|
Fresh New Look We have released a fresh new look to your Corporate Law Bulletin. This includes some changes to the layout and design. You will notice that we have made it easier to navigate through the Bulletin. You will now have the option of using a "Brief Contents" as well as a more "Detailed Contents" view. We have also included navigation arrows so that you can move around the bulletin with ease. Corporate Law Bulletin Bulletin No. 74, October 2003 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. Use the arrows to navigate easily across the bulletin | |
|
Detailed Contents | |
|
1. Recent Corporate Law and Corporate Governance Developments
4. Recent Takeovers Panel Matters
5. Recent Corporate Law Decisions
| |
| 1.1
Ministerial Review Panel report on restoration of confidence in accounting in
South Africa
Mr Trevor Manuel, the Minister of Finance of South Africa, appointed a Ministerial Review Panel early in 2003 to assist in the restoration of public confidence and trust in the areas of financial reporting and auditing. On 22 October the Panel released its report detailing recommendations relating to various corporate governance issues, audit control measures, disclosure issues and training of chartered accountants. A summary of the
report of the panel can be found at:
1.2 IFAC and International Regulators propose reforms to strengthen audit quality The international accountancy profession, together with international regulators, have published reforms to improve the quality of standards and practices in auditing and assurance worldwide and to achieve global convergence of high quality standards. Their focus is on strengthening the international auditing and assurance standards process to bolster public confidence in the work of auditors and in the financial reporting process. The reforms are described in a paper entitled "Proposals for Reform," released on 22 October 2003 and developed by the International Federation of Accountants (IFAC) and international regulators with input from IFAC member organizations, regional accountancy organizations and the profession at large. IFAC's Board will present the reform proposals to its Council for approval in November 2003. The objective of the reforms, which are expected to be implemented in early 2004, is to help ensure that IFAC's standard-setting activities reflect the public interest and are consistent with the priorities of the international regulatory community. Key aspects of the reform proposals include the development of a more transparent standard- setting process, particularly with respect to audit and assurance standards, and the provision for greater public and regulatory input into that process. In addition, the proposals call for the establishment of a Public Interest Oversight Board (PIOB) to oversee IFAC's public- interest activities. Members of the PIOB will be selected by the regulatory community. Regulatory and other international groups involved in the development of the proposals include the International Organization for Securities Commissions (IOSCO), Basel Committee on Banking Supervision, European Commission, World Bank, and International Association of Insurance Supervisors, as well as the Financial Stability Forum, which strives to promote international financial stability and improve the functioning of markets. The International Organization of Securities Commissions (IOSCO) recently reported that it "strongly supports IFAC's efforts" to reform its public- interest activities, including the formation of a Public Interest Oversight Board. The Financial Stability Forum (FSF) also indicated its support of the reform proposals, which they view as a positive step in ensuring that the international auditing standard-setting process is responsive to the public interest. The PIOB will comprise 10 members and will focus on IFAC standard-setting activities related to audit and assurance services, independence and other ethics standards. It will also oversee the education standard-setting process and IFAC's member body compliance program. The reform proposals also include recommendations for strengthening and enhancing the transparency of IFAC's governance, expanding the role of Consultative Advisory Groups in standard-setting processes, and formalizing ongoing collaboration between regulators and IFAC to ensure the efficacy of the reforms. The paper is on the IFAC website.
1.3 Consultation on EU Financial Conglomerates Directive On 22 October 2003, the United Kingdom's Treasury and Financial Services Authority jointly published a consultation paper with the United Kingdom Financial Services Authority on the proposed EU Financial Conglomerates Directive. The Directive requires that prudential supervision for companies which straddle the insurance, banking and investment sectors be applied by a single supervisory co-ordinator. Announcing the publication Financial Secretary Ruth Kelly said: "This Directive is a key element in the Financial Service Action Plan and is necessary to ensure that the supervision of corporate groups takes full account of the group as a whole and the individual firms which comprise it. I hope all those with an interest participate in the consultation process." The consultation paper is on the FSA website.
