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

BLACKETT, Mr Graeme, Deputy Chair, Legislation Review Committee, Governance Institute of Australia

LAWLER, Ms Emma, Fellow, Governance Institute of Australia

MOTTO, Ms Megan, Chief Executive Officer, Governance Institute of Australia

CHAIR: I welcome representatives from the Governance Institute of Australia. 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?

Ms Motto : Yes, thank you. First of all, thank you for having us. I always like to start by acknowledging the traditional owners of the land on which we meet today, the Gadigal people of the Eora Nation, and acknowledge elders past, present and emerging.

I'd start by saying quite blatantly that the world is changing fast. COVID has most certainly intensified and accelerated that pace of change. That's been both at a technological basis but also in behaviour. It's definitely accelerated the changes in behaviour across a whole range of spectrums. For organisations this has exposed how legislation and regulation have not kept pace with that same pace of change. This is not just inconvenient for organisations but is a handbrake to the sorts of innovation and efficiency that are the key drivers of productivity. Productivity, as we all know, is going to be one of the key drivers guiding Australia's economy through the post-COVID crisis and ensuring that standards of living are maintained over the longer term. So we believe urgent reform is needed.

The Governance Institute of Australia understands legislation is designed to guide good behaviour and also has to have the right checks and balances to prevent and disincentivise poor behaviour. We also understand that it needs to balance the needs of both companies and shareholders. But we would contend that overly prescriptive legislation is not the answer and is simply not fit for purpose for the current age and time. Legislation, by its very nature, is broad in coverage and is slow and difficult to change. And of course we've seen that over the last couple of years. Legislation in the modern age needs to be fit for purpose for the range of companies it covers. Some of the companies that we've talked to in our membership include small listed or unlisted public entities that might have only a very small footprint in only a very small geographic location; through to large not-for-profit associations that in fact have a very large national footprint; through to multinational listed entities who, of course, have to traverse the difficulties and challenges across international borders as well as national borders.

Reforms must not just be responsive to COVID. With this bill in mind, it's important because it's a precursor to what we see as more permanent reforms to the Corporations Act. The reforms need to be responsive to the next disruptive event. We know COVID and the current lockdowns in Victoria mean that the level of uncertainty is still very much with us today, and we simply do not know when that level of uncertainty will dissipate. In fact, we would contend if it's not a current pandemic, it could be a future pandemic or some other sort of disruptive event that will, quite frankly, disrupt the way that we can conduct business. It might be a flood or a fire or an ash cloud that prevents us from travelling, prevents us from getting to physical locations. There'll also be technological change. I talk to my children and they ask me what an email address is because they don't communicate in that fashion in this day and age. So we need to make sure that it's fit for purpose, not just for now, but for the future. And of course, it needs to be responsive to both intergenerational and behavioural change. The pace of that change is such that legislation needs to be less prescriptive and more principle based so that it's able to cope in the environment where that change is really rapid. It also needs to be inclusive for all types of the community and all parts of the community. That's not just geographical inclusion, but it's intergenerational inclusion and inclusion on a whole range of bases.

Volatility and uncertainty are the enemies of business, and the current temporary relief measures run out in only three months time. We currently have a large membership that is very challenged in terms of dealing with their future and the AGMs that they're trying to plan. We as a country simply cannot afford to go backwards. We commend both the bill and our recommendations to you.

CHAIR: Thanks very much. Just starting off, do you have any specific comments on schedule 2 of the bill?

Ms Motto : We certainly do. I'll throw to either of our members, but in a broad sense, our members have said that the temporary relief measures for schedule 2 that have been provided to date have made literally no difference to the level of disclosure that they've experienced within their organisations. There is no desire for a different level of disclosure. There is no indication that the world has changed. So our members, and we support them, don't believe that the schedule 2 proposed changes have made a material difference in the level of disclosure.

CHAIR: Just before you give Mr Blackett the opportunity to explore that, who are your members? Could you just give me a bit of background as to who they are and how you're funded as well?

