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Corporate Law Bulletin

Bulletin No. 88, December 2004

Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation

Published by LAWLEX on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Stock Exchange and the leading law firms: Blake Dawson Waldron, Clayton Utz, Corrs Chambers Westgarth, Freehills, Mallesons Stephen Jaques, Phillips Fox.

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Brief Contents

1. Recent Corporate Law and Corporate Governance Developments 2. Recent ASIC Developments 3. Recent ASX Developments 4. Recent Takeovers Panel 5. Recent Corporate Law Decisions

6. Contributions 7. Subscription 8. Change of Email Address 9. Website Version 10. Copyright 11. Disclaimer

Detailed Contents

1. Recent Corporate Law and Corporate Governance Developments

1.1 Compliance with ASX corporate governance guidelines
1.2 US Accounting Board proposes rules concerning independence, tax services and contingent fees
1.3 Strengthened standard for professional independence of Australian auditors
1.4 ABI publishes updated version of guidelines on executive remuneration
1.5 Task force of Securities Regulators from major markets agrees on Code of Conduct Fundamentals for Credit Rating Agencies
1.6 UK Financial Services and Markets Act 2000
1.7 Survey of first time adoption of ASX Corporate Governance Council Principles
1.8 CESR consults on potential regulatory approaches for credit rating agencies
1.9 Confidence in corporate reporting survey
1.10 Future Australian corporate law reform proposals
1.11 UK Board issues draft standard on the operating and financial review
1.12 Simplified prospectus for UK fund investors
1.13 UK government announcement on the operating and performance review
1.14 Multinational executives expect compliance costs to increase
1.15 Board of directors trends - Korn/Ferry study
1.16 Report on board leadership

2. Recent ASIC Developments

2.1 ASIC issues dollar disclosure policy
2.2 ASIC issues guidance on the provision of tax advice
2.3 ASIC calls for public comment on share buy-back proposal
2.4 ASIC releases results of unauthorised foreign insurance maket campaign
2.5 ASIC campaigns against churning and misselling
2.6 ASIC provides guidance on Statements of Advice
2.7 ASIC probes insurance broker remuneration
2.8 ASIC approves CPA/ICAA auditing competency standard

3. Recent ASX Developments

3.1 Amendments to ASX Market Rules
3.2 ASX Market Operator Report

4. Recent Takeovers Panel Developments

4.1 General Property Trust: Panel concludes proceedings

5. Recent Corporate Law Decisions

5.1 A separate hearing on penalty should be held in civil penalty proceedings, breaches of directors’ duties and shareholder ratification
5.2 An invalidly appointed director may appoint an administrator
5.3 Unauthorised payment of company debts by third party - misuse of statutory demand procedure
5.4 Funds paid into court as security and pursuant to a court order are not the property of the company paying in for the purpose of section 468 Corporations Act
5.5 Inside information and alleged insider trading
5.6 The construction of assignment clauses in joint venture agreements
5.7 Are promissory notes "securities" or "interests in managed investment schemes"?
5.8 Right to inspect financial records confirmed as an essential power of directors
5.9 Insolvent transactions favouring institutional creditors – when does a creditor suspect insolvency?
5.10 Administrators' indemnity for loan
5.11 Power of court to accept undertaking not to manage companies
5.12 Act of sending signed, but amended contract, by facsimile not sufficient to establish authority to enter into contract
5.13 Liquidation challenged by minority shareholders
5.14 Directors' power to postpone meetings called by members

EDITOR'S NOTE

This is the final issue of the Bulletin for 2004. The next issue will be published in February 2005. I would like to take this opportunity to thank the supporters of the Bulletin - ASIC, ASX and, in particular, our sponsoring law firms listed above.

I wish all of our readers an enjoyable holiday season.

Professor Ian Ramsay
Editor

1. Recent Corporate Law and Corporate Governance Developments

1.1 Compliance with ASX corporate governance guidelines

Corporate Australia is struggling to come to grips with the ASX Corporate Governance Council’s guidelines (ASXCGCG), a new survey released on 16 December 2004 of the Top 200 companies has found, with only two per cent of respondents believing that the guidelines will improve their organisation’s performance even though complying with them has increased costs by an average of 11 per cent. More worrying perhaps is that 20 per cent of companies chose to comply rather than explain a departure from any of the recommendations, even though they believed their original practice was preferable.

According to Chartered Secretaries Australia’s (CSA) survey, while 43 per cent of respondents believe that the guidelines will improve their governance standards 57 per cent do not believe that the guidelines will improve their organisation’s performance. A further 47 per cent think they could ‘possibly’ improve performance.

60 per cent of respondents were concerned that a ‘why not’ explanation could attract unfavourable public commentary or investor reaction while an overwhelming 96 per cent are concerned that so-called corporate governance experts may adopt a checklist approach to assessing responses to the ASXCGCG.

The survey is on the CSA website.

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1.2 US Accounting Board proposes rules concerning independence, tax services and contingent fees

On 14 December 2004, the US Public Company Accounting Oversight Board voted unanimously to propose for public comment certain ethics and independence rules concerning independence, tax services, and contingent fees.

