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Corporate Law Bulletin Bulletin No. 75, November 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 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Detailed Contents | |||||||||||||||||||||||||||||||||||||||||||||||||
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1. Recent Corporate Law and Corporate Governance Developments
4. Recent Takeovers Panel Decisions
5. Recent Corporate Law Decisions
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1.1 UK Auditing Practices Board issues proposed ethical standards for auditors On 24 November 2003, the UK Auditing Practices Board (APB) issued for public comment five Exposure Drafts of proposed Ethical Standards (ESs) on the integrity, objectivity and independence of auditors. The Standards will establish basic principles and essential procedures with which auditors will be required to comply in any audit of financial statements. When finalised, these Standards will replace the existing guidance for auditors, issued by the auditors’ professional bodies. The five proposed standards cover: ·
integrity, objectivity and
independence; Important new features include the roles of the audit firm’s ‘ethics partner’, the requirement for an ‘independent partner’ where the audit client is a listed company or other public interest entity, and the interaction with the Code of Corporate Governance. To assist readers to understand the context for its proposals and the main features of the Exposure Drafts, the APB has produced an accompanying Consultation Paper, which: ·
provides background information on
relevant regulatory and other developments; The Exposure Drafts are available on the APB website.
1.2 APRA releases paper on second round of general insurance reforms Following the introduction of the new prudential framework for the supervision of general insurers in July 2002, the Australian Prudential Regulation Authority (APRA) released a discussion paper on a proposed second round of reforms on 20 November 2003. The paper responds to a number of the recommendations made by the HIH Royal Commission in April this year, which have been supported by the Government and which also reflect initiatives proposed in APRA’s submission to the Commission in September 2002. The paper outlines proposals to: ·
revise the existing prudential
standards and guidance notes in light of experience and market developments;
and The reforms introduced to the general insurance industry last year have strengthened requirements specifically in relation to financial soundness (liability valuation and capital adequacy) and risk management (particularly in relation to governance and reinsurance). They also established a three-layered system of regulation - the Insurance Act 1973 (substantially amended by the General Insurance Reform Act 2001), prudential standards and guidance notes. This system is supported by a regulatory reporting regime set out in reporting standards made under the Financial Sector (Collection of Data) Act 2001. APRA Member, Mr Steve Somogyi, said that since the introduction of the reforms in 2002, APRA had identified a diversity of interpretations, and therefore practices, by general insurance companies in meeting APRA’s prudential standards. “The 2002 reforms went a long way to strengthening the insurance industry in Australia. However, APRA considers it appropriate to refine, clarify and, in some cases, increase minimum prudential requirements,” he said. “The proposals in relation to disclosure aim to improve the transparency and usefulness of information disclosed by general insurers and APRA.” He added: “Greater disclosure and, flowing on from that, the ability to more accurately assess the financial position and risk management practices of general insurers will benefit policyholders, and the protection of their interests is core to APRA’s mandate.” Also in response to the HIH Royal Commission, APRA is developing a regime of consolidated supervision for general insurance corporate groups, which aims to minimise the risk of adverse developments in one area of a conglomerate damaging the overall soundness of the general insurance group. This will be the subject of a separate consultation paper to be issued in 2004. In addition, APRA intends to release a separate consultation paper and draft prudential standard on “fit and proper” requirements in the general insurance, life insurance and the authorised deposit-taking sectors. This will also be issued in 2004. Comments on the paper are invited by 27 February 2004. A copy of the discussion paper is available on APRA’s web site.
