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

MATHESON, Mr Ian, Chief Executive Officer, Australasian Investor Relations Association [by audio link]


CHAIR: Thank you 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 also like to advise witnesses that answers to questions on notice should be sent to the secretariat by 5.30 pm on Wednesday 16 June 2021. Did you wish to make an opening statement?

Mr Matheson : Yes, please.

CHAIR: Over to you.

Mr Matheson : Thank you very much. Overall, the association welcomes the development of the amendment bill, which in its current state will provide further relief to companies until 16 September 2021 to meet their regulatory requirements to hold meetings such as annual general meetings of shareholders, to distribute meeting related materials such as the notice of meeting and to validly execute documents electronically. We believe, however, that these changes outlined in schedule 1 of the amendment act should be made permanent in the Corporations Act 2001. Specifically, the virtual meeting format should be included as an option for all listed companies and entities without the need to change their constitutions.

AIRA acknowledges the Australian government's position that it will pursue permanent changes relating to electronic communication and conduct an opt-in pilot for hybrid annual general meetings. While we recognise there is a desire to enable a proper assessment of the shareholder benefits of virtual meetings, we believe this interim initiative is an unnecessary and disappointing development, considering the depth of stakeholder engagement that has been conducted to date and the support for these changes to be made permanent. The pilot program will unfortunately increase costs and risks for companies during this additional 12-month period. Instead, we believe a company should immediately be given the flexibility and the freedom to choose which meeting format or combination of formats best suits its shareholders. Both companies and investors have benefited from the added flexibility afforded to them over the past 15 months of annual general meetings and shareholder meetings, thanks to the temporary legislation enacted by the Australian government.

Just to be clear, our members are listed companies predominantly within the ASX 300 and New Zealand's top 50 companies. In New Zealand, virtual meetings are allowed on a permanent basis. The feedback from our members has overwhelmingly been that the choice and accountability to tailor meeting formats to an increasingly diverse investor community has increased attendance and investor engagement. These benefits are pillars of strong corporate governance and meaningful investor communications which may be stymied by the possibility of mandating hybrid meetings for listed entities or implementing a technology-specific framework.

AIRA's position is the culmination of extensive engagement with its members and the Australian government and Treasury over the last decade. We've long held the view that Australia's corporate governance and investor framework has failed to embrace digital technology and is not flexible enough to respond to emerging developments. The consequences of this rigidity and inadaptability were experienced by Australia's corporate community following the outbreak of COVID-19 in Australia, which placed many outdated and outmoded aspects of the Corporations Act into sharp relief. The need for permanent long-term reform in this area has only increased since Treasury's initial consultation in 2016 when it issued its Technology neutrality in distributing meeting notices and materials proposals paper. This is due to the continuing high levels of adoption of technology in this country; the high levels of Australians owning shares, both direct and indirect, through their superannuation and other shareholdings; and the decline in timely postal delivery services. That concludes my opening statement.

CHAIR: Thanks, Mr Matheson. I was going to focus on schedule 2, but on the virtual meetings versus hybrid meetings, did you categorically prefer one over the other?

Mr Matheson : Our position is that we believe the entity, given that the Corporations Act oversees all incorporated entities, whether they be a listed company, a not-for-profit organisation et cetera, should be able to determine what is the most appropriate format for the meeting. Whether it's a virtual, hybrid or physical meeting, or a combination thereof, we don't think that should be prescribed. Hence we think this 12-month trial of hybrid meetings is a bit of a waste of time because companies have already trialled hybrid and virtual meeting formats. They're obviously very used to physical meetings as well. But particularly for companies that have very diverse share registers—for example, if there's a top-100 company with a very institutionally owned register, the institutional investors don't, as a matter of course, turn up to annual general meetings. So a virtual format is probably the most cost-effective format for that type of company with that type of ownership structure. But for a large mutual organisation—say the NRMA in New South Wales, with 100 million-plus members—similarly, possibly a hybrid meeting may be the most appropriate format for them, because they get large a attendance at physical meetings. Most listed companies, with the exception of probably a dozen or so, get a physical attendance at annual general meetings that has been on a long-term decline. We think, if the entity is given the choice of format, it doesn't diminish in any way shareholder or member rights. I think that's been proven over the last 15 months or so with the experience that many companies have had.