1.4 First RepuTex social responsibility ratings announced On 13 October 2003, a new annual social responsibility rating of Australia's top 100 companies was released by Reputation Measurement. The rating is called RepuTex. Companies were assessed by 19 community groups in four areas, Corporate Governance, Environmental Impact, Social Impact, and Workplace Practices. The RepuTex Rating Committee oversees the process and comments on the findings. The main results of the rating are:
Areas of concern
RepuTex will be an annual rating. The full 2003 RepuTex Rating results are published at http://www.reputationmeasurement.com.au (a) RepuTex ratings results and main findings Categories: Overall, Corporate Governance, Environmental Impact, Social Impact, Workplace Practices AAA=Outstanding
(i) Company Performance
(ii) Company Type Performance (Public/Private/Govemment-owned subsidiaries of MNC)
(iii) Industry Sector Performance Of the 14 industry sectors:
(iv) Main Conclusions
(b) Comments by RepuTex The inaugural RepuTex Ratings provide some insight into the current levels of acceptance of the social responsibility agenda within the Australian business community. The strong performance of government corporations reflects the degree of accountability and transparency required of government authorities and the more direct link between these organisations and their community stakeholders. Their good result contradicts the often-held view of the public sector as slow to uptake important global developments and standards of business best practice. The relatively strong performance of local subsidiaries of overseas-listed multinationals, whilst not uniform across this group, is clearly related to the more mature nature of the csr agenda in the UK, Europe and North America. The recently released investigation into corporate sustainability in Australia, the Mays Report (Department of Environment and Heritage, September, 2003), made comment on the nascent nature of csr within the Australian market in comparison with our European and North American counterparts. Whilst some high-profile Australian organisations are still yet to prioritise csr principles, reporting and stakeholder engagement, developments internationally demonstrate the manner in which this agenda has been accepted and incorporated into mainstream business operations. In the UK the tabling of the Corporate Responsibility (CORE) Bill in September of this year follows more than 300 MPs expressing support for comprehensive laws promoting greater corporate accountability. The CORE Bill incorporates provisions for mandatory social reporting for all large UK organisations, compulsory stakeholder engagement and expanding the duties and responsibilities of Directors to incorporate social and environmental factors as well as financial considerations. Several European countries including France, the Netherlands and Denmark already have legislation requiring organisations to produce social as well as financial reports. This growing trend of greater corporate accountability and transparency has also received much attention in North America following the Enron and WorldCom collapses, which precipitated the rapid reform of the Corporate Corruption Bill (Sarbanes /Oxley). By comparison the Australian market has not reacted as swiftly to such developments. While there is a general level of awareness and acceptance of corporate social responsibility many Australian organisations rated by RepuTex in 2003 are only beginning to prioritise social responsibility issues. One area where good progress has been made is in corporate governance. The recent release of new Australian Stock Exchange corporate governance guidelines has generated significant change and development within this area in 2003. The RepuTex 2003 Ratings indicate that the most progressive ASX-listed organisations in terms of their public disclosure and community accountability are by and large those in the highest impact sectors. Heavy industrial, manufacturing and mining organisations have traditionally been subject to the highest level of scrutiny regarding their social and environmental impacts. Whilst these organisations continue to have significant impacts associated with their operations it is apparent that many have moved to integrate community concerns about these impacts into a new framework of operating. This has engendered a culture of greater accountability, transparency and responsibility. This transformation is represented in the 2003 RepuTex Ratings with two large mining organisations, Alcoa of Australia and BHP Billiton, receiving AA ratings, and a further five heavy industrial organisations, BHP Steel, Newmont Australia, Rio Tinto, Amcor and Boral listed in the top 20 performers overall.
1.5 SEC Chairman releases statement regarding late trading and market timing of mutual funds On 9 October 2003 the United States Securities and Exchange Commission Chairman William H. Donaldson issued the following statement: "Recent allegations regarding the sale of mutual fund shares point to abuses in connection with late trading and market timing of fund shares. Our staff is aggressively investigating these allegations and is committed to holding those responsible for violating the federal securities laws accountable and seeking restitution for mutual fund investors that have been harmed by these abuses. It is clear from information developed thus far that there are additional regulatory actions that the Commission should consider in seeking to eliminate or significantly curb late trading and market timing abuses in the future. Consequently, I have asked our staff to prepare rulemaking initiatives to address these issues for Commission consideration no later than next month. Specifically, these initiatives include the following: (a) Late trading The staff is considering new rules and rule amendments designed to prevent late trading abuses.
(b) Market timing The staff also is considering new rules and form amendments that would curb market timing abuses, including rules and form amendments that would:
These are not the only measures under consideration. I have asked the staff to consider whether funds should have additional tools to thwart market timing activity and whether additional requirements are necessary to reinforce funds' and advisers' obligations to comply with their fiduciary duties and to prevent the misuse of material, non-public information, including the selective disclosure of portfolio holdings information. As is the SEC's traditional practice, the staff's recommendations will be presented to the Commission and, if approved, will be published for public comment."