On 20 November 2003, the Australian Corporations and Markets Advisory Committee released its Insider Trading Report, which is the culmination of a detailed review over the last two years. In releasing the Report, the Committee’s Convenor, Richard St John, said: “Clear and effective insider trading legislation is necessary to protect Australian financial markets and encourage investor participation in them. At the same time, the legislation needs to be appropriately focused to ensure that it does not unduly impede or discourage legitimate market activity.” The 38 recommendations in the Report are designed to strengthen aspects of the law and related disclosure requirements, to overcome various anomalies and to clarify the application of the law to different financial markets as well as other aspects. They include: (a) Strengthen the reporting requirements for corporate officers Currently, directors must notify their trading in their own company’s securities (s 205G). This requirement helps to keep the securities market fully informed, while reducing the opportunity for directors to engage in insider trading in those securities without detection. However, this key disclosure law needs to be strengthened. For instance: ·
the
disclosure obligation should extend to senior executives, not just
directors (b) Clarify application to different financial markets The Committee notes difficulties in applying the insider trading provisions in their current form to some financial markets, and canvasses options to accommodate the differing characteristics of those markets. A majority of the Committee considers that the insider trading law should take into account the differing disclosure expectations and requirements of various financial markets by: ·
focusing the insider trading
prohibition on information that the market expects should be disclosed to all
participants on an equal basis A minority of the Committee, being the ASIC Chairman and, on some matters, one other member, does not support these proposed changes and prefers retaining the current law, with specifically designed defences or carve-outs to be introduced where necessary to meet any identified problems. (c) Remove overlaps in the regulation of share issues and buy-backs and exempt some private placements A majority of the Advisory Committee considers that new securities issues and most corporate buy-backs, both of which are already subject to comprehensive disclosure requirements, should not also be subject to the insider trading prohibition. This would remove regulatory overlaps, without weakening the obligation to keep the market fully informed. The majority also notes the general understanding prior to March 2002 that these types of transactions did not come within the insider trading law. The minority does not support any of these exclusions. A majority of the Advisory Committee also recommends that private securities placements to wholesale investors be exempt from the insider trading provisions. Issuers and wholesale placees can negotiate the level of disclosure between themselves under an individual placement. Also, an exemption would not be out of step with overseas jurisdictions, which do not generally apply their insider trading laws to private placements. The minority does not support this exclusion. (d) Permit the use of non-discretionary trading plans A majority of the Committee supports an exemption, modelled on the US SEC Rule 10b5-1, to allow persons who are regularly exposed to inside information (such as directors and other senior corporate officers) to trade in their company’s securities under non-discretionary trading plans, subject to safeguards against abuse. The minority does not support this proposed exemption from the insider trading law. (e) Copies of the Report Copies are available on the Committee’s website.
1.4 UK report on partnership law On 18 November 2003 the Law Commission of England and Wales and the Scottish Law Commission published a joint Report on Partnership Law. This recommends the first statutory changes to partnership law since the principal Acts governing partnerships were passed in 1890 and 1907. Partnerships, both small and large, continue to play an important role in the economy. There are over 500,000 partnerships in the United Kingdom with a combined turnover of approximately £136 billion. The main advantages of partnership as a business vehicle are its flexibility and informality. The suggested reforms strive to ensure that these advantages remain. One of the main disadvantages of partnership is its instability, in particular the rule that a firm ceases to exist on any change in its membership. This is addressed in the recommended reforms. The main thrust of the reforms is to encourage continuity of business and this is done by introducing the concept of separate legal personality for partnerships in England and Wales and clarifying that concept in Scotland. By making the partnership itself a legal entity, the partnership would not automatically dissolve on any change of partners and would be able to enter contracts and hold property. However, partners would continue to be personally responsible for the obligations of the partnership and would owe a duty of good faith towards the partnership and each of the other partners. Larger partnerships are likely to know the kind of agreement they wish to enter into and will have access to advice to ensure that this is given effect to. Smaller partnerships may not. The draft Bill which accompanies the report gives guidance in the form of a default code that will apply unless the partners choose to vary it. The default code deals with matters that partners would expect to be covered by a partnership agreement, such as the sharing of profits and losses, how differences between partners are to be settled and the financial entitlement of a partner on leaving the partnership. When the time comes to break up a partnership, the partners themselves will usually carry out the winding up of a solvent partnership. However, where differences arise, the recommendations enable interested parties to appoint a new official, a partnership liquidator, to wind up the partnership. The recommendations also clarify the law in relation to limited partnerships which were introduced by the Limited Partnerships Act 1907. These differ from general partnerships in that there must be at least one partner who does not wish to take part in the management of the partnership but merely to invest in it. This partner’s capital is at risk to the extent of the investment. With one exception, it is recommended that separate legal personality should apply to limited partnerships too. Due to concerns expressed about the potential tax treatment overseas of limited partnerships with separate legal personality, it is recommended that, in English law only, there should be a category of special limited partnership which would not have separate legal personality. The Report (Law Com No 283; Scot Law Com No 192) together with a summary are available on the Commissions’ websites at www.lawcom.gov.uk and www.scotlawcom.gov.uk.