(a) Background

Section 103(a) of the Sarbanes-Oxley Act of 2002 directs the Board to establish "ethics standards to be used by registered public accounting firms in the preparation and issuance of audit reports." Moreover, Section 103(b) of the Act directs the Board to establish rules on auditor independence "as may be necessary or appropriate in the public interest or for the protection of investors to implement or as authorized under Title II of the Act."

In early 2003, the Securities and Exchange Commission adopted new independence rules in order to implement Title II of the Act. Neither the Act nor the SEC's 2003 independence rules prohibit tax services, as long as the services are pre-approved by the company's audit committee and do not fall into one of the categories of expressly prohibited services.

Since the SEC issued its new rules, two types of tax services have raised serious questions from investors, auditors, regulators, and others relating to the ethics and independence of accounting firms that provide both auditing and tax services.

First, the Internal Revenue Service and the U.S. Department of Justice have brought a number of cases against accounting firms in connection with those firms' marketing of tax shelter products and, specifically, those firms' alleged failures to register or comply with list maintenance requirements relating to, their tax shelter products.

In addition, in November 2003 the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs held hearings on tax shelters in which the sub-committee elicited testimony that described certain potentially abusive tax shelter products marketed through cold-call selling techniques by accounting firms and others.

Second, audit firms have been criticized for providing tax services including tax shelter products to senior executives of public company audit clients. Some have questioned whether an auditor's provision of such services could lead to conflicts of interest.

Over the last year, the Board has evaluated whether an auditor's provision of tax services or any class of tax services to an audit client impairs the auditor's independence from that audit client in fact or appearance. As part of this evaluation, the Board held a public roundtable discussion with individuals representing a variety of viewpoints including investors, auditors, managers of public companies, governmental officials and others. A transcript of the roundtable is available on the Board's website at: http://www.pcaobus.org/News_and_Events/News/2004-12-14.asp

(b) Proposed ethics and independence rules

The Board’s proposed rules fall into three areas. First, the proposed rules would identify three circumstances in which the provision of tax services impairs an auditor's independence:

· Proposed Rule 3521 would treat registered public accounting firms as not independent of their audit clients if they enter into contingent fee arrangements with those clients.
· Proposed Rule 3522(a) and (b) would treat a registered public accounting firm as not independent from an audit client if the firm provides services related to planning or opining on the tax consequences of a transaction that is a listed or confidential transaction under Treasury regulations. In addition, proposed Rule 3522(c) includes a provision that would treat a registered public accounting firm as not independent if the firm provides services related to planning or opining on a transaction that is based on an aggressive interpretation of applicable tax laws and regulations.
· Proposed Rule 3523 would set a new requirement to treat a registered public accounting firm as not independent if the firm provides tax services to officers in a financial reporting oversight role of an audit client.

Second, the proposed rules would further implement the Act's pre-approval requirement by strengthening the auditor's responsibilities in connection with seeking audit committee pre-approval of tax services. Specifically, proposed Rule 3524 would require a registered public accounting firm that seeks such pre-approval to supply the audit committee with certain information; discuss with the audit committee the potential effects of the services on the firm's independence, and to document the substance of that discussion.

Third, the rules lay a foundation for the Board's independence rules. Specifically, proposed Rule 3502 would codify, in an ethics rule, the principle that persons associated with a registered public accounting firm should not cause the firm to violate relevant laws, rules, and professional standards due to an act or omission the person knew or should have known would contribute to such violation. Proposed Rule 3520 would include a general obligation requiring registered public accounting firms to be independent of their audit clients throughout the audit and professional engagement period.

Finally, the proposed rules also include several definitions that would be integral to the operation of the rules.

(c) Other tax services

The Board’s rule-making release discusses other types of tax services that the Board’s proposed rules would not prohibit, along with the Board's reasoning with respect to these services. These services include routine tax return preparation and tax compliance, general tax planning and advice, international assignment tax services and employee personal tax services.

The Board will consider comments before adopting the rules and will submit the proposals to the SEC for approval pursuant to Section 107 of the Act.

The proposals are available on the Board's website.

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1.3 Strengthened standard for professional independence of Australian auditors

As a result of changes under CLERP 9 and the completion of the exposure draft for the revised Professional Statement F1 – Professional Independence, requirements for audit independence have changed according to a media release issued by CPA Australia on 10 December 2004. 

Proposed changes to the statement have been approved by the Board Professional Standards Committee and the revised Professional Statement F1 will be effective from 1 January 2005.

The new requirements include:

· Reduction in the time period for rotation of lead engagement and  audit review partners from seven to five years.
· Written independence declaration by the auditor for each half and full year financial report.
· Additional restrictions on the financial interests, loans and borrowings between a firm / partner / member of the audit team, their immediate family and audit clients.
· Limitation of consultancy arrangements.
· Limitation on auditors being employed by audit clients

The revised Professional Statement F1 provides guidelines on how to identify, assess and manage risk to professional independence, specifically in the provision of assurance services. It also addresses where members are obliged to reject and cease engagement with clients.

