Special Report

CG Watch – Australia

by Charles Yonts, CLSA & Jamie Allen, ACGA / Dec 1, 2018

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Australia has maintained its competitive edge in corporate governance over rivals like Hong Kong and Singapore, according to our latest CG Watch report. Despite being tarnished by banking scandals and public-governance problems, the country still comes in first in most categories and ranks first in Asia-Pacific with an overall score of 71% in 2018.

Fees-for-no-service scandal
Although Australia came out of the global financial crisis in good shape, in the intervening years financial firms have engaged in a range of misconduct, including charging fees for services they knew they would not provide.

Fortunately, the Australian Securities and Investments Commission (ASIC) has been successful in enforcement outcomes. For example, in October 2016 ASIC published a detailed report, Financial Advice: Fees for no service (Report 499), and since then has won considerable compensation and remediation payments for bank customers. Payments are ongoing, yet such enforcement work has been forgotten in all the furore surrounding the royal commission, formed in December 2017 to inquire into misconduct allegations.

Robust CG ecosystem
Australia is the clear leader for listed company governance and disclosure. It continues its strong performance in the CG rules category from 2016, ranking first with a score of 78%.

The country has a comprehensive and well-established continuous disclosure regime which imposes strict reporting obligations. Concepts like “independent director” are clearly defined under the rules and the national CG code is of high quality.

Strict remuneration disclosure certainly makes the country superior to other Asian jurisdictions. The Corporations Act obliges companies to produce detailed remuneration reports to shareholders at AGMs.

They must disclose the board’s policies for determining the nature and amount of remuneration paid to key management personnel, the relationship between policies and company performance, performance hurdles and actual remuneration paid to senior executives and directors.

Companies typically produce reports of 20-30 pages, which is a staggering level of detail compared to most Asian markets.

Weak ESG reporting
While company governance standards and disclosure practices have strengthened considerably over the last two years, Australia does not fare as well when it comes to ESG.

Unlike several jurisdictions in Asia, formal ESG reporting is not a requirement under listing rules.

The CG principles, backed by the Australian Securities Exchange (ASX), include a recommendation that companies disclose their material ESG risks and how they are managing them, but this is only subject to “comply or explain”.

To fill the guidance gap, the Australian Council of Superannuation Investors (ACSI), which has been tracking sustainability reporting in Australia since 2008, and the Financial Services Council (FSC), the peak industry body for asset managers, jointly released an ESG reporting guide in 2016. This research found that around a third of ASX 200 companies failed to provide high quality ESG reporting.

While there is broad agreement on enhancing the transparency, there has been a continuous debate over how much influence shareholders should have over boards in ESG reporting. Unlike other developed markets that allow shareholders to put forward non-binding resolutions, in Australia shareholders are forced to put forward amendments to company articles, which is a very hard task, or vote against directors. In response, the Australian Council of Superannuation Investors (ACSI) is calling for a non-binding shareholder resolution framework.

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