Ms Motto : We're a not-for-profit entity funded by membership and education and training fees. We provide corporate training, corporate governance and risk management training to a broad range of members—about 8,000 members. They traverse from large listed company secretaries through to C-suites, through to NEDs, through to consultants that work in governance and risk managers. So it's a broad range of members all working in the business of institutionalising governance within their organisations, across the public sector, the private sector and the not-for-profit sector. So it's a very broad and diverse membership.

CHAIR: So would individuals be members and would companies be members?

Ms Motto : Individuals are members of our organisation.

CHAIR: Only individuals?

Ms Motto : So we are a true professional association.

CHAIR: Okay. All right. Thanks for that.

Mr Blackett : The only point I would make, in terms of the temporary relief that was provided by the determination—and I should point I work for a governance consultancy, so we have a number of clients. In terms of the temporary relief that was provided, very little attention was paid to the schedule 2 considerations. The bulk of the attention, certainly during the pandemic, was around the ability to have virtual meetings, around the ability to sign documents, around the ability to be able to electronically communicate with members around meeting materials. So there was really, from my observation, certainly amongst the clients who engage us, no change in any type of behaviour in terms of disclosure, how things might be disclosed or any thinking about disclosure—absolutely none at all. I witnessed nothing.

CHAIR: At the top of page 2 of your submission, you write: 'Our members' foremost concern is ensuring any amendments to the Corporations Act, temporary or permanent, are appropriately consulted on and meet the needs of shareholders, members and regulated entities in all sectors'. I note that you say your members support schedule 2, but are you aware that the government did not consult with a single external stakeholder while it was developing these measures?

Ms Motto : We have a pretty close relationship with Treasury and we've had lots of communication on schedule 1. We were surprised that schedule 2 came up in this particular bill and surprised that it was linked in the bill. However, we have had a very good relationship, in the broad, with Treasury and with the proposals of this bill.

CHAIR: Including schedule 2?

Ms Motto : Not specifically including schedule 2.

CHAIR: Can you think as to why that would be?

Ms Lawler : I think, as Megan said, the focus for the members of the Governance Institute has been much more on schedule 1. The areas that we have focused on as a membership and in our practical positions as generally governance professionals and company secretaries have been the issues covered by schedule 1 much more than schedule 2.

CHAIR: Are you aware that, in relation to the temporary changes the government made to continuous disclosure laws last year, it only conducted a handful of targeted consultations on the effects of the temporary changes to continuous disclosure laws in September last year. On a single day, it consulted with the Business Council, the Australian Institute of Company Directors, the ASX and ASIC, and it subsequently met with one section of the Law Council. That's it. The Treasurer says that the details of those consultations are confidential. Putting aside your members' views on schedule 2, do you think that the measures in schedule 2 were appropriately consulted on?

Ms Motto : I would say that we would, in a general sense, always say that broad consultation and more consultation could be done. However, we would indicate that we had not specifically raised these issues because they weren't of huge importance to our members in the way that schedule 1 of the bill was. So the breadth of the consultation is not something that we can comment on.

CHAIR: On pages nine and 10 of your submission, you set out why your members support schedule 2 of the bill. One of the key focuses is on the cost of D&O insurance premiums. Do you believe the measures in schedule 2 will put downward pressure on insurance premiums?

Ms Motto : I can start perhaps. The insurance market is a really complex market and there is no direct causal link that can be made from any one measure and generally the affordability and accessibility of insurance. However, there are some correlational and contextual links that can most certainly be made. A more litigious environment will result in higher premiums overall for a particular portion of the market or a particular market, such as Australia. So there are most certainly some broad links between the cost, affordability and accessibility of insurance and measures designed to protect organisations against scurrilous behaviour in terms of the types of class actions that we potentially sometimes see. So there is a concern in the insurance community, and there are mixed views, and I think that you've heard some mixed views through the course of these hearings. But we would suggest that there is a, if not direct causal link, then certainly a correlational link between this bill and the general insurance affordability and accessibility.

