The most important policy concern of government is to facilitate the
creation of affluence by and for the governed. The role of government varies
from market to market, but in broad terms it involves setting and policing
some rules to encourage transparency and to correct or prevent abuses of
power that may distort the market.
One of the most important markets is the market for investment in public
corporations. Yet, when asked for his opinion on the current corporate
governance debate John Howard answered:
It's not as important as the Commonwealth Games. It's not as important as
a number of other things that are really important.
Such a risible contribution to this debate does little more than expose
as cheap rhetoric the PM's claim to be the best mate of aspirational mum-and-dad shareholders, superannuation holders and self funded retirees. He will
need to do a little better than deploy studied inertia in the service of
management if he wants to be taken seriously on this issue.
Labor has called for the gaoling of corporate transgressors, which is a
good start, but should formulate a comprehensive and distinct alternative to
the Government's inaction. This is a good policy vacuum for Labor to fill.
It is far less ideologically and socially compromised than the Coalition
when it comes to staring down the managerial class for the benefit of small
investors or anyone else without access to the boardroom. So what should
Enter Professor Ramsay
The blueprint for checking errant executives and directors is set out in
the Ramsay Report, which was commissioned and then shelved by the
Government. This report makes a range of recommendations, including:
- the establishment of an Auditor Independence Supervisory Board;
- changes to the ASX listing rules requiring listed companies to
establish an audit committee, with ASX input into its role and
- requiring auditors to make an annual declaration to the Board stating
that they have maintained their independence;
- providing clarification on what constitutes "independence";
- requiring registered auditors to adhere to the codes of ethics set
down by professional accounting bodies; and
- the closer regulation of the operations of auditors, including the
rotation of partners and the increased disclosure of fees and non-audit
Even some of the bodies that represent the interests of accountants and
directors have been publicly supportive of these measures. Where are the
Ramsay's recommendations are good, but he declines to go further,
contending that a too detailed regulation of corporate governance may
promote a culture of avoidance. There is an element of truth to this. But it
is also true that strict and enforceable regulations do not have to
micro-manage companies in an intrusive way. Besides, these problems are
largely caused by managerial greed, which will exist whether you regulate or
not. Some further reforms to augment Ramsay could include:
- going beyond the erection of Chinese walls or the splitting of hairs
when defining acceptable non-audit services and place an outright ban on
non-audit services being provided to audit clients (as in the US
- prohibit employees, partners or directors of an auditing firm from
holding a directorship or other position with a client;
- prohibit partners or directors of auditing firms from having any
financial interest in a client and require them to fully disclose any
financial interest held by their spouse or other immediate family
- require the ASX to conduct random audits on a certain percentage of
listed companies each year.
What about directors and executives?
A serious attempt to change corporate culture must venture into the
boardroom itself. Mooted reforms in this area, some of which are in the US
Sarbanes-Oxley Act, include:
- simplifying the form of financial statements for the average punter;
- requiring public companies to disclose rapidly and in plain English
material changes to their financial condition or any other significant
- prohibiting loans to directors and corporate officers;
- mandatory forfeiting of incentive remuneration in the event of
- making CEOs and chief financial officers responsible for the accuracy
of financial statements;
- requiring that stock options be expensed in the accounts of a company;
- subjecting officers, directors and auditors to a greater risk of
- gaoling executives and directors who deliberately mislead or who
withhold information, especially if in doing so they benefit themselves
at the expense of the shareholders.
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