Members of CPA Australia and the ICCA are required to comply with Professional Statement F1. The standard, tailored to reflect Australian community expectations, is based on the standard agreed in November 2001 by representatives of 120 nations who make up the International Federation of Accountants (IFAC).

These measures not only strengthen existing guidelines and reflect international best practices, they also take the lead on the implementation of a number of key recommendations outlined in the Ramsay Report on Independence of Australian Company Auditors.

For further information on Professional Statement F1 visit the CPA website at:

http://www.cpaaustralia.com.au/cps/rde/xchg/cpa/hs.xsl/1017_12091_ENA_HTML.htm

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1.4 ABI publishes updated version of guidelines on executive remuneration

On 7 December 2004 the Association of British Insurers (ABI) published an updated version of its guidelines on executive remuneration.  Reviewed annually, the guidelines are part of a series of initiatives developed to help ABI members in their corporate governance work, including responsible exercise of their voting rights. The newly revised guidelines take into account developments over the past year, as well as the forthcoming introduction of new International Accounting Standards. 

The effect of the main amendments is to introduce:

· A clarification of the view that chairmen should not receive share incentives geared to performance of the share price.
· A call for greater transparency with regard to bonuses.
· Measures to discourage windfall payments to executives on change of control of a company.
· A recommendation that companies accrue dividends on long term incentive plans, which would be paid to the recipients once the shares involved vest.
· A recommendation that companies publish in advance the approach they will take to adjusting performance hurdles after the introduction of new accounting standards, which may make reporting earnings more volatile.

Further information is available on the ABI website.

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1.5 Task force of Securities Regulators from major markets agrees on Code of Conduct Fundamentals for Credit Rating Agencies

On 3 December 2004 a Chairmen’s Task Force of the Technical Committee of the International Organization of Securities Commissions (IOSCO) completed deliberations on a code of conduct for credit rating agencies. Called the “Fundamentals of a Code of Conduct for Credit Rating Agencies,” the IOSCO document describes provisions that rating agencies should incorporate into their own codes of conduct to deal with issues such as how rating agencies should avoid or mitigate potential conflicts of interest, improve the transparency of the ratings process, and protect their integrity and independence while dealing fairly with issuers, investors and other market participants. The CRA Code Fundamentals are designed to be used by rating agencies of all sizes and business models, operating in all jurisdictions. The Task Force believes that the Code Fundamentals offer a global, converged approach to addressing a range of issues of concern to investors, issuers, governments and rating agencies alike.

At the heart of the Code Fundamentals is a disclosure mechanism to monitor compliance. Rating agencies must disclose how they implement the various provisions of the Code Fundamentals. This approach offers a degree of necessary flexibility to rating agencies, which vary considerably in size, business model, and development of the markets in which they operate. The Task Force expects CRAs to give full effect to the Code Fundamentals. At the same time, investors, issuers, regulators and other market participants will be able to assess in each case whether a given rating agency has implemented the Code Fundamentals to their satisfaction, and react accordingly. The Task Force believes this approach will help advance investor protection and the fairness and transparency of global capital markets while fostering competition among rating agencies.

The IOSCO Technical Committee plans to publish the Code Fundamentals shortly once its constituent members formally approve the document. The Task Force developed the Code Fundamentals in consultation with the Basel Committee of Banking Supervisors and the International Association of Insurance Supervisors, as banking, securities and insurance regulators in a number of countries use credit ratings in certain aspects of financial regulation. On 6 October 2004 the Task Force published a consultation paper which sought comment from the public on an earlier draft of the Code Fundamentals. IOSCO received 39 comment letters from issuers, rating agencies, industry associations, financial institutions and individual investors from around the world.

The CRA Code Fundamentals were developed out of IOSCO’s Principles Regarding the Activities of Credit Rating Agencies that the organization published in October 2003. These Principles described the broad objectives that regulators, rating agencies and other market participants should pursue in order to promote the quality and integrity of the rating process, counter possible conflicts of interest and protect the confidentiality of certain types of information. The Code Fundamentals, by contrast, offer specific measures that credit rating agencies should adopt to achieve the objectives laid out in the CRA Principles.

Copies of the IOSCO CRA Principles Regarding the Activities of Credit Rating Agencies and the IOSCO Report on the Activities of Credit Rating Agencies (which describes what rating agencies do and the regulatory issues that arise out of their activities) can be found on IOSCO’s website at:http://www.iosco.org/pubdocs/pdf/IOSCOPD151.pdf

Copies of the comments the Task Force received in response to its November consultation report and the consultation report itself can be found on IOSCO’s website at: http://www.iosco.org/pubdocs/pdf/IOSCOPD177.pdf

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1.6 Review of the UK Financial Services and Markets Act 2000

On 2 December 2004 the UK Financial Secretary Mr Stephen Timms MP, announced the outcome of the Government's review of the Financial Services and Markets Act 2000 (FSMA) following its first two years of operation. The key results of the review are:

