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Segal, Jillian --- "Corporate Governance: Substance Over Form" [2002] UNSWLawJl 24; (2002) 25(2) UNSW Law Journal 320

[*] BA, LLB (UNSW), LLM (Harv); Member of the Trade Practices Act Review Committee; former Deputy Chair of the Australian Securities and Investments Commission (‘ASIC’). I would like to thank Ceyda Ozsayin of ASIC for her assistance and Alan Cameron, previous Chairman of ASIC, for his valuable input and comments. This article was written before the release of the CLERP 9 policy paper by the Federal Government: Department of the Treasury, Corporate Disclosure: Strengthening the Financial Reporting Framework (2002). Therefore, it comments on general directions, rather than specific changes.

[1] See Chartered Secretaries Australia, ‘Corporate Australia Shaping Up New Survey Finds’ (Press Release 2002/10, 12 September 2002).

[2] See Roman Tomasic, ‘Good Corporate Governance: The International Challenge’ (2000) 12 Australian Journal of Corporate Law 142.

[3] See Working Group on Corporate Practices and Conduct (chaired by Henry Bosch), Corporate Practices and Conduct (3rd ed, 1995) 7. The Cadbury committee in the United Kingdom adopted a similar definition: Sir Adrian Cadbury (chair), Report of the Committee on the Financial Aspects of Corporate Governance — The Code of Best Practice (1992).

[4] See Justice Alex Chernov, ‘The Role of Corporate Governance Principles in the Development of Legal Principles Relating to Directors’ (Paper presented at the Conference on Key Developments in Corporate Law and Equity, University of Melbourne, 16 March 2001).

[5] Working Group on Corporate Practices and Conduct, above n 3.

[6] Frederick G Hilmer (chair), Strictly Boardroom: Improving Governance to Enhance Company Performance — Report of the Independent Working Party into Corporate Governance (1993).

[7] Cadbury, above n 3.

[8] Sir Richard Greenbury (chair), Directors’ Remuneration: Report of a Study Group Chaired by Sir Richard Greenbury (1995).

[9] Sir Ronald Hampel (chair), Report of the Committee on Corporate Governance (1998).

[10] Organisation for Economic Co-operation and Development (OECD), Ad hoc Taskforce on Corporate Governance, OECD Principles of Corporate Governance (1999), <http://www.oecd.org/pdf/M00008000/M00008299.pdf> at 27 September 2002.

[11] It did, however, acknowledge that this may not be appropriate in all cases, particularly where a company is a wholly-owned subsidiary of an overseas parent company.

[12] Working Group on Corporate Practices and Conduct, above n 3.

[13] Working Group on Corporate Practices and Conduct (chaired by Henry Bosch), Corporate Practices and Conduct (1991) 1.

[14] ASX, Discussion Paper, Disclosure of Corporate Governance Practices by Listed Companies (1994).

[15] ASX, Guidance Note 9, Disclosure of Corporate Governance Practices: Listing Rule 4.10 (2001).

[16] David Knott, ‘Corporate Governance — Principles, Promotion and Practice’ (Speech delivered at the Monash Governance Research Unit (Inaugural Lecture), 16 July 2002).

[17] Hilmer, above n 6, 17–21.

[18] Julie Macken, ‘Transparent the Only Way to Go’, Australian Financial Review (Sydney), 20 May 2002, 61.

[19] Danny Samson, ‘Board Games’, The Australian Financial Review (Sydney), 13 June 2000, 34.

[20] Stan D M Wallis, ‘Corporate Governance — Conformance or Performance?’ (Speech delivered at the

Annual Corporate Public Affairs Oration, Centre for Public Affairs, Melbourne, 29 June 2000).

[21] See Diane Grady, ‘Breaking the Boardroom Mould’ (2000) 16(8) Company Director 9.

[22] OECD, above n 10.

[23] Arthur Levitt, ‘An Essential Next Step in the Evolution of Corporate Governance’ (Speech delivered to the Audit Committee Symposium, New York, 29 June 1999), <http://www.sec.gov/news/speech/speecharchive/1999speech.shtml> at 27 September 2002.

[24] These lessons are discussed below in Part III(B). It should be noted that some specific failures of governance, such as excessive and uncommercial options and loans to executives, have only been in focus more recently. Hence these lessons, and earlier pronouncements from ASIC, need to be viewed in context.

