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Economics References Committee
Treasury Laws Amendment (2021 Measures No.1) Bill 2021, Provisions

PORTER, Mr Andrew, Director, Group of 100

WOODHILL, Mr Stephen, Chief Executive Officer and Executive Director, Group of 100


ACTING CHAIR: I now welcome representatives from the Group of 100. Thank you very much for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I would like to advise witnesses that answers to any questions on notice should be sent to the secretariat by 5.30 pm, Wednesday, 16 June 2021. I'd like to invite you to make a brief opening statement, if you would like to do so.

Mr Porter : Thank you for the opportunity to appear before you this afternoon. I'm the CFO of a group of large Melbourne-based listed investment companies which look after the savings of some 200,000 retail shareholders. I'm here today as a director of the Group of 100, or the G100, which is the national body representing the CFOs and senior finance executives of Australia's largest businesses. And as we know, we're joined here by Stephen, the G100 CEO. These opening remarks address the changes incorporated in schedule 2 of the proposed amendments.

The G100 is a firm supporter of Australia's continuous disclosure obligations. Australia's regime is very different from what are called continuous disclosure regimes in Canada, Hong Kong or South Africa, which are more prescriptive about what sort of information needs to be disclosed and when.

Australia's regime is far more stringent. It generally provides good protection for investors, for customers and for employees. The proposed amendments, we would argue, do not weaken these protections or lessen the obligations of directors and officers of ASX-listed companies who, if they are not being deliberately misleading, reckless or negligent, take their responsibilities towards their shareholders and the market and thus their continuous disclosure obligations very seriously indeed.

What they do is remove a loophole which has had unfortunate and unforeseen of course negative ramifications. Currently continuous disclosure obligations require information that a reasonable person would expect would have a material impact on the price or value of the securities be disclosed. The current rules accept that an individual will not be in contravention if they took 'all steps that were reasonable' with regard to compliance and after doing so believed on reasonable grounds that the entity was complying.

The existing loophole has two facets. Firstly, the protection above only applies to individuals. Companies themselves can be sued without the protection of reasonable steps or grounds that are offered to individuals. This is what is known as strict liability. This is why so few shareholder class actions include directors, only 10 per cent in 2018-199 for instance.

Secondly, there is no definition of what reasonable steps or grounds are. This leaves it very open to interpretation. The proposed amendments remove this loophole by specifically giving companies the same protection that is offered to their directors and officers and by defining as reasonable steps or grounds action that is not reckless or negligent.

Class actions could still be launched by shareholders against companies and their directors where there was a case to answer that they have been reckless or negligent or deliberately concealing information. It does not impact the operations of these actions or indeed of litigation funders with regard to product or consumer class actions. The amendments simply give clarity to reasonable steps and give a company the same protection as its officers.

This loophole has, it has been argued, been the cause of an increase in shareholder class actions over recent years due to the inability of the companies to claim the reasonable steps defence. From two shareholder actions in 2009 the number of non-competing actions rose to 15 in 2017 and 22 in 2018, down to 12 last year as the space was crowded out by more consumer class actions.

There have been 107 shareholder class actions launched since 2011. The time and effort spent, should a company choose to contest these actions, is great; five years in the case of a recent Worley action, even before the appeal. Many companies are advised by their insurers to settle out of court, the strict liability nature being so difficult to defend against. This has led to the increase in these actions, which in itself has led to an enormous increase in the cost burden to investors of insuring against them.

D&O insurance costs have grown exponentially, in some cases between 450 and 600 per cent over the last five years; costs that current investors have to bear, accompanied by an increase in deductibles. There are indications that previous rates were too low and D&O insurance covers other risks. But to quote those that are in the business of insurance, the Insurance Council states:

Existing regulatory settings have helped facilitate the growth in class actions for alleged breach of the continuous disclosure rules. This has been a significant driver in the increase of D&O premiums over recent years.

Aon, the broker, stated:

There is little doubt that an unfortunate flow-on effect of the evolving securities class action activity in Australia has been the price and general affordability of D&O insurance.