· the Treasury will introduce a package of deregulatory reforms reducing the scope of FSMA. This should lead to more people being encouraged to save enough for retirement and more people being helped to manage their personal debt problems better;
· other reforms should reduce a range of regulatory burdens on the financial services industry, increasing competition, and reducing costs. These reforms should also help small, innovative and potentially high-growth firms to attract the funding they need;
· the Office of Fair Trading has assessed the impact of FSMA on competition. This assessment concluded that FSMA is likely to have had a positive effect on competition by improving how markets in the financial sector work, and that there are no indications of areas where FSMA itself might have had a significant adverse impact on competition;
· the Financial Ombudsman Service will benefit from a range of developments. These relate to the treatment of cases with wider implications, the introduction of more transparency, and the treatment of cases which are passed from the Ombudsman to the FSA to take regulatory action; and
· the FSA will complete a package of improvements which will reduce compliance burdens placed on the financial services industry. Measures include making the FSA handbook more user-friendly, improving the provision of FSA guidance, reducing consultation burdens, and rolling-out improved cost-benefit analysis.

Further information is available on the HMT public website at:

http://www.hm-treasury.gov.uk/consultations_and_legislation/fsma_twoyrrev/consult_fsma2yrev_index.cfm

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1.7 Survey of first time adoption of ASX Corporate Governance Council Principles

Companies balancing at 30 June 2004 recently became the first group subject to the Australian Stock Exchange (ASX) amended listing rule 4.10.3. Listing rule 4.10.3 requires companies to benchmark their corporate governance practices against the Corporate Governance Council's (CGC) Principles of Good Corporate Governance and Best Practice Recommendations (Recommendations).

Ernst & Young have reviewed the corporate governance statements of the top 200 companies balancing at 30 June 2004 to:

· Gain an insight into the nature and depth of disclosure made in accordance with the new listing rule.
· Identify any trends in relation to particular Recommendations that companies are adhering to and those that companies have chosen not to adopt and the reasons given for non-compliance.
· Consider the extent to which the resultant disclosures achieve the stated aims of the CGC.

Whilst the new disclosure regime is essentially an ‘if not why not’ regime the CGC does require a number of specific disclosures to be made and Ernst & Young have investigated the extent to which companies have complied with these mandatory disclosures.

There are 121 top 200 companies with a 30 June balance date. Of those companies nine had not made their corporate governance statement publicly available at the time of the study and as such the results are based on the 112 companies whose governance statements were available.

For those 112 companies whose governance statement was available:

· 27 (24%) did not make all of the mandatory disclosures
· 6 (5%) provided a ‘minimalist’ statement
· 13 (12%) provided details about the CEO/CFO attestation given to the board, beyond just stating that attestation was received.

The full report is available at:

http://www.ey.com/global/download.nsf/Australia/AABS_ASX_Survey_Dec_04/$file/ASX%20Survey.pdf

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1.8 CESR consults on potential regulatory approaches for credit rating agencies

The Committee of European Securities Regulators (CESR) published on 30 November 2004, a consultation paper which discusses the issue of how to deal with credit rating agencies in a regulatory context within Europe. In particular, whether there are any market failures and whether there is a need for the introduction of some sort of recognition and/or regulation of rating agencies as these are generally not regulated in Europe today. CESR must provide its advice to the European Commission by 1st of April 2005, which will then assess the need, or not, for introducing European legislation or other solutions in this field.

The paper analyses a potential set of rules of conduct that might apply to rating agencies and, in particular, considers the various potential conflicts of interests that might arise as well as the fair presentation and methodologies of rating agencies, staff requirements and the relationship between issuers and credit rating agencies.

Amongst the various potential conflicts of interest which CESR discusses, a number arise in the context of the relationship between issuers and credit rating agencies. For example, ratings agencies are often remunerated by the issuers they rate and sometimes provide the issuer with ancillary services.

CESR discusses a number of transparency requirements that could be placed on rating agencies. For example, one might require ratings agencies to disclose and explain the key elements underlying the rating and to provide an explanation of the assumptions on which the rating is based and the factors to which the rating of this issuer is most susceptible to change.

A further key aspect of the consultation paper is the analysis on how credit rating agencies and issuers might effectively work within the requirements of the Market Abuse Directive, in relation to the handling of confidential and market sensitive information.

Finally the consultation paper explores the various ways one could approach the issues put forward by the European Commission and considers the impact this might have on competition in this sector.

In particular, it indicates the following policy options which exist, namely, either to:

· leave it to the market itself to self regulate on the basis of codes of conduct that are developed by the market participants (drawing on standards established by IOSCO and others);
· have some third party assess compliance with the above mentioned codes;
· draw on the Basel II recognition process for using rating for capital adequacy and to assess the behaviour of rating agencies; and
· put in place a formal registration mechanism and potentially, to establish ongoing supervision, either on a national or EU-wide level where credit rating agencies would be assessed by European securities regulators on an ongoing basis.

For further details on the press release please visit the CESR website.