1.6 CLERP 9 draft legislation released On 8 October 2003, the Treasurer released the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Bill and accompanying commentary for public consultation. The draft Bill generally implements the reforms proposed in the CLERP 9 policy proposal paper (September 2002) and also reflects the outcome of consultations undertaken since the paper's release. In addition, the draft Bill incorporates recommendations of the Ramsay Report (Independence of Australian Company Auditors), the report of the HIH Royal Commission, and takes account of relevant recommendations of the report of the Joint Committee of Public Accounts and Audit (Report 391 Review of Independent Auditing by Registered Company Auditors). The Government is seeking comments from business and the community to ensure that the reforms are effective and achieve optimum outcomes for shareholders and investors. The Bill is intended to be introduced into Parliament in December with commencement from 1 July 2004. Comments on the draft Bill should be sent by 10 November 2003 to: The General
Manager Copies of the Bill and commentary are available at http://www.treasurer.gov.au or from the Treasury Website. Key features of the bill are outlined below: (a) Audit oversight arrangements
(b) Auditor independence
(c) Proportionate liability and incorporation of audit firms
(d) CEO/CFO sign-off
(e) Management discussion and analysis
(f) Financial Reporting Panel
(g) Protection for employees reporting breaches to ASIC
(h) Registration of auditors
(i) Continuous disclosure and infringement notices
(j) Remuneration disclosure
(k) Managing conflicts of interest
(l) Disclosure of fundraising documents
CLERP 9 originally proposed to align more closely the exemptions from the disclosure regimes that apply to sophisticated investors and wholesale clients under Chapters 6D and 7 of the Corporations Act. To allow for a smooth transition to the Financial Services Reform Act (FSRA) regime, it was considered that this issue would be more appropriately considered after industry has fully transitioned to the FSRA regime.
1.7 SEC proposes rules to increase proxy access by shareholders On 8 October 2003 the United States Securities and Exchange Commission approved rule proposals that would require companies to include in their proxy materials the names of nominees for director that are submitted by certain shareholders, as well as disclosure relating to those nominees. The proposals follow the recommendations made by the Division of Corporation Finance in its 15 July staff report, Review of the Proxy Process Regarding the Nomination and Election of Directors. The staff report is available on the Commission's website at http://www.sec.gov/news/studies/proxyreport.pdf. The proposed rules would create a requirement for companies subject to the Commission proxy rules, including registered investment companies, to include in their proxy materials the names and certain other information regarding security holder nominees for election as director. The requirement would arise in cases where:
The number of nominees about whom a company would be required to include information in its proxy materials would vary depending on the size of its board of directors. Companies having eight or fewer board members would be required to include information regarding one nominee, companies with between nine and 19 board members would be required to include information regarding two nominees, and companies with boards of 20 or more members would be required to include information regarding three nominees. The proposed procedure would require a company to include information regarding a security holder nominee for election as a director where:
The Commission is soliciting comment on today's proposals for a 60-day period following their publication in the Federal Register. On 8 August 2003, the Commission proposed new rules designed to implement the staff report's other major recommendations:
Those rule proposals can be found on the Commission's web site at http://www.sec.gov/rules/proposed/34-48301.htm.
1.8 Board Proposes Auditing Standards for Internal Control over Financial Reporting On 7 October 2003 the United States Public Company Accounting Oversight Board unanimously voted to propose and issue for public comment a standard on an audit of internal control over financial reporting. The Board also unanimously voted to propose and issue for public comment a rule which clearly defines terms used in auditing to assist firms in complying with the standards. The auditing standard, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, addresses both the work that is required to audit internal control over financial reporting and the relationship of that audit to the audit of the financial statements. The integrated audit results in two audit opinions: one on internal control over financial reporting and one on the financial statements. Section 404(a) of the Sarbanes-Oxley Act of 2002, and the Securities and Exchange Commission's related implementing rules, require the management of a public company to assess the effectiveness of the company's internal control over financial reporting, as of the end of the company's most recent fiscal year. Section 404 of the Act also requires management to include in the company's annual report to shareholders, management's conclusion as a result of that assessment about whether the company's internal control is effective. Section 404 of the Act, as well as Section 103, directs the PCAOB to establish professional standards governing the