CHAIR: I'll move on. But I like the theatre of the live conferences—just like how a Labor Party conference should be in person as well! I want to focus on schedule 2. The explanatory memorandum for the bill asserts in strong terms that the measures in schedule 2 will:

… lead to significant savings on the cost of directors and officers insurance.

It actually goes on to say that this will be the main impact of schedule 2. The government claims that schedule 2 will result in regulatory savings in the order of $912 million because of lower director and officer insurance premiums. I think that you argue something similar in your submission as well, stating it will:

… help stem the increase in D&O premiums and other costs …

What evidence do you rely on for that aspect of your submission?

Mr Matheson : It's purely anecdotal. Over a number of years, many members have raised with us and at member forums the increasing premiums that they've experienced year in, year out. In many cases, it's in the order of a 200 per cent increase in premiums every year. Some of our members have actually attended meetings with insurance underwriters to try and explain their process for a disclosure process—I'm talking specifically here around those that relate to potential securities class actions, or, I think it's called, schedule B, which I think is that schedule of the insurance contract which relates to continuous disclosure breaches or securities class action related matters—to help the underwriters understand the company's continuous disclosure policy and their process for material information being disclosed to the market as a way of trying to give them comfort that those companies that have a robust process for disclosing information and information filtering up through the appropriate channels is a robust process and, therefore, premiums should not continue to go up in the order that they have year in, year out. Something's obviously driving those increases in premiums. For most of our members that have robust disclosure processes, there just doesn't seem to be any connection between their robust disclosure process and these continuing increases in premiums.

CHAIR: The Law Council made similar claims and then basically said that their feedback was anecdotal as well. So is there nothing more substantial you can point to that would give you confidence that these premiums would come down other than your experience?

Mr Matheson : Correct, yes.

CHAIR: I don't know if you're aware, but the Insurance Council of Australia made a submission to the inquiry. On behalf of the insurance industry, when it comes to the impact of the measures in schedule 2 on insurance premiums, they said:

in the short to medium term at best stem the rate of increase in D&O premiums, but will quite likely have no discernible effect; and

in the medium to long term may lead to some reduction in D&O premiums, but quite likely will have no discernible effect.

That's a direct quote from page 3 of the Insurance Council of Australia's submission to this inquiry. You've said that there's nothing direct that you can point to. Would you be aware of whether the government would have anything to give them the confidence in what they've put forward in the explanatory memorandum about this bill having an impact on insurance premiums?

Mr Matheson : I understand that two of the major D&O insurance underwriters have put in submissions which somewhat conflict with the Insurance Council's position on premiums. All I can say is that, unless you asked companies for specific examples of insurance premiums and where they may have got a discount as a result of the company's disclosure process and their policies in relation to ensuring the availability of all the information that any investor would want, it will have an impact on the company's share price. That should be sufficient, I would have thought, to give those insurance underwriters the comfort they need to not continually increase the premiums. For those companies who have robust disclosure processes, there must be something else that's driving those increases in premiums. As I say, members are saying to us that there just doesn't seem to be any rationale for why that is occurring, because they feel that they've done all they can to ensure that, to the greatest extent possible, they've got the policies and processes in place to ensure that all new material information is disclosed to the stock exchange as and when required.

Senator McALLISTER: I'm listening very carefully, and you've said two important things, I think. One is that there's something else going on that is unrelated to the adequacy of the disclosure practices of the companies in question, and it's not certain as to what that is. Why, then, do you think that this legislation will address this unknown problem? I'm trying to understand the nexus. I don't think anyone disputes that premiums are going up, so that question of fact is agreed. What we're trying to understand is why some submitters have argued that this legislation represents a response to that increase.

Mr Matheson : I'm afraid I'm not a lawyer, so I probably couldn't give you an adequate answer to that question.

Senator McALLISTER: I think it would be good if, given that your organisation has submitted that you consider that this legislation will put downward pressure on price increases on insurance, you might reflect on your evidence and come back to us with an explanation for why you've made that submission. It is an important point that the committee will need to wrestle with in making our report. We wouldn't entirely discount anecdotal evidence, but could you perhaps give some explanation for why you think these measures represent a response to a problem that you've accepted is difficult to define?

Mr Matheson : I think possibly the securities class action environment is such that given that the extent of some of the payouts that have occurred—again I'm imagining that the insurance underwriters are taking the view that if there's a few of these securities class actions in prospect, then they're going to want to continue to cover their risk and increase costs for all listed entities as opposed to just those who are possibly more at risk. I'm not sure that's an adequate answer, but—

Senator McALLISTER: Does your organisation consider that the environment, as you describe it, is unreasonable or unfair? Do you think that those payouts to shareholders should not have been made?