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1.9 Confidence in corporate reporting survey

On 30 November 2004 CPA Australia released its 2004 “Confidence in corporate reporting survey”. The following is a summary:

(a) Corporate governance

· Directors’ accountability – most investors and analysts don’t believe they have adequate means to hold boards accountable.
· Lack of confidence in appointment and removal of directors from the board – Almost half of the investors and 40 per cent of the total public surveyed said they don’t have confidence in the process.
· Support for board performance reviews – Overwhelming agreement among the public (90 per cent), shareholders (90 per cent), analysts (96 per cent), auditors (98 per cent) and CPAs (95 per cent) that boards should be appraised on their performance.
· Greater confidence in non-executive directors – shareholders (48 per cent), financial analysts (45 per cent) and auditors (68 per cent) agreed that non-executive directors are more likely to ‘do the right thing’ by shareholders than executive directors.

(b) Levels of confidence

· Overall levels of confidence in capital markets have remained the same compared with one year ago.
· The biggest increase in confidence was in relation to the Australian share market. The three main reasons for this were market turnaround, greater stability in the economy and better returns.
· The majority of all groups surveyed said their confidence in major corporations had remained the same compared with one year ago. The business community (analysts, auditors, CEOs, CFOs and directors) showed greater increases in confidence than the public.
· Decreases in confidence were most apparent for overseas share markets. The main reasons given for this were the war in Iraq, global instability, and increases in oil prices.

(c) Regulatory reform

· The vast majority believe regulatory reforms introduced recently will lift confidence in investment decision-making.

(i) Reforms such as CLERP 9 and the ASX Corporate Governance Council Guidelines will improve confidence in making investment decisions:

· Active shareholders 83%
· Financial analysts 81%
· CEOs, CFOs, directors 83%
· Auditors 88%

(ii) New additional disclosures in the Directors’ Report will improve confidence in making investment decisions:

· Active shareholders 79%
· Financial analysts 63%
· CEOs, CFOs, directors 71%
· Auditors 72%

(iii) The adoption of International Financial Reporting Standards (IFRS) will improve confidence in making investment decisions:

· Active shareholders 71%
· Financial analysts 61%
· CEOs, CFOs, directors 69%
· Auditors 66%

(d) Executive remuneration

The majority of the public (75 per cent) and analysts (87 per cent) believe executive remuneration should be performance based as opposed to a fixed amount, with most saying it should make up 30 to 48 per cent of the total remuneration package.

(e) Annual report

· More than two thirds of the public with an interest in the share market said they have looked at an Australian company annual report in the last 12 months – of these, almost 80 per cent found it useful.
· Concise or full annual report? – Investors looked mostly at concise reports, analysts and auditors looked at full reports.

(i) Looked at annual report of Australian company:

· Public with share market interest 67%
· Financial analysts 60%
· Directors, CEOs, CFOs 61%
· Company auditors 66%

(ii) Found it useful:

· Public with share market interest 78%
· Financial analysts 86%
· Directors, CEOs, CFOs 93%
· Company auditors 91%

(f) Investment decision-making

· Investors depend most on finance and business media and the annual report to make investment decisions.
· 45 per cent of investors say they rely on annual reports to some degree when making an investment decision, and 26 per cent to a great degree, while 43 per cent say they rely on finance and business media to some degree, and 31 per cent to a great degree. 
· Results show that investors also relied on investor newsletters and analyst reports 40 per cent to some degree and 26 per cent to a great degree. Other sources were financial planners, the ASX website and company websites.
· All groups rely least on company websites to make investment decisions.

(g) Auditor independence and auditor opinion

· Majority of the public and even greater numbers of business professionals are confident that auditors are independent of the company.
· 60 per cent of investors and 74 per cent of analysts said they are quite or very confident in auditor independence.
· Uncertainty about what the auditor opinion relates to within the annual report, with only 45 per cent correctly saying that it relates to the financial statements, notes to the accounts and the directors’ declaration.

(h) Factors that influence investment decisions

The survey looked at the extent to which various factors influence investment decision-making. Options provided were business strategy, past financial performance, corporate governance policies, executive and Board remuneration, outlook for industry sector, management, company Board members, company chief executive, ratings by agencies, media coverage, discussions at the annual general meeting, financial planners and corporate social responsibility.

· Outlook for industry sector, management and past financial performance were the top factors said to influence decision making ‘a lot’.
· Among shareholders, outlook for industry sector was thought to have the most influence, followed by management and past financial performance (43 per cent). Financial analysts also believe management (70 per cent) and outlook for industry sector (56 per cent) had the most influence on investment decision-making, followed by business strategy (50 per cent).
· Discussions at the AGM were not thought to have ‘a lot’ of influence on decision making across all groups surveyed.

(i) The AGM

· Only 20 per cent of shareholders attended an AGM in the last 12 months.
· Shareholders weren’t sure whether they were confident exercising their rights at the AGM – 43 per cent said the were, 43 per cent said they weren’t. Of the business community surveyed the majority agreed that shareholders can be confident exercising their rights at an AGM – financial analysts (53 per cent), auditors (52 per cent) and CEOs, CFOs and directors (59 per cent).

(j) Factors influencing integrity of business leaders

· Personal ethics, business culture that emphasises integrity and threat of large penalties are the key factors thought to influence business leader integrity among investors and analysts.
· Investors and analysts rated personal ethics as the main influential factor for business leader integrity, while the public rated the threat of large penalties highest.
· Company auditors, directors, CFOs and CEOs thought business culture emphasising integrity has the greatest influence over integrity of business leaders.