independent auditor's attestation, and reporting on, management's assessment of the effectiveness of internal control. Companies considered accelerated filers (seasoned US companies with public float exceeding $75 million) are required to comply with the internal control reporting and disclosure requirements of Section 404 of the Act for fiscal years ending on or after 15 June 2004. Accordingly, auditors engaged to audit the financial statements of such companies for fiscal years ending on or after 15 June 2004, also are required to audit and report on the company's internal control over financial reporting as of the end of such fiscal year. Other companies (including smaller companies, foreign private issuers and companies with only registered debt securities) have until fiscal years ending on or after 15 April 2005, to comply with these internal control reporting and disclosure requirements, and the requirement for audit reporting on internal control is similarly delayed. The Board considered the possible effects of the proposed standard on small and medium-sized companies, noting that internal control is not "one-size-fits-all." The proposed standard requires the auditor to communicate in writing to the company's audit committee all significant deficiencies and material weaknesses of which the auditor is aware. The auditor also is required to communicate in writing to the company's management all internal control deficiencies of which he or she is aware and to notify the audit committee that such communication has been made. The proposed auditing standard identifies a number of circumstances that would be, by definition, significant deficiencies and that also would be a strong indicator that a material weakness exists:
The public comment period on this proposal is 45 days. The rule must be approved by the Securities and Exchange Commission to be effective. The Board also voted on 7 October 2003 to propose Rule 3101, which describes the use of certain terms in the auditing and related professional practice standards to communicate the level of obligation imposed on registered public accounting firms and their associated persons in complying with the standards. PCAOB Rule 3100 requires all registered public accounting firms and their associated persons to comply with the Board's Auditing and Related Professional Practice Standards in connection with the preparation or issuance of any audit report for an issuer, as defined in the Sarbanes-Oxley Act of 2002. Proposed Rule 3101 explains how the Board will refer to, and distinguish among, differing levels of professional obligations in the future standards it issues and in the Board's interim standards (in Rules 3200T, 3300T, 3400T, 3500T, and 3600T). Public comments must be received by 6 November 2003. The rule must be approved by the Securities and Exchange Commission.
1.9 UK boardrooms already responding to the Combined Code Latest research released in September 2003 by professional services firm Deloitte shows that UK companies are already beginning to respond to the requirements of the revised Combined Code, which incorporates much of the Higgs, Smith and Tyson reports. (a) Independence Although the Combined Code does not come into effect until 1 November 2003, there have already been significant changes to boards of FTSE 350 companies. The number of executive directors sitting on FTSE 350 boards has fallen by 8% in 2003. At the same time, the number of non-executive directors (NEDs) has increased by 2.5%, indicating that companies are addressing issues of board balance. However, despite the reduction in the number of executive directors, at least 125 independent NEDs will need to be appointed to 30% of FTSE 350 companies in order to comply fully with the Code, which requires at least half the board to be made up of independent NEDs. This number could be even greater, with the report suggesting that 240 NEDs will not pass the Code's independence criteria because they were appointed more than 10 years ago. The independence requirements are also an issue for board chairman. In the FTSE 350, 30% of chairman are not independent as they also act as executive directors of the company and 12% of chairman are not independent as they have previously held executive positions in the same organisation. But there has been an increase in independent chairmen since 2000 when over half the chairmen in FTSE 100 companies and 40% of chairmen in FTSE 250 companies were executive directors of the company. (b) Diversity Deloitte's report also found that boardroom diversity remains an issue. Women continue to be under represented in the boardroom making up only 3% of FTSE 350 executive directors, just a 1% improvement from last year. Currently only one FTSE 100 company has a female chief executive, but six FTSE 350 companies are headed by a woman, compared to four companies in 2002. Of the female executive directors, 40% hold the position of financial director. The past year has seen a greater increase in the number of female non-executive directors. In the FTSE 350, 8% of non-executive directors are women (10% in FTSE 100, 6% in FTSE250) compared to 6% last year. There is only one female non-executive chairman among FTSE 350 companies. Boards do, however, include a broad range of ages. The youngest board member of a FTSE 350 company is 29 years old and the oldest 80 years old. (c) Transparency Although companies are now required to disclose much more information relating to executive remuneration in their annual remuneration reports, the level of disclosure still varies considerably.