[25] IOSCO, Objectives and Principles of Securities Regulation (2002), <http://www.iosco.org/iosco.html> at 27 September 2002.

[26] Howard Davies, ‘Corporate Governance and the Development of Global Capital Markets’ (Speech delivered at the China Securities Regulatory Commission, Beijing, 22 April 2002), <http://www.fsa.gov.uk/pubs/speeches/sp96.html> at 27 September 2002.

[27] This role is conferred on ASIC by the Australian Securities and Investments Commission Act 2001 (Cth) s 11.

[28] There are many other proceedings on foot relating to the conduct of officers and directors. They cover similar alleged breaches of duty, insolvent trading offences, insider trading offences and a range of other conduct and market offences.

[29] ASIC, ‘ASIC Commences Civil Proceedings Against Former Officers of GIO Insurance’ (Press Release 01/217, 20 June 2001), <http://www.asic.gov.au> at 27 September 2002.

[30] Corporations Act 1989 (Cth) (‘Corporations Law’) s 232(6), amended by Corporate Law Economic Reform Program Act 1999 (Cth). The equivalent provision is now contained in Corporations Act 2001 (Cth) ss 182, 184.

[31] Corporations Act 1989 (Cth) s 232(4), amended by Corporate Law Economic Reform Program Act 1999 (Cth). The equivalent provision is now contained in Corporations Act 2001 (Cth) s 180.

[32] See ASIC, ‘Court Finds Former HIH Directors Adler, Williams and Fodera Breached their Duties as Directors’ (Press Release 02/92, 14 March 2002); ASIC, ‘Court Imposes Penalties on Former HIH Directors Adler, Williams and Fodera’ (Press Release 02/192, 30 May 2002); ASIC, ‘Penalty Orders Finalised for Adler, Fodera and Williams’ (Press Release 02/200, 6 June 2002), <http://www.asic.gov.au> at 27 September 2002.

[33] See The HIH Royal Commission <http://www.hihroyalcom.gov.au> at 27 September 2002.

[34] Re HIH Insurance Ltd (in prov liq) and HIH Casualty & General Insurance Ltd (in prov liq); Australian Securities & Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72.

[35] Corporations Act 2001 (Cth) s 180.

[36] Corporations Act 2001 (Cth) s 181.

[37] Corporations Act 2001 (Cth) s 182.

[38] Corporations Act 2001 (Cth) s 183.

[39] Re HIH Insurance Ltd (in prov liq) and HIH Casualty & General Insurance Ltd (in prov liq); Australian Securities & Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80, 85–6. These orders were finalised on 6 June 2002, but were stayed against Mr Adler and Adler Corporation until 3 July 2002 on the basis of certain financial undertakings: Re HIH Insurance Ltd (in prov liq) and HIH Casualty & General Insurance Ltd (in prov liq); Australian Securities & Investments Commission v Adler [2002] NSWSC 510; (2002) 42 ACSR 74.

[40] This amount was subject to verification of the calculation of interest at the time.

[41] Corporations Act 2001 (Cth) s 180(2)

[42] ASIC, ‘ASIC Commences Investigation into Harris Scarfe’ (Press Release 01/115, 4 April 2001); ASIC, ‘Former Harris Scarfe Officer to Face Court’ (Press Release 01/453, 20 December 2001); ASIC, ‘Former Harris Scarfe Officer Appears in Court’ (Press Release 02/19, 18 January 2002); ASIC, ‘Former Harris Scarfe Officer Pleads Guilty’ (Press Release 02/135, 19 April 2002); ASIC, ‘Former Harris Scarfe Officer Jailed’ (Press Release 02/229, 26 June 2002), <http://www.asic.gov.au> at 27 September 2002.

[43] Corporations Act 1989 (Cth) s 232(2), amended by Corporate Law Economic Reform Program Act 1999 (Cth). The equivalent provision is now contained in Corporations Act 2001 (Cth) ss 181, 184.

[44] Corporations Act 2001 (Cth) s 184(2)(b).

[45] Corporations Act 2001 (Cth) s 999, amended by Financial Services Reform Act 2001 (Cth). The equivalent provision is now contained in Corporations Act 2001 (Cth) s 1 041E.

[46] R v Hodgson (Unreported, District Court of South Australia, Judge Bright, 26 June 2002).