1.5 ASIC fee template take up rate impressive On 11 November 2003, the Investment and Financial Services Association (IFSA) released details of the Australian Securities and Investments Commission (ASIC) fee template take up rate. According to the IFSA, the roll out of Product Disclosure Statements (PDS’s) incorporating the ASIC Fee Table continues to gather momentum amongst IFSA member companies in the lead up to the 11 March 2004 deadline for final implementation of the Financial Services Reform measures. “More than a month has passed since the release of the IFSA model PDS’s and the take-up rate amongst our members has been impressive”, said IFSA CEO, Richard Gilbert. “The IFSA Model Managed Investment Scheme (MIS) and Superannuation PDS’s incorporate the recently released ASIC fee template, which was developed by ASIC in line with Professor Ian Ramsay’s recommendations and in consultation with IFSA, ASFA and other bodies. “Several IFSA member companies are now using the model, which to date has been well received by consumers and members alike.” “IFSA has committed its retail public offer, managed fund and superannuation industry members to using the ASIC fee model, which will become a mandatory IFSA Standard on 11 March 2004.” “The fee template has meant the adoption of standardised terminology and standard fee tables, which are designed to facilitate comparison of products, with more transparency for consumers.” “Universal adoption of the fee table should improve disclosure in the way Financial Services Reform intended it to do.” “The rapid adoption of the fee template model has come about largely because there were no surprises. The high level of consultation and the amount of effort that went into the development of these soon-to-be Standards meant that we were able to arrive at a design consensus IFSA member companies were happy with”, Mr Gilbert concluded. The Model PDS’s are available from the IFSA website.
1.6 Horwath study finds widening gap in corporate governance actions of Australia’s top companies A survey on corporate governance practices of Australia’s top 250 public companies has given a mixed scorecard with only 15 companies receiving a top rating, a survey by the University of Newcastle for chartered accountants firm Horwath has found. The Horwath 2003 Corporate Governance study, released on 7 November 2003, analysed information from 2001/02 annual reports of Australia’s Top 250 companies, assessing reporting of governance issues of directors’ independence, auditor conflicts and remuneration practices. The study was conducted by Associate Professor Jim Psaros and Michael Seamer of the Newcastle Business School. Associate Professor Jim Psaros said: “It was of concern that the independence levels of Australia’s top 250 company’s Boards of Directors and associated committees appear to have deteriorated since the 2002 report. “This suggests that some companies are either unwilling or very slow to act. Accordingly, the ASX Corporate Governance Council Guidelines may be very necessary to prompt action by some companies,” he said. The study establishes a star rating system to help investors understand a company’s publicly-reported governance capabilities and showed 54% of companies demonstrated ‘good to outstanding’ practices of governance, while 30% of companies clearly lacked structures and evidence of good practices. Martin Bloom, chairman of Horwath, said the study proved that the gap is widening between well resourced, committed companies and others with less commitment to governance, with the top ranked companies improving their performance and accountability from last year, while the lower ranked companies were losing ground. “It is obvious that a two-tiered society of governance is emerging in Australia. There is a great distinction between large, well resourced companies which commit to corporate governance as important to their business and there are other companies which simply pay lip service to good practices in this area,” said Mr Bloom. Despite the trend that larger companies tended to score better ratings for their governance practices, a number of medium to smaller capitalised listed companies also performed well on the study’s comparisons, illustrating that governance is an issue for all companies. The study’s detailed findings also found: ·
some evidence linking good corporate governance with improved
share prices. On average, it was found that the share price of the “good to
outstanding” corporate governance companies increased by 11.09%. In contrast,
the average share price of the “adequate to poor” corporate governance companies
decreased by 8.91%.
1.7 Release of executive pay best practice principles On 6 November 2003, the Business Council of Australia released best practice principles to provide companies and their Boards guidance on developing and structuring executive pay packages. Deloitte Touche Tohmatsu developed the principles in consultation with Business Council of Australia with the aim of supplementing existing regulatory and industry guidance such as the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations. The key principles and related issues canvassed through this set of Practice Notes are as follows: ·
Board scrutiny and risk
oversight The Guide is published as a set of Practice Notes. Each Practice Note addresses specific executive remuneration issues of concern to Australian companies, board members, chief executives, management and corporate governance practitioners. The intention is to update these from time to time as both Australian and global corporate governance develops, and as better approaches emerge. The Guide reports on proposed reforms contained in the CLERP (Audit Reform and Corporate Disclosure) Bill 2003, released on 8 October 2003. The key principles are: (a) Board scrutiny and oversight The Board has ultimate oversight and responsibility for executive remuneration and this is widely understood and followed. The Board considers the risks arising from remuneration decisions including serious reputation risk and establishes appropriate controls. (b) A strong remuneration philosophy and framework The Board develops, implements and monitors remuneration policy and practice which will attract, retain and motivate executives to add value to the company but prevent the Board having to remunerate executives at levels which are not merited. (c) An effective Remuneration Committee or similar Board body The Board uses a Remuneration Committee or similar committee to develop, design and implement appropriate executive remuneration contracts and arrangements. (d) Shareholders concerns are managed by the Board The Board assists in eliminating or alleviating shareholder concern by disclosing information about the company’s remuneration policies and the costs and benefits of those policies and core entitlements, to enable investors to understand the link between remuneration paid to directors and key executives and corporate performance. (e) Transparency is promoted and disclosure managed There is a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual executives. No executive should be involved in deciding his or her remuneration. (f) Performance is rewarded, not failure At the outset of an executive contract, the Board considers the potential total cost of the appointment and termination in monetary terms. The value and composition of executive remuneration must reward performance not failure. (g) Effective executive contracts are used Executives require some form of contractual protection. Contracts must be carefully evaluated by the Board. (h) Independent advisers are used by the Board as required If the Board or Remuneration Committee wishes to seek advice from outside consultants, the Board or Committee should itself choose and appoint the consultants. Committee members should have direct access to independent remuneration specialists and outside survey data. The principles and accompanying guide are on the Business Council of Australia.