Mr Matheson : Look, I don't want to comment on specific examples or instances, but clearly where there have been demonstrable breaches of continuous disclosure, then there's no doubt that payouts should have occurred. I'm not an expert as to how to determine the extent of those payouts. But we're very strong on the need for all listed entities to have adequate continuous disclosure policies and processes to ensure that, to the greatest extent possible, disclosure breaches which may precipitate a securities class action are avoided. We're on about best practice in insuring, trying to encourage listed companies—because that's what we can do—to ensure that their practices and processes and policies are in place to try and avoid it, because I don't think anyone deliberately is in the business of not disclosing information or disclosing false information. From my experience, often it's a failure of process internally. Sometimes that can occur in an international company or multifaceted business with inadequate appreciation of the importance and materiality of new information, because that's often what it is.

Senator McALLISTER: I suppose, Mr Matheson, the question for this committee in part is: who should wear the cost when that failure occurs? So in those circumstances where a failure occurs on behalf of management and it's not through malice or recklessness but it is a failure, this bill would render that those costs are worn by shareholders rather than by the company. I'm curious to understand if that's a correct understanding of the evidence you have just given.

Mr Matheson : I think that is appropriate. Or, to the extent possible, the insurance premium should cover that. Again, we're talking about inadvertent breaches here, not deliberate breaches of the law.

Senator McALLISTER: But when a company is incompetent in managing the money of other people that's been entrusted to that company, and when company management fails in the way that you describe, why shouldn't there be a remedy for the shareholders who are affected?

Mr Matheson : Well, look, I'm not saying that there shouldn't be a remedy, but in certain circumstances there should be a remedy. At the moment, it just seems to be open slather. I think in cases where it is inadvertent as opposed to deliberate, given that companies are about limited liability and directors are doing that job on that basis, the shareholders are basically paying for the insurance premium, and the insurance premium should cover that risk that's occurring or that inadvertent breach that may have occurred.

Senator McALLISTER: I should say, Mr Matheson, that we appreciate that the bulk of your submission goes to schedule 1. You may or may not know this, but Labor in fact has offered to the government to separate out schedule 1 and 2 so that schedule 1 may be considered in short order to address many of the issues you raise in your submission. But, in relation to schedule 2, we have more concerns, which is why Senator Chisholm and I are spending more time on it. You say that you support schedule 2:

… to ensure that "companies and their officers will only be liable for civil penalty proceedings in respect of continuous disclosure obligations where they have acted with 'knowledge, recklessness, or negligence'".

You say:

AIRA believes these measures will discourage opportunistic securities class actions …

Is it your view that the environment at the moment is characterised by opportunism?

Mr Matheson : In some cases I think that is fair to say, yes.

Senator McALLISTER: Which are those cases?

Mr Matheson : Again, I don't want to go into specific examples, but I have heard, again anecdotally, from members that they have received letters out of the blue from various parties threatening to issue class action proceedings when there's very little evidence of loss on the part of shareholders, and where the alleged breach is not a deliberate breach; it's an inadvertent breach. Again, I would perhaps emphasise that, within large global organisations particularly, new material information can take some time to percolate up in the appropriate way to ensure that the disclosure process is triggered and an appropriate announcement is made. There's a formal process that most companies follow to do that. Again, it's not because they're deliberately trying to mislead or not disclose new material information. It may also be that the information may not be deemed to be material either. That can be a point of debate as well.

Senator McALLISTER: Given that your organisation has made a submission characterising the current environment as being opportunistic, and you've said that that's true in some cases, can I ask you on notice to provide the basis on which you make that assessment? You've declined to name individual cases, but it would help the committee if your organisation could just give an indication of the extent to which you think opportunism pervades the current environment.

CHAIR: Coming back to some of those questions about insurance, I'd be interested—again, on notice—if you could also reflect on the submission from the Insurance Council and provide some further evidence about that.

Mr Matheson : Sure. There may be others that are better qualified to do that.

CHAIR: Well, I suppose it's just looking at your claim around insurance versus what the Insurance Council is saying; they're very much polar opposites. I suppose we'd be looking for some clarification around that as well.

Mr Matheson : Sure.

CHAIR: Thanks very much for appearing before us today, Mr Matheson.

Proceedings suspended from 12 : 50 to 12 : 53