[47] ASIC, ‘ASIC Commences Civil Proceedings Against Former One.Tel Officers and Chairman’ (Press Release 01/441, 12 December 2001), <http://www.asic.gov.au> at 27 September 2002.

[48] Corporations Act 2001 (Cth) pt 2D.6.

[49] Corporations Act 2001 (Cth) s 1317H.

[50] ASIC, ‘ASIC Restrains Rich Assets’ (Press Release 01/199, 8 June 2001); ASIC, ‘ASIC Obtains Court Undertakings Freezing Assets of Former One.Tel Managers’ (Press Release 0 1/205, 13 June 2001); ASIC, ‘ASIC Obtains Modified Undertakings from Former One.Tel Officers’ (Press Release 0 1/343, 24 September 2001); ASIC, ‘ASIC Obtains Ongoing Undertakings from Former One.Tel Officers’ (Press Release 01/446, 14 December 2001), <http://www.asic.gov.au> at 27 September 2002.

[51] ASIC, ‘ASIC Commences Enforcement Action Against Water Wheel Directors Bernard Plymin, William Harrison and John Elliott’ (Press Release 00/500, 27 November 2000), <http://www.asic.gov.au> at 27 September 2002.

[52] The equivalent provision is now contained in Corporations Act 2001 (Cth) s 588G.

[53] ASIC, ‘Court Imposes Pecuniary Penalties on Whitlam’ (Press Release 02/297, 15 August 2002), <http://www.asic.gov.au> at 27 September 2002.

[54] Australian Securities & Investments Commission v Whitlam (No 2) [2002] NSWSC 591; (2002) 42 ACSR 407.

[55] Corporations Act 1989 (Cth) s 232(2), amended by Corporate Law Economic Reform Program Act 1999 (Cth). The equivalent provision is now contained in Corporations Act 2001 (Cth) ss 181, 184.

[56] Corporations Act 1989 (Cth) s 232(6), amended by Corporate Law Economic Reform Program Act 1999 (Cth). The equivalent provision is now contained in Corporations Act 2001 (Cth) ss 182, 184.

[57] Corporations Act 1989 (Cth) s 250A. The equivalent provision is contained in Corporations Act 2001 (Cth) s 250A.

[58] ASIC, ‘Court Finds NRMA Limited President Nicholas Whitlam Breached His Duties as a Director’ (Press Release 02/262, 19 July 2002), <http://www.asic.gov.au> at 27 September 2002.

[59] Australian Securities & Investments Commission v Whitlam (No 2) [2002] NSWSC 591; (2002) 42 ACSR 407, 450.

[60] In breach of Corporations Act 2001 (Cth) s 180(1).

[61] Australian Securities & Investments Commission v Whitlam (No 2) [2002] NSWSC 591; (2002) 42 ACSR 407, 407.

[62] Australian Securities & Investments Commission v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515, 522. See also ASIC, ‘Court Imposes Pecuniary Penalties on Whitlam’ (Press Release 02/297, 15 August 2002), <http://www.asic.gov.au> at 27 September 2002.

[63] Australian Securities and Investments Commission Act 2001 (Cth) s 17.

[64] ASIC, Report of the Special Investigation into Spedley Securities Limited (1998) (‘Spedley report’); ASIC, Report of the Investigation into Burns Philp & Company Limited (1998) (‘Burns Philp report’).

[65] See, eg, New York Stock Exchange (‘NYSE’), Corporate Governance Rule Proposals Reflecting Recommendations from the NYSE Corporate Accountability and Listing Standards Committee (2002), <http://www.nyse.com/pdfs/corp_gov_pro_b.pdf> at 27 September 2002.

[66] Spedley report, above n 64, 17–24.

[67] Ibid 25–7.

[68] Ibid 29–30.

[69] Ibid 31–2.

[70] Ibid 33–6.

[71] Burns Philp report, above n 64, 47–8.

[72] Ibid 50–2.

[73] Working Group on Corporate Practices and Conduct, above n 3.

[74] ASIC, Policy Statement 128, Collective Action by Institutional Investors (1998).

[75] This may breach the takeover restrictions in Corporations Act 2001 (Cth) ch 6.

[76] It is worth noting that this policy statement has been viewed by institutional investors as unduly cumbersome and has not proven effective.

