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Corporate governance in APEC: rebuilding Asian growth, Australian APEC Symposium, 1 November 1998, Sydney: opening speech.

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Ladies and gentlemen, on behalf of the Australian Government, may I warmly welcome you to Sydney for the Australian APEC Symposium, Corporate Governance in APEC: Rebuilding Asian Growth.


The Role of Minister for Financial Services and Regulation


The Australian Government, in creating a Ministry for Financial Services and Regulation, has demonstrated the importance of ensuring appropriate regulation of the financial system as well as promoting the adoption of sound regulation in the Asia Pacific region.


As the Minister for this new and dynamic portfolio, I do not underestimate the challenges that lie before policy makers and regulators in our region. The recent turbulence and volatility in the world’s financial markets reinforces the importance of building a sound regulatory structure in emerging and developed economies. The need to shift our primary focus to strengthen regulation of financial markets across the region reflects the timeliness of this Symposium.


Australia’s achievements


In 1996, the Howard Government established the Financial System Inquiry, chaired by Stan Wallis, an eminent Australian corporate leader. This came about partly due to a realisation that we had to aim for world’s best practice in the delivery of financial services and ensure that our regulatory system was flexible and responsive enough to accommodate further rapid change in the financial sector.


The Wallis Inquiry was charged with recommending appropriate regulatory arrangements that would best ensure an efficient, competitive and flexible financial system, consistent with financial stability, prudence, integrity and fairness.


In response to the Wallis Report, the Howard Government introduced on 1 July this year a new organisational framework for the regulation of the financial system. Two key institutions emerged within this framework and now form part of my portfolio responsibilities. The new Australian Prudential Regulation Authority, or APRA, responsible for the prudential supervision of a broad range of institutions, including the deposit taking institutions, life and general insurance companies, and superannuation funds. And the new Australian Securities and Investments Commission with a focus on market integrity, disclosure and other consumer protection issues.


The Corporate Law Economic Reform Program


While these reforms ensure that we have appropriate regulatory institutions, the Howard Government also recognised that it is equally important to make sure that the laws and regulations administered by the regulators are responsive to the challenges presented by globalisation, competition and, very importantly, financial innovation.


To this end, we have committed ourselves to the modernisation of Australian Corporations Law and the revamping of the regulation of the financial services industry. The Corporate Law Economic Reform Program seeks to ensure that our business regulation is consistent with international best practice and provides an appropriately secure environment for investment in Australia.


Effective regulation of financial markets and corporations is vital to the efficient functioning of our economy and will increase market confidence. The Corporate Law Economic Reform Program in Australia seeks to enhance the transparency of financial information and the accountability of market participants by modernising the regulation of fundraising, takeovers, directors’ duties, corporate governance, financial reporting and financial markets and investment products.


Achieving these reforms will facilitate more investment and better economic growth for Australia We cannot forget that sustained real growth is the ultimate aim of all of our policy reforms so that we can improve the welfare and security of our nations.


Regional Financial Instability


The recent instability in international financial markets has created large impediments to achieving economic growth for many economies in our region.


There are many factors which have contributed to recent regional economic instability. Clearly the lack of appropriate prudential supervision was a significant factor and most analysts identify problems in corporate governance as a contributory factor to the Asian financial crisis. This is evident as the vulnerability of institutions in one country become contagious across the region. The broad dimensions of these problems are generally well documented and highlight the public policy consequences of weakness in corporate governance.


Fully informed markets are essential to the integrity of the financial system. Basic regulatory principles relating to the quality of disclosure and accountability of corporate managers will promote investor confidence and market stability. And establishing initiatives like this Symposium is crucial to developing strategies to repair the path towards sustainable economic growth


The Symposium


Thinking on corporate governance has developed very rapidly through the 1990s. Identifying the principles behind sound corporate governance will permit the development of a more robust financial system to assist the recapitalisation of viable Asian corporations and Asian economic recovery.


This Symposium has a particular focus on garnering the advice of businesses and investors. I particularly want to thank the regional business and investor participants who have taken time from their urgent and important challenges at home to share their experiences with us.


This Symposium offers you the opportunity to contribute strong, practical advice from the investor and business community to APEC Finance Ministers and Leaders on the priorities we should focus on in assisting corporate governance reform in various APEC economies. This contribution will look at both what governments need to do in getting the legal and regulatory infrastructure right and what governments should leave for the business and investor communities to determine by evolving their own improved practices.


