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Wednesday, 4 December 2002
Page: 7208

Senator WATSON (7:36 PM) —Tonight I wish to place on record some aspects of good corporate governance. Following a number of spectacular corporate collapses both in Australia and overseas, corporate governance issues have recently been the subject of intense focus, including a report by the Joint Committee of Public Accounts and Audit of the federal parliament. Mr Ian McPhee of the Australian National Audit Office says:

The profile given to corporate governance in the public sector has been one of the most positive stimuli for change and better performance in the last decade.

Congratulations, I say. Mr McPhee goes on to say:

It may not have received top billing among the specific reform agenda items but it has always been seen as a front row contributor to a highly performing Australian Public Service (APS) that has universal application to all Commonwealth bodies.

The Prime Minister now wishes to extend the APS performance through a high-level inquiry into Australian statutory authorities, with the announcement of a review into corporate governance. This review will be undertaken by the distinguished business leader and former chairman of Rio Tinto and Westpac, Mr John Uhrig AC. A specific focus of the review will be on a select group of agencies with critical business relationships, including the Australian Taxation Office, the Australian Competition and Consumer Commission, the Australian Prudential Regulation Authority, the Reserve Bank, ASIC, the Health Insurance Commission and Centrelink. In addition to analysing existing governance arrangements, the review will address the selection process for board members and office holders, the mix of experience and skills required by boards, the development requirements of boards and their relationship to government.

The Australian Financial Review reported in September on the results of a study commissioned by Horwath New South Wales and conducted by the Newcastle Business School. It was a study of the corporate governance practices of the top 250 Australian companies. The report rated 29.2 per cent of the companies as inadequate in terms of corporate governance—including 5.2 per cent which were rated as `seriously deficient'. Those are alarming figures. The study noted that one of the most significant issues was that a number of companies employed non-executive directors who failed to meet the key independence criteria necessary for good corporate governance.

The Joint Committee of Public Accounts and Audit has been at the forefront of examining these sorts of issues, having completed the following reports in recent times: report 372, Corporate governance and accountability arrangements for Commonwealth government business enterprises, and report 391, Review of independent auditing by registered company auditors. The committee's most recent report stated:

... effective corporate governance is an essential part of the modern corporate entity. Public and private sector organisations will ultimately be judged by how well they direct, control and deliver their corporate activities.

Corporate failures during the 1980s and early 1990s in particular have brought to the attention of the public the need for efficient, effective and responsible corporate governance. Shareholders and governments have had to pay dearly in cases where corporate entities have failed to apply effective corporate governance and accountability arrangements. Further interest in the topic has been generated by the onset of the Asian financial crisis. Poor corporate governance in both the public and private sectors is considered to have been a contributor to the financial decline of South-East Asian economies during 1997.

Corporate governance is not about power. It is about finding ways to ensure that decisions are made effectively and it is about putting monitoring and control mechanisms in place. It is about the way corporate entities are governed, as distinct from the way that they are managed. The OECD has stated:

If countries are to reap the full benefits of the global capital market, and if they are to attract long-term capital, corporate governance arrangements must be credible and well understood across borders. Where companies do not rely primarily on foreign sources of capital, adherence to good corporate governance practices will help improve the confidence of domestic investors, may reduce the cost of capital, and ultimately induce more stable sources of financing.

I will now move on to the important issue of risk management. It is important that boards understand the degree of risk and areas of risk and are able to distinguish between what I call `pure risk' and `speculative risk'. Further, boards should have plans to manage the different levels of risk. In the superannuation area, where I have a particular interest, Deloitte's national superannuation partner, Mr Richard Rassi, believes that the most significant area of governance requiring improvement is the area of risk management, with boards needing to be aware of all key strategic and operational risks facing their funds.

Audit committees, of course, are an important ingredient of corporate governance. The membership should all be independent directors, as many failed corporations have got into trouble with the chair coming from either the chief executive officer or the chief financial officer. Audit committees comprising independent directors are an important element in corporate governance arrangements. Some common better practices associated with audit committees include: operating to an approved charter which clearly sets out its authority and lines of responsibility; having unfettered access to both the internal and external auditor functions and having in place processes for regular communication with the internal and external auditors; having unfettered access to executive management; and having access to all correspondence between the auditors and management, in particular all audit reports and responses thereto. In addition, the audit committee must set out and agree to the CEO's remuneration.

What about the role of ASIC in corporate governance? This role is increasingly important, and I think the increased influence of ASIC in this area is a reflection of the lack of interest from the major accounting bodies, which should cover aspects of good corporate governance in their audit reports. The Chairman of ASIC, Mr David Knott, whom I greatly respect, recently stated that ASIC has been vigorous in enforcing good corporate governance. In the last four or five years in relation to accounting issues, ASIC has successfully achieved restatements in company accounts of more than $3 billion—a great amount of money.

Looking at recent corporate history, we have had the corporate failures of HIH, NRMA, One.Tel, Pasminco, Harris Scarfe, Centaur and Ansett in Australia, and the big one of Enron in the United States, just to name a few. In the last three years in Australia alone, 69 people have been sent to jail in relation to corporate offences. Last year 19 people were imprisoned—11 of them company directors—and currently 111 defendants are on criminal charges.

I found it extraordinary that, on the back page of today's Financial Review, there appeared to be an implied attack on Mr David Knott for being too hard on at least one corporate person who had certainly failed in his duties in terms of good corporate governance. The paper seemed to take the attitude that it was a situation of overkill. I think that it is an appalling indictment of a newspaper for it to print that sort of rubbish, because we have to raise our standards and not be apologists for these sorts of people who have ripped off millions of dollars from innocent people.

Following public concern, the Australian Stock Exchange has set up the Corporate Governance Council. The council should be good both for companies and for the ASX. Corporations are now increasingly being called upon to have governance systems extending beyond their traditional focus to cover such areas as consumer protection; the rights of individuals, including employees; and environmental impacts and sustainability. Environmental and social sustainability management has now been firmly placed on the corporate governance agenda, and this is a good development.

Companies are being pressured to adopt higher standards of non-financial reporting and to provide more economic, environmental and social performance information. This is in order to provide more insight into the vision and effectiveness of management in anticipating a wider range of risks and opportunities in the marketplace. The focus on corporate governance is driven not just by the corporate failures of the past but also by the challenges of the future. I trust that our current interest in the issue of corporate governance is not cyclical—it does seem to come and go—and that it will be a permanent feature of good accounting practice in this country.

Senate adjourned at 7.46 p.m.