[77] The ASIC Corporate Governance Roundtable includes representatives from a wide range of business and investor organisations such as the Australian Institute of Company Directors and the Australian Shareholders’ Association.

[78] OECD, above n 10.

[79] ASX Corporate Governance Council, ‘Corporate Governance Council to Broaden Disclosure’ (Media Release, 1 August 2002), <http://www.asx.com.au/shareholder/pdf/CorpGovCouncil010802.pdf> at 4 October 2002.

[80] ASX Corporate Governance Council, ‘Statement by Participants’ (Media Release, 15 August 2002), <http://www.asx.com.au/shareholder/pdf/CorpGovCouncil150802.pdf> at 4 October 2002.

[81] Corporations Act 2001 (Cth) ss 674, 675. These were inserted by the Financial Services Reform Act 2001 (Cth). The equivalent provisions were previously contained in Corporations Act 1989 (Cth) ss 1001A, 1001B.

[82] See ASIC, Better Disclosure for Investors (2000), <http://www.asic.gov.au/asic/pdflib.nsf> at 27 September 2002.

[83] See especially, Australian Investor Relations Association, Best Practice Guidelines for Communication between Listed Entities and the Investment Community (2001), <http://www.aira.org.au/AIRA%20Guidelines%20August%202001.pdf> at 27 September 2002.

[84] Knott, above n 16. It is expected that CLERP 9, the next phase in the government’s Corporate Law Economic Reform Program, will deal with this issue.

[85] ASIC, ‘Coles Myer — ASIC Calls for More Information and Shareholder Activism’ (Press Release 02/337, 16 September 2002), <http://www.asic.gov.au> at 27 September 2002.

[86] ASX Corporate Governance Council, above n 80.

[87] ASX, Exposure Draft, Proposed ASX Listing Rule Amendments Enhanced Disclosure (2002), <http://www.asx.com.au/about/pdf/ExposureDraft2002JulyEnhancedDisclosure.pdf> at 27 September 2002.

[88] Corporations Act 2001 (Cth) ss 792B(2), 792C, 792D, 794D.

[89] OECD, above n 10; IOSCO, above n 25.

[90] The Department of Trade and Industry and the UK Treasury have appointed Derek Higgs, a veteran investment banker, to head their review into the role of non-executive directors in the UK. See John Kiphoff, ‘Investment Banker Chosen to Head DTI Review’, Financial Times (London), 15 April 2002, 2.

[91] Pub L No 107–204, 116 Stat 745 (2002).

[92] See Ian Ramsay, Independence of Australian Company Auditors: Review of Current Australian Requirements and Proposals for Reform — Report to the Minister for Financial Services and Regulation (2001), <http://www.treasury.gov.au/contentlist.asp?classification=14 & titl=Publications> at 23 July 2002.

[93] David Knott, ‘Corporate Governance — 1980s Revisited?’ (Speech delivered to the Australian Institute of Company Directors, Western Australia, 17 October 2001); Jillian Segal, ‘Everything the Company Director must know about Corporate Financial Disclosure and Continuous Disclosure’ (Speech delivered at the Australian Institute of Company Directors Conference, Sydney, 31 October 2001); Jillian Segal, ‘The Future of Corporate Regulation in Australia’ (Speech delivered at the 18th Annual Company Secretaries’ Conference, Surfers Paradise, 19 November 2001).

[94] David Knott, ‘Protecting the Investor: The Regulator and Audit’ (Speech delivered at the CPA Congress 2002 Conference, Perth, 15 May 2002).

[95] That is, the duty to notify ASIC under s 311 of the Corporations Act if the auditor has reasonable grounds to suspect that a contravention of the Corporations Act has occurred; and believes that the contravention has not been, or will not be adequately dealt with, by commenting in the auditor’s report or bringing it to the attention of the directors.

[96] See NYSE, above n 65.

[97] ASX Corporate Governance Council, above n 80.

[98] See generally the references above n 93.

[99] The Financial Reporting Council has confirmed that Australia will adopt International Accounting Standards by January 2005: Financial Reporting Council, ‘Government Proposals and Accounting Regulation’ (Press Notice 66, 24 July 2002), <http://www.frc.org.uk/publications/publications384.html> at 27 September 2002.