1.8 SEC approves NYSE, NASDAQ strengthening of corporate governance standards for listed companiesOn 4 November 2003 the US Securities and Exchange Commission approved new rules proposed and adopted by the New York Stock Exchange (NYSE) and the NASDAQ Stock Market requiring widespread strengthening of corporate governance standards for listed companies. The new rules establish a stricter, more detailed definition of independence for directors and require the majority of members on listed companies’ boards to satisfy that standard. In addition, the rule changes include a number of provisions that require and facilitate independent director oversight of processes relating to corporate governance, auditing, director nominations, and compensation. SEC Chairman William Donaldson said, “These rule changes are at the core of a broad movement by our markets to enhance the corporate governance practices of the companies traded on them and I congratulate the NYSE and the NASD for their efforts. Investors will recognize significant benefits from these actions now and long into the future.” The release approving the new rules may be found on the Commission’s web site at www.sec.gov/rules/sro/34-48745.htm Following is a summary of summary of the new NYSE listing rules taken from the SEC release. (a) HistoryIn 1998, the NYSE and NASD sponsored a committee to study the effectiveness of audit committees. This committee became known as the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (“Blue Ribbon Committee”). In its 1999 report, the Blue Ribbon Committee recognized the importance of audit committees and issued ten recommendations to enhance their effectiveness. In response to these recommendations, the NYSE and the NASD, as well as other exchanges, revised their listing standards relating to audit committees. In February 2002, in light of several high-profile corporate failures, the Commission’s Chairman at that time requested that the NYSE and NASD, as well as the other exchanges, review their listing standards, with an emphasis this time on all corporate governance listing standards, and not just those provisions relating to audit committees. After reviewing their corporate governance listing standards, the NYSE and the NASD, through NASDAQ, filed corporate governance reform proposals with the Commission in 2002. In January 2003, pursuant to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), the Commission proposed Rule 10A-3 under the Exchange Act, which directs each national securities exchange and national securities association to prohibit the listing of any security of an issuer that is not in compliance with the audit committee requirements specified in Rule 10A-3. Because the provisions concerning audit committees in the NYSE and NASDAQ corporate governance reform proposals, as filed with the Commission, did not conform in all respects with the audit committee requirements set forth in Rule 10A-3 as proposed by the Commission, both the NYSE and NASDAQ revised their proposals. In April 2003, the Commission adopted Rule 10A-3. In order to conform their proposals to the requirements of final Rule 10A-3, and to incorporate comments from the public and revisions suggested by the Commission’s staff, the NYSE and NASDAQ each filed further amendments to their proposals. Significant aspects of the proposed rule changes, as amended, are described below. (b) NYSE proposalsAccording to the NYSE, the NYSE Corporate Governance Proposal is designed to further the ability of honest and well-intentioned directors, officers, and employees of listed issuers to perform their functions effectively. The NYSE believes that the proposal also will allow shareholders to more easily and efficiently monitor the performance of companies and directors in order to reduce instances of lax and unethical behaviour. (i) Independence of majority of board membersNYSE Section 303A (1) of the NYSE Manual would require the board of directors of each listed company to consist of a majority of independent directors. Pursuant to NYSE Section 303A(2) of the NYSE Manual, no director would qualify as “independent” unless the board affirmatively determines that the director has no material relationship with the company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). The company would be required to disclose the basis for such determination in its annual proxy statement or, if the company does not file an annual proxy statement, in the company’s annual report on Form 10-K filed with the Commission. In complying with this requirement, a board would be permitted to adopt and disclose standards to assist it in making determinations of independence, disclose those standards, and then make the general statement that the independent directors meet those standards. (ii) Definition of independent directorIn addition, the NYSE proposes to tighten its current definition of independent director as follows. First, a director who is an employee, or whose immediate family member is an executive officer, of the company would not be independent until three years after the end of such employment relationship (“NYSE Employee Provision”). Employment as an interim Chairman or CEO would not disqualify a director from being considered independent following that employment. Second, a director who receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from the listed company, except for certain permitted payments, would not be independent until three years after he or she ceases to receive more than $100,000 per year in such compensation (“NYSE Direct Compensation Provision”). Third, a director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the company would not be independent until three years after the end of the affiliation or the employment or auditing relationship. Fourth, a director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the listed company’s present executives serve on that company’s compensation committee would not be independent until three years after the end of such service or the employment relationship (“NYSE Interlocking Directorate Provision”). Fifth, a director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues, would not be independent until three years after falling below such threshold (“NYSE Business Relationship