1.10 Implications of the Growth of Hedge Funds Report On 29 September
2003, the United States Securities and Exchange Commission released its staff
report on the Implications of the Growth of Hedge Funds. (a) Background on report of the implications of the growth of hedge funds At the request of the Commission, the staff has conducted a study of hedge funds, including their investment advisers and other service providers and their investors. The Commission's decision to study the hedge fund industry was based, in large part, on the growth of hedge fund assets coupled with the Commission's lack of information about these investment pools. The hedge fund industry recently has experienced significant growth in both the number of hedge funds and the amount of assets under management. Based on current estimates, 6,000 to 7,000 hedge funds operate in the United States managing approximately $600 to $650 billion in assets. In the next five to ten years, hedge fund assets have been predicted to exceed $1 trillion. The growth in hedge funds has been fuelled primarily by the increased interest of institutional investors such as pension plans, endowments and foundations seeking to diversify their portfolios with investments in vehicles that feature absolute return strategies - flexible investment strategies which hedge fund advisers use to pursue positive returns in both declining and rising securities markets, while generally attempting to protect investment principal. In addition, funds of hedge funds ("FOHF"), which invest substantially all of their assets in other hedge funds, have also fuelled this growth. The study focused on a number of key areas of staff concern, including the recent increase in the number of hedge fund enforcement cases, the role that hedge funds play in the financial markets and the implications of the Commission's limited ability to obtain basic information about hedge funds. The staff also examined the emergence of registered FOHFs - FOHFs that register under the Investment Company Act of 1940 ("Investment Company Act") so that they may offer and sell their securities to a larger number of investors and FOHFs that register under the Investment Company Act and the Securities Act of 1933 ("Securities Act") so that they may offer and sell their securities in the public market. Finally, the staff reviewed hedge fund disclosure and marketing practices, valuation practices and conflicts of interest. (b) Concerns relating to hedge fund growth As noted above, the study was, in large part, the result of the Commission's recognition that it lacks information about hedge fund advisers that are not registered under the Advisers Act and the hedge funds that they manage. Although this recognition is not new, the Commission's attention was focused again on the hedge fund industry as a result of the recent growth of the industry and the increase of investments in hedge funds by institutions. Although hedge fund investment advisers are subject to the antifraud provisions of the federal securities laws, they are not subject to any reporting or standardized disclosure requirements, nor are they subject to Commission examination. Consequently, the Commission has only indirect information about these entities and their trading practices and is hampered in its ability to develop regulatory policy as hedge funds become more important participants in our financial markets. The Commission is concerned about the inability to examine hedge fund advisers and evaluate the effect of the strategies used in managing hedge funds on the financial markets. The Commission is also concerned about the lack of applicable regulatory measures necessary to ensure that material information to assist investors in making fully informed investment decisions is available. The Commission's inability to examine hedge fund advisers has the direct effect of putting the Commission in a "wait and see" posture vis-à-vis fraud and other misconduct. The Commission typically is able to take action with respect to such fraud and other misconduct only after it receives relevant information from third parties (for example, investors or service providers), and frequently only after significant losses have occurred. In contrast, the Commission believes that its examination program not only allows the Commission to identify misconduct by registered investment advisers earlier, but it also assists in identifying and possibly preventing certain misconduct from developing into fraud. The Commission is also concerned that some hedge fund investors may not always receive useful information about the investment adviser and its management of the fund. In addition, the Commission believes that disclosure to some hedge fund investors could be improved to address conflicts of interests of hedge fund advisers. One of the Commission's key concerns relates to the manner by which hedge fund advisers value hedge fund assets. The broad discretion that these advisers have to value assets and the lack of independent review over that activity gives rise to questions about whether some hedge funds' portfolio holdings are accurately valued. The Commission's concern not only reflects its recognition of the incentives that may cause an adviser to inaccurately value hedge fund assets, but it also reflects its concern that registered funds that invest their assets in hedge funds may lack access to information that enables them to "fair value" their interests in hedge funds and therefore accurately calculate their net asset value. (c) Staff recommendations relating to hedge fund advisers, funds of hedge funds and hedge funds:
1.11 Shareholders' rights in DLCs On 29 September 2003, the Australian Council of Superannuation Investors ("ACSI") called on the Federal Government to undertake a comprehensive policy review of the major governance issues that it argues seriously weaken key shareholder rights in dual listed company structures. ACSI is calling for this action in response to research commissioned from leading commercial barrister and listed Company Director SEK Hulme QC. Some of the concerns discussed in the paper include: (a) Removal of directors The DLC structure makes it much more difficult, if not impossible, for shareholders to remove directors if the board opposes such action. (b) Obstacles to takeovers The traditional sanction available to the market for non-performing companies is a takeover. If the dual listed company does not support a takeover bid, it will be inherently difficult to pursue. That is evidenced by the speculation regarding a GE takeover of Brambles and recognition in the market that a hostile bid for a dual listed company is very difficult. A successful bid would require acceptance by two different sets of shareholders in two different jurisdictions. The DLC Board also has discretionary powers in a takeover that do not exist in 'normal' single listed companies. Takeover arrangements for DLCs need further consideration given the nature of the structure that cuts across at least two jurisdictions. Current DLC arrangements could also increase the risk of litigation, causing a disgruntled bidder to pursue legal action to seek to overcome any perceived or actual impediments. A summary of the paper is on the ACSI website.