Other factors were peer opinion, remuneration package, membership of a professional body like CPA Australia and whistleblower protection:

· 70 per cent of investors, the public, analysts and auditors said they believe membership of a professional body such as CPA Australia influence the integrity of a business leader to some degree.

(k) Confidence in the integrity of business leaders

· The survey looked at levels of confidence in the integrity of nine functions: business analysts, company auditors, company management including CFOs, company regulators, CEOs, business media, company directors, company lawyers, and financial planners.
· The public had the most confidence in the integrity of business media with 52 per cent quite confident and 16 per cent very confident, followed by financial planners with 50 percent of the total public quite confident in the integrity of financial planners and 14 per cent very confident.
· The public and investors were slightly less confident in the integrity of company management with 41 per cent quite confident and only seven per cent very confident, and company lawyers with 32 per cent quite confident and six per cent very confident.

(l) Satisfaction with information sources

Those who said a particular source influenced them a lot when making an investment decision were asked about satisfaction levels. Satisfaction with information sources relied on a lot found that 81 per cent were satisfied with financial planners. This included:

· 73 per cent of active shareholders were satisfied
· 80 per cent of passive shareholders were satisfied
· 95 per cent of analysts were satisfied
· 73 per cent of CPAs (CEOs, CFOs and Directors) were satisfied
· 67 per cent of auditors were satisfied

(m) Confidence in information sources

When it came to confidence in information sources when considering an investment, of the seven options provided, active investors said they had the most confidence in a financial planner (29 per cent) and investor newsletters and analyst reports (29 per cent). Other options were annual reports, company websites, general finance and business media, and the ASX website. Financial analysts (37 per cent) said they had most confidence in investor newsletters and analyst reports, as well as financial planners (31 per cent).

(n) About the survey

The survey was commissioned by CPA Australia and undertaken by Worthington DiMarzio in mid October 2004. The survey sample comprised 300 members of the public, including 162 who hold an interest in the share market, as well as 150 financial analysts, advisers and stockbrokers. The views of 200 chief executives, chief financial officers and directors and 50 internal and external auditors from CPA Australia’s membership were also captured.

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1.10 Future Australian corporate law reform proposals

On 29 November 2004, the Australian Department of the Treasury released the Government’s list of planned regulatory reforms. In the area of corporate law reform, the proposed reforms include:

(a) Corporations Amendment Bill 2004

This Bill is in response to the Parliamentary Joint Statutory Committee on Corporations and Securities (PJSC) Report on matters arising from the Company Law Review Act 1998 and various Companies and Securities Advisory Committee reports.

The Exposure Draft Bill included provisions to:

· remove the provision which allows a single director of a listed company to call a meeting of members (Section 249CA);
· remove the 100-member rule from Section 249D of the Corporations Act 2001 (Corporations Act). Recommended by the PJSC report and by the Companies and Securities Advisory Committee (CASAC) - now the Corporations and Markets Advisory Committee (CAMAC) - in its June 2000 report ‘Shareholders’ Participation in the Modern Listed Public Company’. Also recommended by the PJSC in its June 2004 report on CLERP (Audit Reform and Corporate Disclosure) Bill 2003;
· remove the requirement for companies to disclose information reported to overseas exchanges (Section 323DA); and
· amend the requirements relating to the disclosure of proxy votes (subsection 250J (1A)).

The Government is considering the submissions received and a revised Bill is being finalised. It is likely that the revised Bill will be exposed again for public consultation.

(b) ASIC - Enforcement Powers Bill

The Bill will provide the Australian Securities and Investments Commission (ASIC) with consistent information-gathering, investigative and enforcement powers to enable it to efficiently fulfil its market integrity and consumer protection roles, improve the efficiency and effectiveness of various information-gathering, investigative and enforcement powers, and make minor and technical amendments and remove drafting errors. The Bill will make consequential amendments to ASIC powers conferred under the Australian Securities and Investments Commission Act 2001, Corporations Act 2001, Superannuation Industry (Supervision) Act 1993, Retirement Savings Accounts Act 1997, Life Insurance Act 1995, Insurance Contracts Act 1984 and Mutual Assistance in Business Regulation Act 1992. The Bill is expected to be ready for public consultation in the first half of 2005.

(c) Corporations Amendment Regulations

These proposed regulations relate to implementation of single fee disclosure to support superannuation choice of fund measures and other miscellaneous matters. The Financial Services Reform Act 2001, established within the Corporations Act 2001, is an improved regulatory regime for the financial services industry, which include harmonised licensing, disclosure and conduct regime for financial service providers. The proposed regulations contain a number of technical amendments that will refine the operation of certain elements of the Financial Services Reform Act 2001 as well as supporting the choice of fund disclosure package. It is expected that amendments will be made by March 2005.

Further information on regulatory reforms proposed for 2005 is available on the Treasury website.