This Australian Symposium will yield its own report to APEC Finance Ministers and Leaders, but it is also an important input to a broader APEC corporate governance initiative being co-ordinated by Malaysia in conjunction with the Asian Development Bank and the World Bank.


I believe your assessments will help the Australian Government’s work in APEC to identify gaps in technical assistance on corporate governance matters. My Prime Minister has stated that he will be announcing in Kuala Lumpur an Australian package of technical assistance to help economies fill those gaps. Australia will be encouraging other APEC members in a position to help, to do likewise.


Why corporate governance matters


Why has the Howard Government placed so much emphasis on corporate governance and its reform?


Broadly, corporate governance refers to the dynamics of the interaction between investors, managers and the board of directors in public companies. It is made up of many interlinking components, such as appropriate disclosure, directors’ duties and internal structures which provide for independent review of the process and decision making within a company.


Corporate governance has become a lively topic for many reasons.


Corporations become increasingly important in the organisation of economic activity as economies grow and modernise. Good corporate governance practices help ensure that managers pursue the same objectives held by the owners who supply the capital used by the corporation.


Better corporate governance increases the confidence of investors, which encourages more widespread shareholding throughout the community. That can be particularly valuable if a community wants to grow when access to foreign savings (through foreign direct investment, portfolio investment or foreign borrowing) is limited.


Appropriate corporate governance principles also contribute to efficient resource allocation: it provides high-performing corporations with lower-cost capital. In that way, it can both make the most returns from scarce domestic savings, and increase domestic corporations’ access to portfolio investment from overseas.


Better corporate governance is particularly important in attracting the portfolio investments of a new class of institutional investor, such as investors in pension funds and unit trusts that have become prominent this decade. These institutional investor s allocate internationally huge amounts of funds. Demographic and retirement pension developments in the capital-exporting economies suggest the role of these institutional investors is likely to continue to grow in the foreseeable future. If they can be satisfied of the quality of national corporate governance arrangements and management in the companies in their portfolio, they can be among the more stable contributors to foreign investment.


Any national corporate governance system that can meet the needs of such institutional investors will have a big advantage in attracting foreign portfolio investment.


Benefits of disclosure


Managers depend on good accounting and audit information to run their corporations safely and in a way that can remain profitable in the event of external shocks. Shareholders and lenders depend on good reporting and disclosure of information to select their investments, and to focus their interventions through shareholders’ meetings and the like when managers’ performance is deficient or makes the corporation vulnerable to shocks.


Key parts of the public sector that are also dependent on good corporate reporting and disclosure to do their jobs properly include regulators of corporations and stock exchanges, prudential regulators of financial institutions and those with the responsibility for ensuring the systemic soundness of the financial sector. National statisticians, frequently heavily dependent on timely and realistic corporate reporting as an element in compiling national accounts and partial economic indicators, also depend on reliable reporting and disclosure. And macroeconomic policy advisers are dependent on accurate information to be able to give governments realistic and timely warnings of the magnitude and urgency of necessary corrective macro and structural policy reforms.


The point to emphasise here is that enhanced, accurate information and a better understanding of the underlying economic situation in a country through transparent corporate and financial sector rep orting is a great ally of timely government policy reform.


Improvements in corporate governance draw heavily on the ideals of greater transparency and better accountability which are widespread in many areas of proposed policy and institutional reform. These ideas run consistently through all proposals to improve the international financial architecture and the operations of the global economy and are well documented in the recent work of the G-22, particularly its Working Group on Transparency and Accountability.


Enhancing transparency and accountability is aimed at helping markets themselves work better and more smoothly, with fewer ‘blind spots’, less herding and fewer surprised reversals of sentiment following the release of previously hidden information.


It is now a key task to re-capitalise viable East Asian financial institutions, corporations and state enterprises. In that process, East Asian economies will experience high levels of privatisation and corporate restructures in years ahead. Timely corporate governance reforms will help rebuild confidence for domestic and international investors in equity markets.


Reforms in corporate governance will improve the profitability with which scarce investible resources are allocated, thereby increasing GDP and its growth rate.


The role of the market


Of all the areas of reform required in international financial architecture and national economies as a result of the Asian crisis, perhaps no other requires quite such a role for private sector institutions and interest groups as corporate governance reform.