Provision”). The NYSE proposes to clarify this proposal with respect to charitable organizations by adding a commentary noting that charitable organizations shall not be considered “companies” for purposes of the NYSE Business Relationship Provision, provided that the listed company discloses in its annual proxy statement, or if the listed company does not file an annual proxy statement, in its annual report on Form 10-K filed with the Commission, any charitable contributions made by the listed company to any charitable organization in which a director serves as an executive officer if, within the preceding three years, such contributions in any single year exceeded the greater of $1 million or 2% of the organization’s consolidated gross revenues. The NYSE also proposes to clarify this proposal by adding commentary explaining that both the payments and the consolidated gross revenues to be measured shall be those reported in the last completed fiscal year, and that the look-back provision applies solely to the financial relationship between the listed company and the director or immediate family member’s current employer. A listed company would not need to consider former employment of the director or immediate family member. The NYSE proposes to define “immediate family member” to include a person’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than domestic employees) who shares such person’s home. The NYSE also proposes that references to “company” include any parent or subsidiary in a consolidated group with the company. The NYSE further proposes to revise the phase-in of the look-back requirement that the NYSE had previously proposed by applying a one-year look-back for the first year after adoption of these new standards. The NYSE also proposes to change all of the look-back periods from five years to three years. The three-year look-back would begin to apply from the date that is the first anniversary of Commission approval of the proposed rule change. (iii) Separate meetings for board membersNYSE proposes to require the non-management directors of each NYSE-listed company to meet at regularly scheduled executive sessions without management. In addition, NYSE proposes to require listed companies to disclose a method for interested parties to communicate directly with the presiding director of such executive sessions, or with the non-management directors as a group. Companies may utilize the same procedures they have established to comply with Rule 10A-3(b)(3). (iv) Nominating/corporate governance committeeNYSE proposes to require each listed company to have a nominating/corporate governance committee composed entirely of independent directors. The NYSE also proposes to require such committee to have a written charter that addresses, among other items, the committee’s purpose and responsibilities, and an annual performance evaluation of the nominating/corporate governance committee (“NYSE Nominating/Corporate Governance Committee Provision”). The NYSE further proposes to clarify that the committee would be required to identify individuals qualified to become board members, consistent with the criteria approved by the board.(v) Compensation committeeNYSE proposes to require each listed company to have a compensation committee composed entirely of independent directors. The NYSE also proposes to require the compensation committee to have a written charter that addresses, among other items, the committee’s purpose and responsibilities, and an annual performance evaluation of the compensation committee (“NYSE Compensation Committee Provision”). The Compensation Committee also would be required to produce a compensation committee report on executive compensation, as required by Commission rules to be included in the company’s annual proxy statement or annual report on Form 10-K filed with the Commission. Further, the NYSE proposes to (1) delete the previously proposed statement that the compensation committee has the sole authority to determine the compensation of the chief executive officer (“CEO”), and provide that either as a committee or together with the other independent directors (as directed by the board), the committee would determine and approve the CEO’s compensation level based on the committee’s evaluation of the CEO’s performance; and (2) add a provision to the commentary on this section indicating that discussion of CEO compensation with the board generally is not precluded. (vi) Audit committee· CompositionNYSE Sections 303A(6) and 303A(7) would require each NYSE-listed company to have a minimum three-person audit committee composed entirely of directors that meet the independence standards of both NYSE Section 303A(2) and Rule 10A-3. The NYSE also proposes to delete the previously proposed commentary relating to NYSE Section 303A(6) and replace it with the following: “The Exchange will apply the requirements of Rule 10A-3 in a manner consistent with the guidance provided by the Securities and Exchange Commission in SEC Release No. 34-47654 (April 1, 2003). Without limiting the generality of the foregoing, the Exchange will provide companies with the opportunity to cure defects provided in Rule 10A-3(a) (3).” In addition, the Commentary to NYSE Section 303A(7)(a) would require that each member of the audit committee be financially literate, as such qualification is interpreted by the board in its business judgment, or must become financially literate within a reasonable period of time after his or her appointment to the audit committee. In addition, at least one member of the audit committee would be required to have accounting or related financial management expertise, as the company’s board interprets such qualification in its business judgment. The NYSE also proposes to clarify that while the Exchange does not require that a listed company’s audit committee include a person who satisfies the definition of audit committee financial expert set forth in Item 401(e) of Regulation S-K, a board may presume that such a person has accounting or related financial management experience. If an audit committee member simultaneously serves on the audit committee of more than three public companies, and the listed company does not limit the number of audit committees on which its audit