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Tuesday, 14 December 1993
Page: 4588

Senator McGAURAN (12.07 a.m.) —In recent weeks the structure of the Australian stock market came close to undergoing one of the most profound policy changes in its history. The near decision of the Australian Stock Exchange Board of Directors to allow the introduction of differential voting shares—or super shares as they are known—would have transformed the investment culture in this country and would have altered the terms on which ordinary shareholders buy shares. It had the potential to change the relationship of power and accountability which operates across the stock market.

  The issue of the introduction of super shares onto the Australian Stock Exchange needed to be treated most cautiously. It needed to be pursued in an open and orderly manner so that the Australian shareholders, large and small, could make an informed judgment as to its merits or otherwise. But the manner in which the Australian Stock Exchange pursued the super shares issue should be of great concern to the investment and business community.

  If nothing else, it caused the Joint Committee on Corporations and Securities—of which I am a member—to intervene and, by doing so, encouraged the federal Attorney-General (Mr Lavarch) to intercede in the issue as well. This dramatic parliamentary intervention occurred simply because, in mid-November this year, it looked as if the Australian Stock Exchange was about to introduce super shares of its own volition.

  Indeed, the Australian Stock Exchange issues paper on differential shares was only widely distributed on November 10. The Australian Stock Exchange issues paper raised some 25 specific issues which needed to be responded to. These had to be lodged by November 29—only 19 days after it was first released. Further, the Australian Stock Exchange informed the public that it would make a decision on the share plan as early as December.

  I understand the Australian Stock Exchange's concerns over the threat of losing News Group's contribution to the market's profitability. I believe News's contribution to daily turnover is something like 10 per cent, and I understand trading in News shares earns brokers about $60 million a year. I appreciate that the exchange operates in an international market and cannot long survive structural distortions in its own listings which are not apparent in others.

  Despite this, however, there were bigger community issues involved about which the ASX needed to be well aware. The decision to rush through the superannuation shares initiative did nothing for the confidence of the ordinary shareholders—those mums and dads—who have been courted by the stockbrokers in the last two years.

  Principally, with the Woolworths and the Commonwealth Bank floats, the share market has won a good deal of renewed favour and interest from small shareholders. The mums and dads have been encouraged to return to the Stock Exchange and to invest their private earnings—their wages and salaries—into stocks and issues. They have done this on the basis that the wheeling and dealing which characterised the market in the 1980s has been buried. They have returned because they believe that the Gordon Gekko mentality has been burnt out of the boardrooms and that an Australian family can invest confidently in a new, responsible, sober-minded investment industry which looks to the long term, not to the quick return at their expense.

  But no sooner does the family investor return to the market than the managers of the stock market are seen to be back to their old tricks. What sparks the public suspicion even more so in these matters is the coincidental timing of the superannuation share development. No sooner does the stock market become a bit bearish and no sooner does its capitalisation increase, investment rates recover and the brokers become a bit flush with funds again, than we get the smell of the deals being done all over again.

  The Stock Exchange's unseemly rush to embrace superannuation share plans shows that the board of the ASX is not sufficiently distant and dispassionate from the market forces operating in brokerage houses and other across-market influences. It seems to me that the ASX board has an ongoing potential conflict of interest between its perceived loyalties to the brokerage houses on the one hand and the investing public on the other. This problem is set to become the source of continuing difficulties in the future.

  As long as the Australian Stock Exchange board of directors continues to be simply chosen from amongst the ranks of the brokerage houses we cannot expect it to act effectively as a watchdog of its own conduct. Look at the composition of the ASX board of directors. Its 15 members all come from the narrow stock brokerage and banking areas. Ten are elected members of the ASX and four were appointed directors by the other 10. The other is the managing director of the Stock Exchange. So, at a minimum, 11 of the 15 are straight out of the Stock Exchange itself.

  I do not see on the current membership list too many ordinary shareholders or dispassionate observers, obviously dedicated by virtue of their backgrounds to oversee the interests of the investment public. They are part of the broker-stock market culture and cannot be rightly expected to carry out an increasingly formal regulatory role. But here they are making judgments which have massive ramifications for the community and for the legion of small, ordinary shareholders. This serves as a warning for the future.

  The ASX board, as currently constituted, may not be suitably representative or appropriately far enough removed from the stock market to make the professional judgments that the community and the parliament expect of it. In view of this, it is important that the parliament reassess the structure of the ASX board to ensure that it is effectively pursuing the interests of the investing public and executing its regulatory responsibilities in an arm's length way.

  Regulatory agencies are expected to be aloof from the activity that they are designed to regulate. But, for some reason, the ASX has escaped the issue and the responsibility. I remind the Senate that when similar issues arose in the UK the board of the London Stock Exchange was restructured to widen its representation to provide it with the basis for the effective execution of its regulatory and monitoring functions.

  I propose the restructuring of the ASX board, either by statute or through its own articles of association, to ensure a wider body of representation of interests and viewpoints. The current ASX articles allow for four appointed representatives from the business community. I believe that this practice needs to be widened. Representation on the ASX board should embrace shareholder representative bodies and associations and other public and private figures with a professional and academic interest or a long experience in company law, the activities of the stock market or consumer affairs.

  The appointment of outsiders to the ASX board could be given effect through amendments to the Securities Industry Act 1980—the principle act under which the ASX was incorporated. This would give statutory effect to the representative remodelling of the ASX board, and it would serve to override any inconsistencies which might arise in the ASX's own articles.

  Generally, I would envisage that outside appointees to the ASX board would be similar in status and standing to nominee directors in other companies. I also consider it important that there be a mandatory reporting requirement on the part of the ASX to the Joint Statutory Committee on Corporations and Securities of all major decisions affecting the operation of the share market and the interests of ordinary shareholders. This will ensure that no key decisions are pushed through the ASX without careful consideration. This reporting requirement could take a legislative form, though I envisage the ASX accommodating a requirement from within its own resources and on a cooperative basis for a trial period at the very least.

  I make this recommendation in view of the simple fact that neither the joint committee nor the Attorney-General received any prior warning concerning the decision making process that the ASX had embarked upon in respect of super shares. This is a set of circumstances which the investing public and the parliament should not have to tolerate. I cannot see any reason for having any confidence that these circumstances will not re-emerge unless the parliament pushes for change in the ASX board structure. I intend to refer the matter to the Joint Statutory Committee on Corporations and Securities, with the aim of establishing an inquiry into the representative nature of the ASX board.

  Having lost the confidence of the public in the 1980s, we surely cannot afford to lose it again in the 1990s. While accusations of interference in stock exchange activities may be levelled and its greater freedoms damaged, I believe greater damage would be done to the competitiveness of the exchange by loss of confidence in the ability of the ASX to monitor exchange activities than any small scale regulatory intervention into the ASX's affairs could ever cause.