From a domestic perspective, effective corporate governance practices are essential to international competitiveness and economic growth. Governments should seek to encourage public corporations to adopt appropriate governance structures. However, because of the dynamic nature of world financial markets, policy makers should avoid unnecessary prescription which could lead to inflexibility and inhibit innovation. Once the fundamental requirements of transparency and accountability have been met, corporate governance practices should develop in response to competitive economic, commercial and international pressures, rather than in response to prescriptive rules. Corporate governance practice is evolving rapidly, and even in a particular economy, no single detailed practice will suit all companies in all industries at all stages of corporate life cycles. Nevertheless, mandatory legislative requirements should be imposed if there is a clear failure of these mechanisms to produce appropriate corporate governance practices.


Good reporting and disclosure regimes inherently require participation by local specialist groups in all our economies: accountants; auditors; company directors; regulators; legal experts and industry associations. I believe that working together to achie ve these improvements in corporate governance will strengthen society at large and pay social and political dividends well beyond the technical issues of corporate governance themselves.


Australian Corporate Governance Principles


Australia has been well served in the current volatile environment by the robustness of its corporate governance arrangements. Our current regulatory framework imposes minimum obligations and responsibilities on directors including the duty to act honestly; the duty to exercise care and diligence; the duty to act in the best interests of the corporation; the duty not to make improper use of inside information, or improper use of position, for private advantage, or to cause detriment to the corporation; the duty to avoid inappropriate related party transactions; and the duty to avoid insolvent trading.


Our independent legal and regulatory systems, the quality of our banking supervision and of our managements and directors have all helped to separate us from corporate problems in the more troubled economies. Again, that should stand as a reminder to all that the disturbances of policy reform and associated structural changes necessary to build a responsive economy, undertaken in a timely way, pay real dividends, especially when the economy is subjected to unforeseen shocks.


As mentioned earlier, our Corporate Law Economic Reform Program seeks to modernise business regulation including corporate governance, financial reporting and conduct and disclosure practices in financial markets.


The program seeks to achieve better economic performance by ensuring that Australia’s corporate laws and regulation operate at best international practice and provide an institutional environment for investment which has integrity and transparency. We do not seek to remove the commercial risks inherent in any investment - instead, we want those risks made more transparent and properly priced. Our Corporate Law Economic Reform Program will bring about improvements in the transparency of financial information and the accountability of participants in financial markets. An underlying theme of the reforms is to improve the quality and timeliness of information disclosures to the markets.


The key reforms in relation to corporate governance include clarifying a number of existing rights and obligations of directors to provide greater certainty. The Howard Government is also encouraging the continuous monitoring of corporate governance practices by the Australian Stock Exchange, investors, relevant industry associations which promote best practices, and the Government.


In closing my comments on recent Australian developments, I should mention that we are also participating in work at the Organisation for Economic Co-operation and Development to develop international thinking on possible corporate governance standards and guidelines. I understand that other participants will be outlining that work in more detail later in the conference.




I would hope that work over the next two days will give the participating national regulatory authorities and public officials a clear set of practical messages from the experienced business and investor participants who are heavily represented among our key speakers and panelists.


1 hope that you will discuss both the key general principles we should strive to implement, and more detailed ideas or priorities for particular corporate governance reforms in particular APEC economies.


APEC Finance Ministers, and the Malaysian authorities who will take this Symposium’s results as one of their inputs, would also value your thoughts on whether there are any programs of technical assistance for particular economies, or work in the APEC group as a whole, that we should seek to implement to accelerate and assist national corporate governance reforms.


A rapporteur who, together with the session chairpersons, will report back to you in the final session of the Symposium will observe each of the three substantive sessions of this conference. From those reports, we will produce an overview report from the Symposium for APEC Leaders when they meet in Kuala Lumpur on 17-18 November 1998, and also a fuller report for the Malaysian collaborative initiative and for Finance Ministers when they next meet in 1999.


I believe we have a lot of work ahead of us all in the field of corporate governance reform. And reform, like progress, always involves some element of risk. In cricket parlance - you can’t take a quick single if you are never prepared to leave the batting crease. In this case, it is important not to swing from the early 1990’s excesses of euphoria about Asia’s prospects to similar excesses of despair.


There was real substance to the decades of Asian success, including the growth of a corporation’s greatest resources, its skilful, well-educated, hardworking employees. Those same assets will help us in the recapitalisation of Asian corporations in a more robust framework of corporate governance that will be more resistant to any future economic shocks.


My thanks to you all once again for your participatio n in the Symposium and welcome to our Olympic City.




Contact: Jim Murphy, Treasury   0418 488 689