This has not just impacted large companies. As the broker Marsh notes, and as directors have told me, smaller companies and charities are seeing their insurance costs rise and their insurance options decrease as a result of this. There are also arguments that the current loophole prevents much forward-looking disclosure, with a fear that if forecasts, et cetera are wrong then the company could be the target of a class action suit. The G100 supports the proposed amendments on continuous disclosure as a way of closing this loophole, providing more certainty to companies and reducing the cost for investors without compromising or weakening Australia's continuous disclosure regime.

ACTING CHAIR: Thank you, Mr Porter, and thank you, Mr Woodhill, for being here also. I start with your evidence today and the evidence in your submission about the prevalence of shareholder class actions. We have had a variety of evidence presented to the committee about whether it is the case that shareholder class actions have increased over the past several years. All the evidence we have heard today is that there has not been an increase in shareholder class actions.

A study by Professor Morabito has been referenced today and in submissionsI am not sure whether you are familiar with it. He has done a range of work in this area and across the companies listed on the ASX. He finds that the shareholders of 34 companies or groups of companies filed class actions in the period from 1 July 2014 to 30 July 2019, providing an annual average of 6.6 companies or groups of companies whose shareholders resorted to the class action device. I do appreciate that I am quoting from a study that you don't have in front of you. He concludes that, 'In light of the information provided above, it can be confidently concluded that there has been no explosion of shareholder class actions in Australia either over the last 27 years or in recent years'. His analysis also finds that shareholder class actions are declining as a proportion of total class actions, which is something you also referenced in your evidence. Is it your submission that the evidence from Professor Morabito that has been cited is incorrect?

Mr Porter : Without seeing in detail Morabito's evidence, the reference to only 10 per cent of shareholder class actions involving directors and officers because of this loophole comes from his research. But the figures I have been given by lawyers and by brokers would argue otherwise. As I said in my opening remarks, there were two shareholder actions in 2009; this went up to 22 in 2018. That is an enormous increase. The sheer numbers themselves also don't give rise to the perceived risk of one that is certainly extant, as the brokers noted, in the reason why costs have gone up with regard to D&O insurance.

ACTING CHAIR: I draw from your evidence, putting aside the questions about the data for the moment, that you think shareholder class actions are not a good thing.

Mr Porter : It would depend on the nature of the class action itself. As I said, even with the proposed amendments, class actions where the company is being reckless or negligent or deliberately withholding information would still go ahead. There is certainly a place for class actions per se and there is a place for class actions against companies and officers where recklessness or negligencewhich is still a lower bar than they have in the US with regard to these actions, as an aside. So I believe that there is a place for them. The ideal solution would be for ASIC to be taking the lead in prosecuting these actions where there has been reckless or negligence in terms of disclosure, and perhaps also having a mechanism whereby affected shareholders can be reimbursed. But that is not what we are. I believe that there is a place for class actions and I believe that this legislation defines the grounds under which they can take those actions more succinctly.

ACTING CHAIR: Is there a role for this kind of private enforcement in supplementing the work of the regulator, supplementing the work of ASIC, to make sure that we have a strong market that people can invest in with confidence, based on good information?

Mr Porter : Shareholders should expect that their directors and their officers take all their obligations seriously. If there is a risk that companies and directors can be held liable for recklessness or for negligence or for deliberately withholding information, then that may well have a benefit and a perceived impact. I agree; we want to continue being an efficient capital market.

ACTING CHAIR: In relation to the questions around director and officer insurance, the Insurance Council made a submission to the committee on behalf of the industry and said that, when it comes to the impact of the measures in schedule 2 on insurance premiums, in essence there would be no effect. I will read you their evidence. Page 3 of the submission states that the proposed legislative changes will:

In the short to medium term at best stem the rate of increase, but will quite likely have no discernible effect; and in the medium to long term may lead to some reduction in premiums, but quite likely will have no discernible effect.

I am sure you have seen their submission. Do you disagree with their evidence?

Mr Porter : I have seen their submission. I quoted them, in saying that it is their belief that existing regulatory settings have helped facilitate the growth in class actions. So, as with any insurance business, there would need to be a period where we see fewer shareholder class actions in this regard for the premiums to start coming down. That is the way the insurance market works. Insurance companies would love to see insurance premiums stay high while the risk of action goes down, but that, perhaps, is putting too much into the submission.