CHAIR: I just want to try and be clear on this, because this has been a topic we've been focused on today. Do you believe the measures in schedule 2 will put downward pressure on insurance premiums?

Ms Motto : I think in a general sense they will be supportive of downward pressures. However, to make a direct correlational link between the two is fraught with danger because the insurance market is complex and there are a great many other contextual factors.

CHAIR: No politician wants to promise lower insurance premiums, do they? Just trying to get into this in a bit more detail, the substance of your belief is basically pretty practical in terms of it will be harder for there to be class action cases; therefore, it will be more likely that insurance premiums will drop as a result. Is that effectively the substance of it?

Ms Motto : Yes. Reduced litigation will mean reduced risk for insurers and that will have a price differential.

CHAIR: Are you aware at all of the Insurance Council of Australia's submission to this inquiry?

Ms Motto : I haven't read it in detail, but I'm aware that they made a submission.

CHAIR: I've raised this a couple of times. In short, they say that in the short to medium term, at best it will stem the rate of increase in D&O premiums, but will quite likely have no discernible effect. And in the medium to long term, they say that it may lead to some reductions in D&O premiums, but will quite likely have no discernible effect. That's from their submission. Does that give you any pause for thought? Have you had any direct conversations or evidence from insurance companies that would be contrary to that?

Ms Motto : I would first of all say that that's broadly in line with the views that I've just expressed. But I would also say that we have had some anecdotal evidence from some of the smaller brokers to indicate that there would be some downward pressure applied to insurance premiums. Overarchingly, I would say the position of the Governance Institute is that whilst that would be welcomed from the corporate community, it's not the driving force behind why we would see such change as being important to the market. The distraction that is caused to organisations—who are overwhelmingly doing the right thing—through these sorts of actions is probably the primary driver.

CHAIR: I asked this of one of our previous people giving evidence. On notice could you perhaps have a look at that Insurance Council submission and provide any more detail that you could on the insurance aspect directly?

Ms Motto : Happy to do so and we can reflect with our members, obviously, on their own experience.

CHAIR: Thanks. I'm just curious about this. You might not know the answer, but are there different pools of insurance depending on the size of the company and the type of people that you would engage with from an brokering point of view?

Mr Blackett : I can't answer that question. I'm not an insurance expert.

Ms Motto : No, I don't know.

CHAIR: That's okay.

Ms Lawler : I couldn't answer that question, but what I can say is that it's different for listed companies versus unlisted companies because obviously listed companies have a much higher risk profile for the continuous disclosure.

CHAIR: That's okay. I should have said earlier that we've also got Senator Patrick and Senator Brockman on the teleconference as well. Senator Patrick, did you have some questions?

Senator PATRICK: Yes, thank you very much, Chair. I'll work my way backwards. Noting you're interested in governance—and obviously laws are always designed to alter conduct, be it personal or corporate or for directors and so forth. In order to preserve the principle of continuous disclosure, which I think everyone supports, and noting that there would be an additional burden upon someone who sought to perhaps prosecute or take on an entity that had not done the right thing, and noting the burden that's associated with proving a particular state of mind, what would be the governance arrangements one would put into place or prescribe to make sure that, were this legislation to come through, there would be sufficient evidence to deal with inappropriate conduct?

Ms Motto : Sorry, Senator. It's good to hear your voice, but I'm just struggling a little with the question. So you're asking what the governance—

Senator PATRICK: In effect, the change to the legislation would place an additional burden upon someone who sought legal or judicial remedy for a breach of continuous disclosure obligations. I wonder, if this legislation were to go through—I imagine your organisation supports the idea of proper disclosure—what governance arrangements could be put in place to complement the change in legislation that is proposed to ensure that, if a discovery was requested or if someone thought someone was doing the wrong thing, the burden of prosecution could be met?