1.12 SEC Issues Policy Statement on Business Continuity Planning for Trading Markets On 26 September 2003 the United States Securities and Exchange Commission issued a Policy Statement setting forth its view that self-regulatory organizations operating trading markets (SRO Markets) and electronic communication networks (ECNs) should apply certain basic principles in their business continuity planning. The Commission also requests comments on the Policy Statement. The principles outlined in the Policy Statement include planning for the resumption of trading no later than the next business day following a wide-scale disruption, geographic diversity between primary and backup sites, assuring the full resilience of important shared information systems (such as the consolidated market data stream), and confirming the effectiveness of backup arrangements through testing. Each SRO Market and ECN should implement plans reflecting these principles as soon as practicable, and strive to do so by the end of 2004. Commission staff intends to engage in an ongoing and individualized dialogue with each SRO Market and ECN to discuss application of these principles in a manner most appropriate for the particular trading market. The Commission believes it important for the SRO Markets and ECNs to take concrete steps to strengthen their resilience to address the continuing, serious risks to the US financial system posed by the post 11 September environment. To date, the trading markets have made significant progress in increasing the robustness of their business continuity plans. By applying the principles outlined in the Policy Statement, the Commission believes the SRO Markets and ECNs will better assure their own resilience and that of the US financial system. The Policy Statement can be accessed on the SEC's web site at http://www.sec.gov/rules/policy/34-48545.htm
1.13 Independent Directors Crucial to Corporate Governance: Hong Kong report On 18 September
2003, the Hong Kong Institute of Company Secretaries (the Institute) released
its report on Independent Non-Executive Directors (INEDs) titled "The Duties and
Responsibilities of Independent Non-Executive Directors of Hong Kong Listed
Companies". Other findings include:
1.14 UK House of Commons Trade and Industry report: Rewards for Failure On 16 September 2003, the United Kingdom House of Commons Trade and Industry Committee released its report on severance pay for company executives. The report sought consultation on whether, and if so what, new measures might be required to tackle excessive 'golden parachutes' for the outgoing executives of poorly performing companies. In the course of
the inquiry evidence was taken from the Investment Management The report concluded:
A full copy of the
report is available at:
1.15 Study finds empirical evidence of a correlation between corporate risk quality and financial performance There is a strong correlation between companies' risk quality and financial performance, according to a new study released on 16 September 2003 of 438 publicly quoted companies across a broad range of industries. The study, 'Improving Risk Quality to Drive Value,' conducted by Oxford Metrica, an independent internationally recognised strategic advisory firm, analysed a global portfolio of firms that comprised a total market capitalisation of US$3.4 trillion (£2.1 trillion). The findings reveal that companies with high risk quality have low cash flow volatility, a core value driver. Additionally, the study concludes that risk quality is a strategic issue and a key characteristic of a value-creating firm, as well as an essential aspect of effective corporate governance procedures. 'Risk Mark' - a benchmarking system created by commercial and industrial property insurer FM Global for evaluating a firm's risk quality and relative probability for loss compared with that of thousands of other firms in various industries - provided Oxford Metrica with a data source for the research. The premise of the study is that a company need not experience a disruption to its business to demonstrate the value of investing in risk quality. Furthermore, it indicates that diligently following property risk improvement procedures is a characteristic of value-creating firms. In order to evaluate the risk management investment decision in a shareholder value framework, the research first defines what is meant by 'value' and identifies core drivers. Second, the metrics of risk and value used in the study are defined, and third, the relationship between risk quality and financial performance is demonstrated and measured. Finally, the study portfolio is analysed in a broader context to establish the generalisability of results. In the context of the study, risk quality is defined in terms of property risk management. It is driven by the core operational activities of a business, the physical location of those activities and how they are managed and protected. The executive
summary of the study results is available at:
1.16 CBI unveils guidelines on severance packages In its response to the UK Department of Trade and Industry consultation on termination payments for directors, on 16 September 2003, the Confederation of British Industry (CBI) unveiled guidelines on directors' severance packages. They recommend immediate disclosure of contractual terms and conditions, one year rolling contracts, part-payment in shares and regular contractual reviews. They also outline ways of handling the different elements of severance packages - basic pay, earned bonus and pensions. (a) Best Practice Guidelines
1.17 New US survey shows Sarbanes-Oxley Act has increased effectiveness of audit committees and corporate governance On 8 September 2003 James H Quigley chief executive officer of Deloitte & Touche LLP, told an audience at the National Press Club in Washington DC that the Sarbanes-Oxley Act of 2002 is having a positive effect on corporate governance, causing audit committees to meet more frequently and for greater duration. As of 3 September, Deloitte researchers had received responses from 66 of the firm's top clients on a range of corporate governance issues to determine how they are weathering the changing business climate, including regulatory changes, over the past year. The client survey conducted by Deloitte also asked leaders how Sarbanes-Oxley was affecting audit committees. The Deloitte survey showed that audit committees are meeting more frequently than they did prior to passage of Sarbanes-Oxley. Of the 66 companies surveyed, the number of audit committees meeting more than six times per year increased from 11 companies prior to the passage of Sarbanes-Oxley to 39 following the enactment of the legislation. The time spent in committee sessions has also risen significantly. Half the companies surveyed met for less than one hour per meeting prior to Sarbanes-Oxley. Post Sarbanes-Oxley, the number of committees meeting less than one hour dropped to 10 percent of the survey participants. The responses came largely from manufacturing, consumer, and financial services companies. The majority of responses came from companies with revenues of US$1 billion to US$5 billion (48 percent) or more than US$10 billion (26 percent).