ACTING CHAIR: They said that the legislation will have no discernible effect on insurance premiums.

Mr Porter : I believe their submission said that they were still supportive of the amendments going ahead. It would be a question of timeline, one would say. I believe that with the evidence coming through, if there are a reduced number of class actions, there would be more insurers coming into the market. There would be downward pressure, in exactly the same way that if there are fewer hurricanes, house insurance premiums come down.

Insurance companies benefit from the fact that if they can keep premiums high while claims are low, they make increased profits, so there is possibly a reason why some insurance companies would like to see premiums stay high. But I believe that if the number of cases were declining, we would expect to see more people coming into the market and thus the price come down.

ACTING CHAIR: You are claiming different insight into the question of insurance premiums from the Insurance Council, which has said in its evidence to this inquiry that this legislation will have no discernible impact on premiums.

Mr Porter : I would say that (a) it would depend upon the timeline that one looks at. I would expect to see no immediate impact on premiums, although even a reduction or a halt in the increase of premiums would be beneficial, as the Insurance Council says. I would also say, to use the expression of cui bono, that the insurance companies would quite like to see premiums stay high.

ACTING CHAIR: They also look at the medium- to longer- term and say that there would be quite likely no discernible effect. But we have your views on the record about that issue. I want to go to the broader question of the amount of consultation and review work in this area. A couple of years ago, the Australian Law Reform Commission recommended that the government conduct a comprehensive review of continuous disclosure laws and that any such review undertake wide consultation, draw from an evidence base and should be conducted by agencies with sophisticated understandings of the regulatory provisions, class action law and procedure, and the securities market. That recommendation has not been implemented by the government. Would the Group of 100 support that kind of review of continuous disclosure laws?

Mr Porter : Yes, we would support a review into that. However, we do not believe it should be at the expense of not passing these amendments while that review goes on.

ACTING CHAIR: In relation to the sorts of measures we are talking about today, should a similar broad consultation have occurred?

Mr Porter : This is an issue that has been discussed and consulted on widely through business and through law. As I go back to the opening remarks, this loophole has appeared and has now, one could argue, been taken advantage of: companies are not given the same protection as the officers and directors who actually do the work. So, yes, there can be ongoing reviews; there should always be ongoing reviews of legislation. In fact, one could argue that it is the review of this particular legislation that has led to these amendments being proposed.

ACTING CHAIR: We have had evidence from Treasury in answer to a question on notice put to them as part of the inquiry that they didn't consult with anyoneany single individualaround schedule 2, around the legislation. We also have had evidence that there was some discussion around the impacts of the temporary measuresa limited one-day consultation with Treasury and groups like the Business Council of Australia and the ASX. There hasn't been any consultation in either of those ways with anyone representing shareholders and investors. Should groups like the Australian Shareholders Association have been consulted in some way on the measures in schedule 2? If not, why not?

Mr Porter : I'm not conscious of how many members the Australian Shareholders Association have. I appreciate their role. Consultation, of course, if formally done, should always be done widely. However, I should note that, at least with the G100, we have been discussing this issue, not necessarily with Treasury but with politicians of both sides, with the independents and with ASIC, for a number of years.

ACTING CHAIR: That might just suggest that there's been lobbying on the part of the business community, but there's been no consultation with broader stakeholders who may be affected by changes in the market, like the Shareholders Association, the Investors Association, the Association of Independent Retirees, self-managed superannuation funds, National Seniors and so on. You may have had some conversations with politicians in government about it, but none of the groups that I have just spoken about have been consulted on the provisions in schedule 2 of this legislation. Do you think that is appropriate when a change like this has been proposed?

Mr Porter : I'm assuming that all of the bodies that you mentioned have had the opportunity to make submissions and commentary on the legislation that is underway. I would also state that businesses are often talking to their investors. All businesses, whilst communicating rather than necessarily lobbying, take strongly into account the views of their investors. That is, after all, who we are here looking after the interests of.

ACTING CHAIR: There was no consultation around schedule 2. We know that there was no consultation. There were no public hearings. The bill has already gone through the House. Do you think that an appropriate level of consultation has occurred for the changes that we're talking about today to continue as disclosure and to the ability of shareholders to seek remedy if they feel they've been damaged?