committee members serve, each board would be required to determine that such simultaneous service would not impair the ability of such member to effectively serve on the listed company’s audit committee and to disclose such determination. · Audit committee charter and responsibilitiesNYSE Section 303A(7)(c) would require the audit committee of each listed company to have a written audit committee charter that addresses: (i) the committee’s purpose; (ii) an annual performance evaluation of the audit committee; and (iii) the duties and responsibilities of the audit committee (“NYSE Audit Committee Charter Provision”). The NYSE Audit Committee Charter Provision provides details as to the duties and responsibilities of the audit committee that must be addressed. These include, at a minimum, those set out in Rule 10A-3(b)(2), (3), (4) and (5),as well as the responsibility to annually obtain and review a report by the independent auditor; discuss the company’s annual audited financial statement and quarterly financial statements with management and the independent auditor; discuss the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies; discuss policies with respect to risk assessment and risk management; meet separately, periodically, with management, with internal auditors (or other personnel responsible for the internal audit function), and with independent auditors; review with the independent auditors any audit problems or difficulties and management’s response; set clear hiring policies for employees or former employees of the independent auditors; and report regularly to the board. · Internal audit functionNYSE Section 303A(7)(d) would require each listed company to have an internal audit function. (vii) Corporate governance guidelinesNYSE Section 303A(9) would require each listed company to adopt and disclose corporate governance guidelines. The following topics would be required to be addressed: director qualification standards; director responsibilities; director access to management and, as necessary and appropriate, independent advisors; director compensation; director orientation and continuing education; management succession; and annual performance evaluation of the board. Each company’s website would be required to include its corporate governance guidelines and the charters of its most important committees, and the availability of this information on the website or in print to shareholders would need to be referenced in the company’s annual report on Form 10-K filed with the Commission. (viii) Code of business conduct and ethicsNYSE Section 303A(10) would require each listed company to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and to promptly disclose any waivers of the code for directors or executive officers. The commentary to this section sets forth the most important topics that should be addressed, including conflicts of interest; corporate opportunities; confidentiality of information; fair dealing; protection and proper use of company assets; compliance with laws, rules and regulations (including insider trading laws); and encouraging the reporting of any illegal or unethical behaviour. Each code would be required to contain compliance standards and procedures to facilitate the effective operation of the code. Each listed company’s website would be required to include its code of business conduct and ethics, and the availability of the code on the website or in print to shareholders would need to be referenced in the company’s annual report on Form 10-K filed with the Commission. (ix) CEO CertificationNYSE Section 303A(12)(a) would require the CEO of each listed company to certify to the NYSE each year that he or she is not aware of any violation by the company of the NYSE’s corporate governance listing standards. This certification would be required to be disclosed in the company’s annual report or, if the company does not prepare an annual report to shareholders, in the company’s annual report on Form 10-K filed with the Commission. In addition, NYSE Section 303A(12)(b) would require the CEO of each listed company to promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material non-compliance with any applicable provisions of the new requirements. (x) Public reprimand letterNYSE Section 303A(13) would allow the NYSE to issue a public reprimand letter to any listed company that violates an NYSE listing standard. (xi) Exceptions to the NYSE corporate governance proposalsThere are a number of exceptions to the new rules. For example, the NYSE proposes to exempt any listed company of which more than 50% of the voting power is held by an individual, a group or another company from the requirements that its board have a majority of independent directors, and that the company have nominating/corporate governance and compensation committees composed entirely of independent directors. The other exceptions are outlined in the SEC Release. (xii) Application to foreign private issuersNYSE Section 303A would permit NYSE-listed companies that are foreign private issuers, as such term is defined in Rule 3b-4 under the Exchange Act, to follow home country practice in lieu of the new requirements, except that such companies would be required to: ·
have an audit committee that satisfies the requirements of Rule
10A-3; Listed foreign private issuers would be permitted to provide this disclosure either on their website (provided it is in the English language and accessible from the United States) and/or in their annual report as distributed to shareholders in the United States in accordance with Sections 103.00 and 203.01 of the NYSE Manual. If the disclosure is made available only on the website, the annual report would be required to state this and provide the web address at which the information may be obtained. (xiii) Proposed implementation of new requirementsIn NYSE Amendment No 2, the NYSE proposes a revised implementation schedule for the new requirements. Pursuant to the new schedule, listed companies would have until the earlier of their first annual meeting after 15 January 2004, or 31 October 2004, to comply with the new standards. However, if a company with a classified board is required to change a director who would not normally stand for election in such annual