1.18 Corporate Law Judgments Milestone Since September 1999, the Centre for Corporate Law and Securities Regulation at the University of Melbourne website has offered a comprehensive database of corporate law judgments delivered by all courts of all Australian jurisdictions since that date. In October this year, the website added its 2,000th judgment to the site. The database features a flexible search screen that enables practitioners, students and the general public to search for cases according to date, judge, court, case name, keywords or phrase. The Law Institute Library recently reviewed the Corporate Law Judgments site and described it as "a great alternative to AustLII for locating corporate law decisions".
1.19 Study of voting levels in UK companies Pension Investment Research Consultants' (PIRC) annual proxy voting survey for AGMs held by FTSE All Share companies between August 2002 and July 2003 (545 respondents), has found that the substantial increase in average voting levels shown last year has not continued despite the introduction of the CREST electronic voting platform and the weight of regulatory pressure towards encouraging shareholder activism.
| |
| 2.1 ASIC
class order provides relief to allow multi-issuer PDS
On 23 October 2003, the Australian Securities and Investments Commission (ASIC) released a new Class Order declaration [CO 03/0876], relating to the preparation of a product disclosure statement ("PDS") under s.1013A of the Corporations Act 2001 ("the Act") by multiple issuers. The Class Order relief permits a PDS to be prepared by more than one issuer under s.1013A of the Act where:
ASIC has adopted this approach to promote commercial efficiency and flexibility for related issuers in a conglomerate group, whilst maintaining the safeguards afforded to consumers under the Act. By requiring the PDS to relate to a particular kind of financial product, ASIC believes that consumers will be better able to compare the merits (and relative costs) of like products offered by various issuers within a corporate group. There is less likelihood that consumers may be confused about the benefits and risks of a group's products when they are of the same kind. ASIC recognises that there may be some circumstances where related issuers may wish to use a single PDS for different kinds of financial product. In these situations, ASIC will consider granting relief on a case-by-case basis. A copy of the Class Order can be obtained from the ASIC's Infoline by calling 1300 300 630 or from the ASIC website at http://www.asic.gov.au/co For further
information contact:
2.2 Amended Pro Forma 209: AFS licence conditions On 22 October 2003, the Australian Securities and Investments Commission (ASIC) reissued Pro Forma 209 Australian financial services licence conditions (PF 209). The amendments to PF 209 are a result of the introduction of new regulations and changes to ASIC policy, including Policy Statement 166 Licensing: Financial requirements (PS 166) and Policy Statement 175 Licensing: Financial product advisers - Conduct and disclosure (PS 175). These changes come into effect immediately. The following summary explains the nature and purpose of each amendment. Australian financial services (AFS) licensees who wish to take advantage of the changes outlined below must apply for a variation to their AFS licence using ASIC form FS03, requesting that the revised versions of all of the conditions and definitions listed below be imposed. PF 209 and form FS03 are available via the Financial Services homepage on the ASIC website at http://www.asic.gov.au/fs. (a) Summary of Amendments to PF 209 (i) Authorisation Condition 1: There are new authorisations to cover licensees who provide financial services in relation to consumer credit insurance only. The life insurance product authorisations have been expanded to include any products issued by a Registered Life Insurance Company that are backed by one or more of its statutory funds. (ii) Base level financial requirements Condition 11: The amendment provides a licensee with an additional means of meeting the 3-month cash flow requirement in lieu of Option 1 or Option 2. A licensee is now exempted from the requirement to prepare 3-monthly cash flow projections where an eligible provider provides an enforceable and unqualified commitment to pay an unlimited amount in respect of the licensee's obligations for a period of 3 months. ASIC will also amend Parts F and G of PS 166 to reflect this change. (iii) Financial requirements for foreign exchange dealers Condition 18: This condition has been amended to reflect changes to financial requirements imposed on foreign exchange dealers applying for an AFS licence. ASIC has changed its policy under PS 166 to permit all foreign exchange dealers to comply with an adjusted surplus liquid funds (ASLF) requirement reflecting Part F of PS 166 as an alternative to the $10 million tier one capital requirements under Part G. (iv) Financial requirements for licensee transacting with clients Condition 20: Minor amendment to add the word "monetary" before the word "liabilities" in the first line