Ethical behaviour is a crucial matter
for everyone in business, but is particularly important for those at
the senior manager and board director levels. Much has changed since
the ‘cowboy era’ of the 1980s - especially the attitude of those at
the top. But is the change a genuine desire to act more honestly, or
are those who are dishonest merely better at hiding their
activities? In this issue, Australian CPA looks at the key issues in
the governance area, showing how companies can establish structures
for ethical behaviour. First, Joe Longo of the ASIC provides the
view from the regulator.
Corporate governance has been a central business
issue of the 1990s. To a large extent, the excesses of the 1980s
ensured that it would be the focus of public and shareholder
attention.
In the past decade there has been increasing
pressure from the investment community, in particular, on directors
to give greater attention to issues including stewardship,
accountability, risk management, codes of conduct and ethical
behaviour.
At the same time, regulators - including the
Australian Securities and Investments Commission - have been
actively driving the demand for disclosure with an increased
emphasis on board composition, its membership and independence. This
has been partially achieved through the appointment of independent
non-executive directors and separation of the chairman and chief
executive roles. The requirement for greater disclosure is in part a
response to the increased focus on director’s duties and
responsibilities. It puts the spotlight on stewardship,
accountability and control.
Earlier this year, ASIC turned particular
attention to the monitoring disclosure by directors of listed
companies of interests in the listed company’s shares. It became an
issue after a survey of 38 randomly selected Melbourne-based listed
companies showed that during the past 12 months, 35 per cent of
directors failed to disclose their interests within the 14-day
reporting period. Of that group, almost two-thirds of directors had
lodged their notifications more than a week late.
More significantly, in reviewing companies from
the random sample where there had been no notifications or no recent
notifications of directors’ interests, ASIC had found seven
directors in breach of the requirement. These directors had direct
or indirect shareholding interests in their companies and are in
breach of their disclosure obligations for periods ranging from 21
months to three years.
For those that do breach the Corporations Law,
evidence suggests that ASIC is effectively dealing with recalcitrant
directors and others, particularly when it comes to enforcement. In
the year to June 30, 1999 ASIC commenced 233 investigations compared
with 214 in the previous corresponding period. There was a
considerable increase in the number of criminal enforcement actions
completed - almost double the previous period. The number of civil
enforcement actions almost doubled to 64 from 34 in the previous
period.
This has taken place while the number of
registered companies continues to rise to about 1.15 million
currently, from 1.09 million in 1997/98.
Educating the
community
As well as playing an important enforcement
role, ASIC has taken on a wider education role, largely as a result
of new responsibilities to consumers of all financial products and
services, except lending.
The new responsibilities, which took effect from
July 1 1998, doubled the number of people ASIC protects from the
40-50 per cent of adults who hold investments to the entire adult
population. To deal effectively with this much wider consumer base
and with additional legal complexities including in the
superannuation and insurance industries, new strategies were
introduced to:
- target inspections and take action that will
increase the quality of service and advice for consumers and
remove incompetent or dishonest people;
- guide and consult with industry so consumers
can use new products and services without loss of
protection;
- strengthen relationships with financial
institutions and industry associations to raise standards of
disclosure and advice that investors and consumers receive; and
- communicate so that businesses comply with
the law and consumers use their rights to avoid fraud. Enforcement
evidence also suggests that no matter what rules are put in place,
there will always be companies who mismanage and control their
businesses to the detriment of shareholders. ASIC takes the view
that the more shareholders know about what is expected of company
directors and officers, the better.
Investigations
One of the most important investigations of the
past year was into the affairs of Burns Philp Ltd, a former
blue-chip company with thousands of small shareholders. The
company’s massive write downs in its herbs and spice businesses
resulted in the collapse of its share price and raised questions
about whether directors had adequately supervised management and had
revealed the problems soon enough.
We documented in a report the problems the
company had had, and the problems experienced in accurately valuing
its brand names. To draw out lessons for the future, we also
reported on the special investigation into Spedley Securities Ltd,
which collapsed in 1989, with massive debts.
In one of the largest corporate investigations,
major frauds were revealed and, through the DPP, successfully
prosecuted. With the legal proceedings concluded, the report
highlighted lack of internal controls, the dominance of a single
director, Brian Yuill, and the absence of an ‘arm’s length’
commercial approach to loans.
In the latest financial year, ASIC took action
against dishonest directors, bankrupts managing companies, insolvent
trading, ‘phoenix company’ activity, and failure to cooperate with
external administrators. Ten of the 22 people jailed in 1998/99 were
company directors who cheated investors or creditors of small to
medium-sized companies or who were involved in managing companies
while disqualified. We summarily prosecuted 354 directors or company
officers who had failed to give external administrators statements
about the company’s affairs or books and records. During the year,
this process was streamlined, causing a marked jump from the 90
prosecutions a year earlier.
Where company directors have two or more
companies which are wound up in the previous seven years and return
less than fifty cents in the dollar to creditors, ASIC may ask them
to show cause why they should not be prohibited from managing
companies. In 1998/99, 74 people were prohibited from acting as
directors.
Acquired for the first time last year was the
power to accept enforceable undertakings. These offer a quicker and
cheaper method than court action for remedying possible breaches of
the law. Undertakings were accepted from 25 companies and
individuals in 1998-99 as a result of our accounting surveillance to
individuals involved in advising consumers. The surveillance
measures were an important way for ASIC to identify problems and
areas the accounting profession and business community had in
relation to their disclosure obligations.
Financial
surveillance
Particularly for the accounting profession,
ASIC’s scrutiny of financial reports is highly significant. The
latest surveillance project was carried out on the financial reports
of 111 listed companies with balance dates from 1 July 1998 to 31
December 1998. It identified major problem areas in the amortisation
of intangible assets, abnormal items and directors’ and officers’
emoluments.
Small business has been a particular focus, with
the attendance to more than 1,290 regulatory matters affecting small
companies during the year. These included action to eliminate
bankrupts from company management, responses to requests from
directors and shareholders and applications in relation to assets of
defunct companies which vest in ASIC.
In each state and territory, ASIC’s small
business team has developed relationships with company liquidators
to identify serious offenders and to provide assistance. Teams have
also set up links with professional groups, industry associations
who represent small business, especially in industries prone to
higher than average levels of insolvency, such as the building and
computer sales industries.
The forces shaping corporate governance, like
enforcement and shareholder pressure, appear to be changing the
attitudes of directors. This is reflected in greater participation
by directors in investigations and surveillance programs held to
determine the level of understanding about specific sections of the
Corporations Law.
In the year ahead, ASIC will continue to develop
various strategies to encourage compliance with a special emphasis
on electronic enforcement. The recent formation of the Electronic
Enforcement Unit inside ASIC has focussed our attention not only on
the need for regulation of electronic commerce, but also the need to
work with industry to structure policies and consumer education
strategies to keep up with technology.
Joe Longo is National Director, Enforcement,
with the Australian Securities and Investments
Commission.