meeting, the company would be permitted to continue such director in office until the second annual meeting after such date, but no later than 31 December 2005. Notwithstanding the foregoing, foreign private issuers would have until 31 July 2005, to comply with any Rule 10A-3 audit committee requirements. Companies listing in conjunction with their initial public offering would be required to have one independent member at the time of listing, a majority of independent members within 90 days of listing, and fully independent committees within one year. They would be required to meet the majority of independent board requirement within 12 months of listing. Companies listing upon transfer from another market would have 12 months from the date of transfer in which to comply with any requirement to the extent the market on which they were listed did not have the same requirement. To the extent the other market has a substantially similar requirement but also had a transition period from the effective date of that market’s rule, which period had not yet expired, the company would have the same transition period as would have been available to it on the other market. This transition period for companies transferring from another market would not apply to the audit committee requirements of Rule 10A-3 unless a transition period is available under Rule 10A-3.
1.9 United
States board of directors study compares board practices in Asia Pacific, Europe
and North America
·
The
American Fortune 1000 boards
lead the way in holding Executive Sessions (87 percent) without their CEO
present. Japanese boards are least likely to gather without the CEO present (4
percent); “This has been a watershed year for board members worldwide. The increased scrutiny on governance has brought unprecedented complexity and demand on corporate boards, forcing directors to now spend on average between 19 and 25 hours per month on board matters. In addition, personal risk has risen dramatically and the minimum acceptable participation level keeps rising,” said Charles King, head of Korn/Ferry’s Global Board Services Practice. Korn/Ferry’s global survey also found that diversity among directors continues to rise for the Fortune 1000 boards. Women now occupy at least one seat on 79 percent of the Fortune 1000 boards, while African-American, Latino and Asian directors can now be found in 71 percent of Fortune 1000 boardrooms, up 4.4 percent over last year. (b) Compensation findings ·
Average board member cash
compensation of Fortune 1000 organizations rose 3.4 percent to $43,306 in
2002; “When we began this survey in 1972, only 4 percent of the companies polled provided some type of stock program in director compensation,” Mr. King said. “Furthermore, only 6.9 percent of the participants thought directors should be compensated with stock options.” (c) Other key survey findings · Independence remains an essential concern of directors:
· Most American directors (81 percent) say their company’s CEO compensation program is effective compared to 65 percent in Germany and 53 percent in Non-Japan Asia
1.10 AIMR survey provides insight regarding quality of financial information, effects of earnings guidance and the quality of investment research A survey released on 27 October by the global Association for Investment Management and Research, a nonprofit organization of almost 70,000 investment professionals, found that more than 80% of the analysts and portfolio managers who responded worldwide say that financial statements and footnotes are “extremely” or “very” important to their analysis and investment decision making. However, they only give public companies an average grade of “C+” for the overall quality of financial reporting and corporate disclosure. The 2003 AIMR 2003 Global Corporate Financial Reporting Quality survey also found that 44% of respondents give companies a “B” for financial reporting quality but only 1% awarded them an “A.” Another 44% give companies a “C,” while 14% marks of “D” or “F.” When AIMR last conducted a similar survey, in late 1999, the majority of respondents (56%) rated corporate reporting quality a “B,” and 5% rated it an “A”, while only 37% gave it a “C” or lower. When asked about the importance of certain types of financial information and the quality of that information, respondents stated that footnote disclosures are just as important as the balance sheet. Areas where there are large gaps between importance and quality are off-balance sheet assets and liabilities, extraordinary, unusual and non-recurring charges, and pensions and other retirement benefits. (a) Corporate
balance sheets are seen as highly important, but need a boost in quality
Investment
professionals note sizable gaps between the importance of even core financial
statements and their quality. (Based on 1822 responses)
Asked about 15 additional sources of key financial information from public companies, investment professionals rated as top five: 1. Footnotes to
the financial statements Respondents were also asked to rate 33 specific types of information that may be found in the financial statements and related footnotes and disclosures. The top five: 1. Information
about off-balance sheet assets or liabilities (b) Buy-side (in-house) analysts rated highest for research quality, importance Asked to rate non-corporate sources of information, portfolio managers and buy-side analysts clearly value their own in-house analysts the most, compared to six other possible sources listed. ·
Eight out of 10 (79%) buy-side
investment professionals consider their in-house analysts to be very or
extremely sources of information, compared to 52% who feel the same way about
independent outside research and 45% who say research from brokerage firms is
extremely or very important. (c) Earnings
guidance believed to lead to corporate manipulation of financial
reports Seven out of 10 portfolio managers and securities analysts believe the practice of corporate managements giving “earnings guidance” increases “earnings management” (corporate manipulation of financial reports). ·
Only 26 percent believe that an
alternative practice - general trend and performance information from management
(without EPS forecasts or income targets) - increases “earnings management”.