of the condition. (v) Audit opinion on financial requirements Condition 26: Adjusted to reflect changes to condition 11 and forthcoming changes to PS 166 in relation to the areas covered under the audit for the cash needs requirement of Base Level Financial Requirements. (vi) External dispute resolution schemes Condition 30: The purpose of this amendment is to exempt a licensee from the requirement to be a member of an External Dispute Resolution Scheme (EDRS) until 11 March 2004, to the extent that there is no EDRS in place that covers complaints relating to the type of financial service provided by the licensee. (vii) Agreement with holder of financial product on trust Condition 32: This has been amended to exempt licensees who appoint sub-custodians from some of the requirements under the condition, where the licensee demonstrates by documentary evidence that compliance with these requirements is not practicable. (viii) Protection of underlying land in primary production Condition 43: ASIC has amended this condition for licensees of timber plantation schemes, to allow them up to 9 months after the issue of interests in the scheme to register the investors' interests in the land under State or Territory land titles law. The purpose of the amendment is to ensure that the registration requirement imposed by this licence condition does not have the potential to deprive investors in timber plantation schemes of the benefits of the 12-month prepayment rule introduced by Treasury into taxation legislation in 2002. (ix) Stockbroker responsibility for subsidiary companies Condition 55: This is a new condition that will apply to a stockbroker who elects to take responsibility for the acts and omissions of a subsidiary nominee company who provides custody services on its behalf. (x) Retention of financial services guides, statements of advice and material relating to personal advice Condition 56: This is a new condition that will be imposed on all licensees and will apply where a licensee provides financial product advice to retail clients. The condition applies the record keeping requirements set out in PS 175. (b) Definitions
2.3 ASIC releases version 4 of eLicensing and AFS licensing kit On 21 October 2003, the Australian Securities and Investments Commission (ASIC) released version 4 of the eLicensing system, together with an updated version of the Australian financial services (AFS) Licensing Kit, for entities wishing to apply for an AFS licence before the end of the two-year transition period on 10 March 2004. Version 4 takes into consideration the widening of eligibility to apply for an AFS licence under the streamlining process following regulations made on 11 March 2003, and other recent changes to regulations. It also takes into account recent ASIC Class Orders CO 03/645: FSR Act transition - regulated activities - deposit products and insurance products and CO 03/705: Non-cash payment facilities - licensing exemption. The release of Version 4 follows recent updates to ASIC's industry guides, which are designed to assist applicants choose the right authorisations and assessment process when applying for an AFS licence. These guides incorporate the version 4 changes and provide further clarification of ASIC's operational processes. Applicants who have started preparing their applications in version 2 should be aware that they will not be able to submit those applications after 21 October 2003. However, applicants who have started in version 3 will not have to start their applications again. More information on
the eLicensing system and the AFS Licensing Kit, as well as
2.4 ASIC provides overview of applications for relief under FSRA On 10 October 2003, the Australian Securities and Investments Commission (ASIC) provided an overview of its decisions in some recent applications for relief from the licensing, conduct and disclosure provisions of the Corporations Act 2001 (the Act) as amended by the Financial Services Reform Act 2001 (FSRA). ASIC has released this information both to illustrate examples of the sorts of matters where it has provided relief, and to make the manner in which ASIC has responded to specific matters fully transparent. The overview also includes examples of the circumstances in which ASIC has refused relief. 'ASIC intends to issue these overviews at least twice-yearly to assist industry in understanding our approach to regulation under the FSRA regime', ASIC Director of Financial Services Regulation (Legal and Technical Operations), Ms Pamela McAlister said. 'While each application for relief is considered on a case-by-case basis, this overview provides some guidance on the circumstances in which ASIC will consider granting relief. However, potential applicants should not assume that ASIC will provide relief in the future in similar cases, as each relief application depends on the unique facts and circumstances of the case', Ms McAlister said ASIC's general policy is to only consider granting relief from the requirements of Chapter 7 of the Act to address atypical or unforeseen circumstances and unintended consequences of those provisions. |