Mr Blackett : I'd contend that in the future we wouldn't be doing anything different to the way we're doing things now. When it comes to matters of disclosure, there are a lot of factors at play. As we as we say in our submission, there's any number of factors which may or may not have an influence on what you think may cause a shift in share price or not. So I'd contend that there's probably nothing that we would do. I've made the point that I've not seen any change, certainly amongst my clients, in the way that they approach continuous disclosure since the temporary relief was introduced. I wouldn't sort of see that if that were to be made permanent, behaviours would change as a result in the future. I think that in terms of evidence as to who knew what and why and when, nothing would change now or in the future from what would be happening now in terms of how companies and their disclosure committees or their executives choose to characterise or make a determination of whether or not a release or a disclosure is made to market.

Senator PATRICK: In terms of your observation about people not changing their conduct as a result of the temporary measures, wouldn't you accept that most people do the right thing and therefore it would be hard to see a change in amongst what is generally a large cohort who do the right thing anyway?

Mr Blackett : Absolutely I'd agree with that. I'd hate to think I'd be involved with a company that is trying to do the shonky thing. So, yes, if everybody's trying—that's what I've observed, not only in continuous disclosure but also around virtual meetings and anything to do with everything else. The companies I work with are trying desperately hard to get it right to ensure that the shareholders are considered and looked after and that the experience is good for them as well as for the company. Absolutely. I haven't witnessed, as far as I can tell, any scurrilous behaviour.

Senator PATRICK: It just gives rise to the question as to the value of the proposition put forward—people saying there has been no change in conduct because you are working with a group that always does the right thing anyway; that no matter what you changed they would be inclined to do the right thing. This legislation is trying to deal with the very small cohort who are not doing the right thing.

Ms Motto : Indeed, and we appreciate that it's always difficult to strike the right balance, particularly within, as I said, a legislative framework. What we're keen to see not happen is for the legislation to be used as a hammer to crack the walnut, which is the very small percentage of poor behaviour. Certainly, I would say one of the things that we enjoy very much is that the type of member that is inclined to join the Governance Institute of Australia is going to be the type of member that is more inclined to behave at the pinnacle rather than the opposite. So what you say may be true. From our perspective, the obligation itself is not changing, albeit the burden of proof, as you said, is. There are potential remedies to that in terms of a differential experience between the burden of proof required by a regulator and the burden of proof required by, for example, class actions. It may be something that can be considered in the fullness of time, but it's not something our members have considered at this point in time. But what we would like to see is a more nuanced approach so that the vast majority of organisations that are doing the right thing are not subject to undue nervousness around the behaviour of unprincipled individuals taking class action, for example.

Senator PATRICK: Noting your observation that most of your members in some sense wouldn't be affected either way because they're always doing the right thing, and also noting Senator McAllister's proposition that schedule 1 seems to have general support, schedule 2 at the very best has divided support and perhaps the Labor Party have indicated that they're not inclined to support it and actually I'm sitting with them on that at the moment, what do you say to the government if this, in fact, is bundled and has to pass as one piece of legislation—what to you is more valuable? Would you say to the government, 'Look, cast aside schedule 2 if you can't get schedule 1 up', or would you say, 'Hold everything together and we'll just see how this pans out'?

Ms Motto : We in fact canvassed our members on this exact topic yesterday, and the answer is emphatically the former. Schedule 1 is so important to our members in terms of providing the certainty that they need to get on with business and that they need to be efficient and innovative in the way that they do that business, that we would be prepared to split the bill.

Senator PATRICK: Thank you. That's all the questions I have, Chair.

Mr Blackett : But only schedule 1 as it relates to the amendments that we proposed in our submission?

Ms Motto : Correct, because we are highly cognisant, for example, of small organisations who are nationally and geographically diverse—hundreds of members across the country—to whom a hybrid meeting is simply not suitable and who would prefer to run a virtual-only meeting and who have done so very successfully. There are many examples of organisations and we would say once again that the legislation should be less prescriptive and give organisations optionality on a principled basis, that they should do what's in the best interests of their members, shareholders and so forth, rather than be prescriptive around a certain format.

Senator PATRICK: Thank you.

CHAIR: There being no further questions, I thank witnesses for coming along today. We will now suspend.

Proceedings suspended from 13:19 to 13:28