Good policy, good politics – why don't politicians push for better corporate governance?

The problem

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:

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 they do?

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 composition;
• 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 services.

Even some of the bodies that represent the interests of accountants and directors have been publicly supportive of these measures. Where are the people's representatives?

Beyond Ramsay

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 Sarbanes-Oxley Act);
• 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 members; and
• 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 news;
• prohibiting loans to directors and corporate officers;
• mandatory forfeiting of incentive remuneration in the event of accounting restatements;
• 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 litigation; and
• 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.