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1.11 UK Board issues draft standard on the operating and financial review

Following a UK Government announcement on 25 November 2004 (see Item 1.13 below), the Accounting Standards Board (ASB) issued on 29 November 2004 an exposure draft of a Reporting Standard (RED 1) on the Operating and Financial Review (OFR). 

Under the Government proposals, quoted companies will be required to prepare a statutory OFR for the first time for financial years beginning on or after 1 April 2005. The Government has also announced that it intends to specify the ASB in legislation as the body to make the standards for the OFR.  Regulations giving legal effect to the proposals will be laid before Parliament in the next two months.

The proposals in the RED build on the requirements of the forthcoming Regulations and the ASB’s existing 2003 statement of best practice on the OFR, which is already used by many companies.

The proposals involve a principles-based standard which, in particular, makes clear that the OFR is to reflect the directors’ view of the business.  The objective is to assist investors to assess the strategies adopted and the potential for those strategies to succeed.  The information in the OFR will be useful to both investors and other users.

They also provide a basic framework for directors to apply in order to meet the requirements of the Regulations.  It is for the directors to consider how best to use this framework to structure the OFR, given the particular circumstances of the entity.

Although following a framework approach, the ASB is conscious that some guidance would be useful to directors and it has accordingly prepared some draft Implementation Guidance to accompany the draft Reporting Standard. The Guidance sets out some illustrations and suggestions of specific content and related key performance indicators that might be included in an OFR, especially on the particular matters referred to in the Regulations.

For further information visit the ASB’s website at: http://www.frc.org.uk/asb.

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1.12 Simplified prospectus for UK fund investors

On 26 November 2004 the UK Financial Services Authority opened for consultation its proposed approach for implementing European requirements on product information for collective investment schemes such as Unit Trusts and OEICs.

The proposals set out requirements for a new document that will be known as the Simplified Prospectus. EU rules require this document to be offered to anyone who wants to invest in a collective investment scheme. The FSA's proposals build on the existing UK approach to investment product information - the Key Features document – by adding some new information requirements to meet EU standards.

These new information requirements include:

· a 'Total Expense Ratio' (TER) figure showing the costs and charges of the fund. The figure will not take account of front-end charges, exit costs or certain fund expenses such as dealing costs;
· a 'Portfolio Turnover Rate' (PTR) figure, to reflect the volume of dealing within the fund; and
· the historic performance of each UCITS showing up to ten years' annual returns.

The consultation will close on 28 January 2005 and the FSA expects to make the new rules to come into force on 1 March 2005 with a transitional period until September 2005.

Further information is available on the FSA website at: http://www.fsa.gov.uk/pubs/press/2004/101.html

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1.13 UK government announcement on the operating and performance review

On 25 November 2004 the UK Trade and Industry Secretary Patricia Hewitt made an announcement relating to the new Operating and Financial Review (OFR). The OFR is intended to improve the quality, usefulness and relevance of information provided by quoted companies, helping shareholders get a better understanding of a quoted company's business and future prospects.

Ms Hewitt's Parliamentary announcement set out the following key changes:

· Directors will be expected to exercise the same level of care in relation to the OFR as required under the common law. As is the case for financial accounts, directors will be expected to apply 'due care, skill and diligence' in preparation of this new narrative report.
· Auditors will be required to state in their reports whether the information given in the OFR is consistent with a company's accounts as well as whether any other matters that came to their attention in the performance of their functions as auditors of the company were inconsistent with information directors have given in the OFR.
· To allow time for the business, assurance and enforcement communities to prepare for the OFR and to review the new reporting standard being developed by the Accounting Standards Board (ASB), the commencement date for the Regulations will be changed to financial years beginning on or after 1 April 2005.
· Where shareholders have agreed to receive summary financial statements, there will be no requirement for the full OFR to be sent, and shareholders will be notified of the availability of the OFR on the company website.
· Potential duplication of reporting requirements occasioned by the introduction of the EU Modernisation Directive will be avoided.
· The existing administrative enforcement regime in relation to defective accounts will be extended to cover defective OFRs and Directors' Reports as well. The FRRP will review the OFR in response to third party enquiries and in relation to possible omissions or mis-statements. The FRRP's administrative enforcement role will begin one year after the Regulations come into effect and apply to OFRs and Directors' Reports for financial years beginning on or after 1 April 2006.

For more information please go to: http://www.wired-gov.net/

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1.14 Multinational executives expect compliance costs to increase

More than half of U.S. and European multinational companies (51 percent) will increase compliance spending by an average of 23 percent during the next 12-24 months, according to the PricewaterhouseCoopers' Management Barometer Survey released on 23 November 2004.

Despite this sizeable increase, 44 percent of senior executives said their company does not have a clear view of its total compliance spending, although another forty-five percent of the respondents said their company does. However, the survey shows most of the companies which have a clear view of spending do not include remediation costs, penalties, fines, lost revenue and lost management time when tracking. These findings suggest that the ability to accurately track costs and measure value, even by companies with a clear view of the costs involved, is incomplete at best.

According to the survey, 59 percent of executives say their compliance programs are "somewhat inefficient" and that aspects can be streamlined, while an additional five percent say their programs are inefficient and their company spends more than it needs to. Only 32 percent consider their compliance programs "very efficient."