Mr Porter : All I can comment on is that I do believe the G100 has been appropriately consulted on this. I do believe, as I said before, that with the proposed amendments, shareholders absolutely still have remedies to hold directors, officers and companies to account for reckless or negligent behaviour. As I said, I think the proposed amendments make that legislation clearer and more efficient.

ACTING CHAIR: Just finally from me, before I turn over to Senator Brockman: do you think that the reforms strengthen or weaken the ability of shareholders to seek remedy if they feel they've been damaged?

Mr Porter : I believe they make no difference at all.

ACTING CHAIR: I did say that was going to be my last question, but that makes me wonder what it is you think that the impact of the reforms will be.

Mr Porter : I believe that those who wish to see whether there is a case to answer, rather than trying to ascertain that a company has been reckless, negligent or deliberately withholding information, will have to consider carefully whether they wish to launch those actions if they do not have that evidence. Therefore, I believe that the markets will become more efficient and, as I said, perhaps unlike the Insurance Council of Australia, I believe that over time the insurance costs will come down. I do not believe it affects shareholders' rights to take action if directors, officers or a company have been reckless, negligent or deliberately withholding information.

ACTING CHAIR: Thank you. I'll hand over to Senator Brockman.

Senator BROCKMAN: Thank you, Chair. Just a few questions from me. It's fair to say that continuous disclosure is built on a number of pillars, including civil litigation, but also statutory penalties and criminal prosecution; you'd agree with that statement?

Mr Porter : I would.

Senator BROCKMAN: Do you think there's been any fall in the standards of continuous disclosure during the COVID-19 temporary measures period?

Mr Porter : We have not seen any.

Senator BROCKMAN: So you think that company directors, people in positions of responsibility, are upholding both the letter of the law and the principle of continuous disclosure which have been established for a period of time?

Mr Porter : I do. As I said before, I believe that directors of listed companies, if they are not being reckless, negligent or withholding information, take their responsibilities for continuous disclosure extremely seriously and have continued to do so during this period.

Senator BROCKMAN: I dropped out on one occasion, so I did miss a little bit of your evidence. Hopefully, I am not repeating anything here. Just in terms of the negative impact of class actions on D&O insurance, could you just talk us through how D&O insurance has changed in terms of its premiums over the last few years?

Mr Porter : Perhaps I can best quote Aon, who are actually responsible for placing these insurance premiums: There is little doubt that an unfortunate flow on effect of the evolving securities class action activity in Australia has been the price and general affordability of D&O insurance.

Both the Insurance Council and the brokers state that there is a very clear link between the class action activity and D&O insurance. As I said before, it is not just affecting large companies. Because of the way the insurance market works, that has had a knock-on effect throughout smaller companies and indeed charities as well.

Senator BROCKMAN: What do you think has been the impact of those cost increases in D&O insurance in terms of corporate governance?

Mr Porter : In terms of corporate governance, the costs have had to go up. Some companies are now considering whether to abandon side C, which is the cover for the company itself all together because of costs. It is perhaps more than simply the fear of the cost increasesalthough that is a burden upon investorsthat's had an impact on corporate governance.

What has had more of an impact, I believe, on corporate governance has been the reluctance to make forward-looking statements or to take an amount of time to scrutinise every statement that is going out to see whether, because of this strict liability natureand, again, I say it doesn't affect officers and directors, it is just the company itself, because of this loopholein future it can be the subject of a class action. That is what is taking some of the time.

Lastly, I would also say that the litigious nature of the regime has made some people more reluctant to take on board appointments. We may be losing out on some highly experienced corporate government professionals because of that.

Senator BROCKMAN: Whilst you can't quantify a decrease, your evidence is that you believe that this change in schedule 2 will put downward pressure, at least over time, on D&O insurance?

Mr Porter : That is our firm belief, yes.

Senator BROCKMAN: Excellent. I am happy to leave it there, Chair. Thank you.

ACTING CHAIR: Thank you, Senator Brockman. Thank you, Mr Porter, and Mr Woodhill. We very much appreciate your evidence today. That concludes today's public hearing. On behalf of the committee, I'd like to thank all those who have made submissions and sent representatives here today for their cooperation in this inquiry.

Committee adjourned at 15 : 24