(d) CFOs have
an edge over CEOs with investment professionals (Based on 1050 responses)
1.11 Global survey shows CEOs taking greater responsibility for corporate reputations In response to high-profile cases of corporate wrongdoing and diminished corporate reputations over the last two years, 65 percent of CEOs surveyed worldwide said it is their personal responsibility to manage their company’s reputation. Only 14 percent of the corporate executives polled said their company’s board was responsible and just 12 percent considered corporate reputation a responsibility of their communications department, according to the Fifth Annual Corporate Reputation Watch survey of senior executives. The survey, released on 3 October 2003 examined corporate executive level perspectives on issues such as the importance of corporate reputation, influencers of corporate reputation, threats to reputation, governance issues, and corporate social responsibility initiatives. The survey
revealed that corporate boards are putting more pressure on CEOs to build
corporate reputation. When choosing a CEO successor, the CEOs
overwhelmingly agreed (97 percent) that boards place at least some weight on a
candidate’s ability to protect and enhance the company’s reputation.
CEOs agreed that corporate social responsibility (CSR) initiatives contribute to corporate reputation. Overall, eight out of 10 CEOs said that CSR initiatives contribute at least moderately to their companies’ reputation, but only three out of 10 said they contribute a “significant amount.” European CEOs place a higher weight on CSR initiatives. Ninety-four percent believe CSR initiatives contribute at least moderately to reputation. CEOs overall cite the primary business objectives of CSR initiatives as recruiting and retaining employees (71 percent), favorable media coverage (51 percent) and promoting transactions and partnerships (40 percent). Increasing sales and enhancing stock price are mentioned more frequently by CEOs as objectives of corporate reputation, than corporate social responsibility. The vast majority of CEOs believe the recent focus on more stringent corporate governance and board oversight is going to be a permanent fixture in the corporate landscape. While most CEOs believe boards of directors are doing a good or excellent job in performing an oversight role, a majority (68 percent) also believes that a higher proportion of independent directors will become a long-term outcome of increased corporate governance. Methodology: The Fifth Annual Corporate Reputation Watch was conducted by ORC International in August and September 2003. Executives with qualifying titles of CEO, president or chairman, along with North American, Asian and European executives were surveyed. Two hundred fifty seven completed surveys were tallied, representing executives at 199 public and 54 private companies. The overall sample has a +/- 5 percent margin of error. To view the results of the Corporate Reputation Watch survey, visit www.corporatereputationwatch.com
1.12 Executive pay & performance – latest Australian study Directors at Australia’s top 200 public companies are failing to link executive pay with performance, according to research commissioned by the Public Sector Superannuation Scheme and other superannuation funds. The research, published in October, examined 2001 and 2002 annual reports, accounting for more than 2400 directors. The research failed to find a link between pay and performance. The research also found that disclosure among the surveyed firms is poor, with 50% granting share options to executives without informing investors the value of the options, despite the fact that the options accounted for 12% of total pay. Seventy-four percent of the companies did not disclose what hurdles determine options grants. While 95% have remuneration committees, 30% said their committee includes executive members, and only 6 of those companies said the executive(s) did not participate in discussion of their own compensation. Another 25% did not disclose the details of their remuneration policies, and 7% did not disclose the pay data for all executives and directors. Following is an extract from the research paper. The governance of executive remuneration within listed entities has been, and remains, the subject of significant media and public policy attention. As a current issue of governance concern, remuneration stands head and shoulders above any other area of governance interest in the public arena. Risks emanating from this concern include increased regulation together with erosion of investor confidence. Recent regulatory and other developments evidence heightened risk relating to remuneration governance disclosure: ·
Corporations Amendment Bill 2002
(Cth) — a
bill for an Act to amend the Corporations Act 2001. Key proposed amendments include
amendments to strengthen s300 and s300A. | |||||||||||||||||||||||||||||||||||||||||||||||||