[100] The ‘true and fair’ override was removed in Australia some years ago due to perceptions that it was abused by preparers of financial statements who used the override to avoid standards that they did not agree with.

[101] It is arguable that the present provisions of the Sarbanes-Oxley Act of 2002 in this regard are uncertain. The conflict principle framework from the report of the US Senate Committee on Banking, Housing and Urban Affairs was not included, only a list of example services: Committee on Banking, Housing and Urban Affairs, Report together with Additional Views to Accompany S 2673 (2002) 15–19. This is an area that may need to be further addressed by the US Public Company Accounting Oversight Board.

[102] The Institute of Chartered Accountants in Australia and CPA Australia, Professional Statement F1: Professional Independence (2002), <http://www.cpaaustralia.com.au/01_information_centre/10_audit/1_10_0_f1_draft.asp> at 10 September 2002.

[103] See, eg, ANZ Banking Group Ltd, ‘ANZ Enhances Governance Standards’ (Press Release, 24 April 2002).

[104] Jay W Lorsch, ‘Empowering the Board’ (1995) 73(1) Harvard Business Review 107, 107.

[105] See Michael Skapinker, ‘A Simple Job Becomes a Thankless Task’, Financial Times (London), 2 March 2002, 15.

[106] See Martin Dickson, ‘The Perils of Directorship’, Financial Times (London), 25 April 2002, 24.

[107] NAPF Sets Out ‘Investor Expectations’ of Outside Directors (2002) Independent Director <http://www.independentdirector.co.uk/NAPF_investor_expectations.htm> at 4 October 2002.

[108] Cadbury committee, above n 3.

[109] NAPF Sets Out ‘Investor Expectations’ of Outside Directors, above n 107. See also Tony Tassell, ‘Non-Executive Directors “Should Limit Positions Held”’, Financial Times (London), 10 May 2002, 4.

[110] Working Group on Corporate Practices and Conduct, above n 3.

[111] Hampel, above n 9, 17.

[112] Ernst & Young conducted a survey of 94 board members from the UK’s leading 500 companies which suggests that, with the increased interest in corporate governance issues, the role of non-executive directors will become far more important. Key findings of the survey include that 96 per cent of respondents believed the role of the non-executive director was either fairly valuable (40 per cent) or very valuable (56 per cent). When asked specifically what it was they valued, 79 per cent mentioned their insight and experience, 74 per cent their independence and 70 per cent the challenges they make: Market and Opinion Research International (‘MORI’), A Force for Good — Captains of Industry Say that Non-Executive Directors Will Become Increasingly Important and Valuable¸ Ernst & Young (2002).

[113] See Alistair Osborne, ‘Lord Young Takes Final Shot at Fat Cats and Non-Execs’, The Daily Telegraph (London), 25 April 2002, 31

[114] See NYSE, above n 65. This sets out the proposed corporate governance listing requirements for companies listed on the NYSE. These requirements are to be codified in a new s 303A of the NYSE’s Listed Company Manual.

[115] Ibid, proposed s 303A(3).

[116] Ibid, proposed s 303A(6).

[117] Ibid, proposed s 303A(9).

[118] Ibid, proposed s 303A(7)(b)(ii)(F).

[119] See Simon Targett, ‘Call to Reshape Role of Independent Directors’, Financial Times (London), 18 February 2002, 31.

[120] Ibid.

[121] See generally Ann-Maree Moodie, The Twenty-First Century Board: Selection, Performance and Succession (2001).

[122] Ibid 22.

[123] See Mark Watson, Developing Directors (2002) Boardroom Practice Articles <www.iod.com> at 27 September 2002.

[124] See Moodie, above n 121, 41.

[125] For example, both HIH and Enron had an audit committee with outside directors.

[126] Geoffrey P Miller, ‘Catastrophic Financial Failures: Enron, HIH and More’ (Speech delivered at the Ross Parsons Lecture 2002, The Global Regulation of Banking and Insurance: From HIH to Enron, University of Sydney Law School, Sydney, 11 July 2002).

[127] See Working Group on Corporate Practices and Conduct, above n 3.

[128] See NYSE, above n 65.

[129] See Allesandra Fabro, ‘Leave Governance to Business — Warburton’, Australian Financial Review (Sydney), 6 September 2002, 3, reporting on a speech by Dick Warburton to the Press Club, Canberra.