Forty-nine percent of U.S. and European multinational companies believe their compliance programs need improvements and 52 percent do not clearly understand the value their company receives from compliance spending.

During the next 12-24 months, nearly all respondents (90 percent) plan improvements to their company's compliance efforts. These will include improving risk management, strengthening programs to reduce compliance costs and streamlining cost efficiency. Overall, all companies responding to the survey expect to increase their compliance spending by an average of 9.9 percent during the next 12-24 months.

The Barometer found that 26 percent of companies have no formal means of measuring the effectiveness of their compliance efforts. Fifty-nine percent rely on regular audits and reviews and only 27 percent utilize key performance indicators (companies were allowed to have more than one answer).

According to the survey, external requirements and regulations account for 74 percent of total compliance costs. U.S. multinationals spend a higher percentage on external requirements than European multinationals (84 percent to 61 percent). European companies spend a higher percentage (39 percent to 16 percent) on internal compliance - including ethics, code of conduct, risk management rules – than do U.S. companies.

Overall, surveyed executives estimate that they spend on average about 6.16 percent of their administrative and operations budget for compliance – with spending at product companies slightly higher than service companies – 6.44 percent and 5.62 percent, respectively. U.S. companies spend an average of 5.93 percent versus 6.50 percent in Europe.

A comparison of findings from U.S. and European companies shows a few areas with a clear difference:

· U.S. executives are more positive than European executives on compliance effectiveness. Forty-four percent of U.S. executives cite need for improvements, versus 55 percent in Europe;
· Sarbanes-Oxley clearly dominates compliance spending in the U.S. Sarbanes-Oxley accounts for 54 percent of U.S. costs versus only 12 percent in Europe; and
· In the U.S., 48 percent of executives say their company lacks understanding of its total compliance spending versus 38 percent in Europe.

Pricewaterhouse Coopers’ Management Barometer is a quarterly survey of top executives in a cross-section of large, multinational businesses. It developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.

Information about Barometer Surveys as well as PDF versions of the U.S. and European findings are available at: http://www.barometersurveys.com.

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1.15 Board of director trends – Korn/Ferry study

Complying with the Sarbanes-Oxley Act and other corporate governance legislation has come at a significant cost “both monetary and otherwise” to companies worldwide, according to the 31st Annual Board of Directors Study, released in New York on 22 November 2004 by Korn/Ferry International.

The most comprehensive, longest-running survey of its kind in the world, the Board of Directors Study examines opinions and practices found in boardrooms of major corporations throughout the world. The findings are based on the responses of nearly 1,000 board members from 14 nations in the Americas, Asia Pacific, and Europe. This year, the survey population was expanded to include directors of South African companies.

Highlights of this year's study include:

· Compliance Costs. Virtually all (99 percent) of the U.S. respondents said their boards have complied with Sarbanes-Oxley at an average implementation cost of $5.1 million. Four out of five UK boards (81 percent) reported meeting the general independence rules of the Higgs and Smiths Reports, at an average cost of $1.5 million. Similarly, 81 percent of French companies have spent an average of $910,000 to meet the recommendations of the Bouton Report.
· Director Risk. The percentage of the Americas respondents declining board invitations due to increased liability has doubled since Sarbanes-Oxley became law, from 13 percent in 2002 to 29 percent this year. Almost one-third (31 percent) of directors of German boards refused a directorship invitation on this basis, nearly triple the 11 percent who did so last year.
· Executive Sessions. Ninety-three percent of Americas respondents said they hold executive sessions during regular meetings that do not include the company's chief executive, an increase from just 41 percent two years ago. Though less common in Europe and Asia Pacific, the percentage of Japanese boards that now meet without the chief executive increased from four percent in 2003 to 27 percent this year. In Germany, the percentage climbed from seven to 24 during the same timeframe, and in France, the percentage went from seven to 19 percent.
· Lead Director. Since enactment of Sarbanes-Oxley, the percentage of respondents in the Americas reporting their board has formalized the lead director role has more than doubled, from 32 percent to 80 percent this year. Three-fourths (78 percent) of respondents serving on Australia/New Zealand boards said composition includes a lead director.

This year's study also examined trends in director compensation and stock ownership. The average annual retainer and per meeting fee for full-board service awarded to directors of Fortune 1000 organizations was US$56,970, 22 percent above 2003's US$46,640 and 32 percent more than the US$43,306 reported in 2002, the year of the Sarbanes-Oxley Act. The Audit Chair received US$10,317, 27 percent more than awarded last year, while committee members were given an average retainer of US$7,914, a one-year increase of 16 percent.

Requiring directors to own stock is a practice with limited support outside of the Americas and France. Four of five (81 percent) respondents serving on French company boards are required to do so, as are two-thirds (65 percent) of their counterparts in the Americas. Of those Americas respondents experiencing a change in director compensation this year, 37 percent stated that restricted stock was added or increased while 10 percent reported stock options were eliminated from the overall package award. The cash component increased for a majority (52 percent).

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