second Board would provide the valuable introduction of a
system of checks and balances into corporate governance procedures. A
separation of powers in other words.
This proposal is a proactive
one, designed to prevent problems and improve corporate performance. To those
who answer that the stockmarket will police companies with poorly performing
Boards in corporate governance, that involves a reactive attitude and a
prejudicial one to shareholders since the value of their shares will have
fallen.
The corporate governance board
proposal would both simplify and reduce the role, responsibilities and workload
of the main board directors as well as increasing their credibility by removing
the powers which permit the perception or actuality of a conflict of interest.
This should thereby improve the accountability of directors and the internal
governance of companies and lead to better business management decisions by
directors. Ultimately, this is about re-establishing the balance of company
governance in favour of shareholders, rather than management.
It is essential that the
separate governance board be elected on the democratic basis of one vote per
shareholder rather than one vote per share.
Although the Australian
Democrats believe that this system is desirable for most sizeable and listed
companies, we appreciate shareholders must have the right to determine how the
company they own is governed. Consequently, we believe that all listed
companies of sufficient size should be obliged to put a motion that a corporate
governance board be established and allow shareholders to vote on that motion,
to decide for or against.
Recommendation:
That all listed companies of
sufficient size should be obliged to give their shareholders the option of
establishing a corporate governance board at the next annual general meeting of
the company.
Obligation to Report
Suspicions of Fraud
The Australian Democrats believe
that directors and executive officers should be obliged to report to the
auditor any suspicion they may have about any fraud or improper conduct
involving the company.
The report of the majority is
flawed in a number of respects:
- It views the role of the auditor as only extending to an
examination of the accounts to ensure compliance with the Corporations Law
– the role of the auditor is much wider than this.
- Whilst the terms ‘suspicion’ and ‘improper conduct’ are capable
of subjective interpretation, like many other terms contained in the Corporations
Law, there is no magic in these terms and they are to be attributed an
ordinary meaning. The suggestion of different interpretations is not a valid
reason for not pursuing this important safeguard.
- The suggestion that the imposition of this duty of disclosure to
the auditor will reduce a director’s responsibilities under the law is
completely baseless. Directors and officers duties and obligations would be
unaffected except for the requirement to make disclosure to the auditors.
- Auditors are professionals who are accustomed to dealing with
irregularities and suspicions of fraud. To suggest that they would be placed
in a position of uncertainty when presented with information that might
indicate a fraud or misconduct ignores the fact that they already make
decisions relating to this type of information when it arises from their audit
procedures.
Recommendation
That the Corporations Law
require directors and executive officers of a company to report to the auditor
any suspicion they might have about any fraud or improper conduct involving the
company.
Director’s Power to Call a
Meeting
In its report on the Draft
Second Corporate Law Simplification Bill 1996, the Joint Committee recommended
that individual directors be given a right to requisition meetings. The
Committee commented:
The Committee accepts that recent events in relation to
some companies have demonstrated a need for individual directors of listed
companies to be able to act independently in the interests of all shareholders.
The right to call a members meeting gives some substance to this independence
and it should not be a right that can be withdrawn through the
constitution of a listed company.
The Democrats continue to take
the view that a single director should have this right. In their report
arising out of this inquiry, the majority of the Committee comment:
Strong arguments were made for retaining this power on
the grounds that its public benefit outweighed the infrequent occasion when a
director may abuse the power.
Since the enactment of this
provision, the Committee were advised that not one director (out of many
hundreds) had used the provision. It is quite evidently a ‘reserve power’ and
has great value as such.
Recommendation:
That section 249CA of the Corporations
Law be retained.
Requisitioning a General
Meeting
In our report on the Company Law
Review Bill, we commented:
It is vital that minority shareholders retain the
ability to call meetings. It is equally vital that such shareholders are
effectively dissuaded from using this power frivolously or vexatiously.
We still hold that view, and
consequently we cannot agree with the majority that the threshold for calling a
meeting should be a holding of 5% of issued share capital by the requisitioning
members.
Thresholds need to be sensible
but not unreasonable.
We believe that there may be
merit in revising upward the threshold of 100 members, especially for large
mutual organisations. We also believe that the shareholding held by each
member should be defined as a ‘marketable parcel.’ We are disappointed that the
majority was not able to formulate a number of options that could be put to the
Parliament in the alternative.
Given the choice between the
existing regime and that proposed by the majority of the Committee, the
Democrats favour a provision approximate to the existing regime.
Senator Andrew Murray
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