Monday, 2 March 2015
Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014; Second Reading
On behalf of the Labor Party, I make a contribution to the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014. This bill amends the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001. Labor supports the bill and will not be proposing any amendments. I note that the bill has been the subject of an inquiry by the Senate Economics Legislation Committee, which recommended that the bill be passed. There are a number of measures contained within this bill and I will speak to each of them separately.
Firstly, on the 100-member rule, the changes in items 1, 2 and 10 of schedule 1 to the bill amend the Corporations Act 2001. These changes are designed to better balance the rights of shareholders to raise issues with a company with the cost to companies of being required to call and hold a general meeting. It repeals the so-called 100-member rule, which creates an obligation on a corporation to hold a general meeting at the request of 100 or more shareholders. As cited in the Bills Digest from the Parliamentary Library, this provision is not a new one, having been introduced into the Companies Act 1981 by Attorney-General Gareth Evans in 1983. However, since that time there has been significant change in the composition of shareholders as well as the number of large listed companies in Australia, a result of economic reforms undertaken by both sides of politics. Today, the growth in retail shareholders means the specific number of 100 is often a very small proportion of the overall membership of a company. I note that amongst major countries Australia is the only one that applies a numerical test for convening an extraordinary general meeting regardless of share capital held.
The removal of this element of the 100-member rule was of particular concern to Senator Xenophon, who submitted a dissenting report to the Senate Economics Legislation Committee's inquiry. Importantly—and I want to make this point very clear—the proposed changes do not remove the ability of 100 or more shareholders to add items to scheduled annual general meetings and to instigate debate as an agenda item at these meetings. This retains the right for 100 or more members to raise issues of concern, as exists under the current act, without the often significant cost to shareholders of scheduling extraordinary meetings. The changes we are dealing with today do not affect the right of 100 shareholders to put a resolution to be considered at a general meeting or to distribute a shareholder statement with the notice convening that meeting. The changes do not affect the ability of 100 or more shareholders to engage to raise points of particular interest and to hold companies to account. That is as it should be.
Shareholder activism is an important component of corporate governance and that needs to be accepted. Small shareholders have a legitimate right to put up questions to boards of public companies and to raise issues of concern. Shareholders should be able to put issues on the annual general meeting agenda and to instigate a debate at that meeting. This right is of particular importance to retail shareholders, who have limited opportunities to meet with the company prior to the annual general meeting. These rights will not change with the proposed legislation.
Labor recognises that the 100-member rule, though, can impose significant costs on business and that these can be, to some people's minds, unreasonable. For example, in the two years from late 1999 to late 2001, NRMA was forced to call 12 EGMs to consider resolutions removing directors, each of which incurred several million dollars in costs and resulted in none of the relevant resolutions being passed. In 2012, Woolworths was compelled to call an extraordinary general meeting in relation to one-dollar limits on poker machines. The cost of notifying its shareholders alone was $500,000. The hosting of the meeting meant that Woolworths incurred further costs. The resolution received just 2.5 per cent support.
In another example, a company based in South Australia, Santos, was compelled to hold an extraordinary general meeting following a call from more than 100 individual shareholders to abandon its Narrabri coal-seam gas project in New South Wales. A resolution not to abandon this project subsequently passed, with approval from 99 per cent of the shareholders.
No-one objects to the fact that people might have different views. Shareholders should be able to raise concerns legitimately through a number of mechanisms, but not at significant cost to other shareholders. As I mentioned previously, Australia is currently alone in providing for a shareholder test that applies regardless of how much capital the requisitionists hold. It is more common that requisitionists must hold at least five to 10 per cent of the shares before they can call a general meeting. Again, no-one disputes the fact that shareholders have a right to question directors and decisions made by a company, but it should not be at a cost to other shareholders. So Labor will support this change.
The second issue goes to remuneration reporting requirements. Items 3 to 5 and 10 of schedule 1 to this bill amend the Corporations Act to improve and streamline remuneration reporting requirements. Currently, disclosing entities that are companies must disclose for each member of the key management personnel the value of options that lapse during a financial year. Disclosing entities that are companies must also disclose for each member of the key management personnel the percentage value of the remuneration that consists of options. This bill makes changes so that listed disclosing entities that are companies must disclose for each member of the key management personnel only the number of options that lapse during a financial year and the financial year in which those options were granted. There will no longer be an obligation to disclose the value of options that lapse or the percentage value of remuneration that consists of options for each member of the key management personnel.
Currently, all disclosing entities that are companies are also required to prepare a remuneration report, regardless of whether they are listed or unlisted. This bill changes that, so that unlisted disclosing entities that are companies are no longer required to prepare a remuneration report. Listed disclosing entities continue to be required to prepare a remuneration report.
Labor has a proud record of reforming executive remuneration by introducing the two-strikes test, that allows shareholders concerned with the executive remuneration to vote to spill the board under certain circumstances. Labor supports improving the disclosure of executive remuneration information in Australia. There have been concerns raised by shareholders and users of remuneration reports that currently the reports contain some information that was of limited benefit or which can be found at other places in the annual report.
Labor also supports removing the unnecessary requirement for unlisted disclosing entities that are companies to prepare a remuneration report. Unlike listed entities, they are not required to have their remuneration report adopted by shareholders through a non-binding resolution and are not subject to the two-strikes test.
The third issue goes to clarifying the financial year. Item 6 of schedule 1 to this bill amends the Corporations Act 2001 to clarify the circumstances in which a financial year may be fewer than 12 months. There is confusion about the conditions under which directors may determine that a financial year is shorter than 12 months. Currently, section 323D sets out how companies, registered schemes and disclosing entities may determine the length of their financial year. While an entity's financial year is expected to be approximately 12 months long, entities can determine otherwise in cases where, for example, an entity needs to modify its financial year by up to seven days to accommodate week-based internal reporting frameworks or where an entity needs to synchronise its financial year in order to prepare consolidated financial reports.
However, section 323D(2A) allows entities to determine that their financial year is fewer than 12 months if none of their previous five financial years have been fewer than 12 months, the shorter financial year commences at the end of the previous financial year and the decision is in the best interests of the entity. Stakeholders have raised concerns about the interaction between this provision and the operation of subsection 323D(2), which requires that a financial year is 12 months unless determined by the directors to be a period that is shorter or longer than 12 months by up to seven days. There is confusion surrounding whether taking advantage of the flexibility in section 323D(2) would trigger the five-year period in which an entity is precluded from assessing the benefits offered by section 323D(2A). Similarly, subsection 323D(3) requires an entity to synchronise its financial year end with its parent entity when it becomes a controlled entity. Again, stakeholders have raised concerns that this provision may trigger the five-year period in which an entity is precluded from accessing the benefits offered by section 323D(2A).
The bill seeks to clarify that directors may determine that a financial year is shorter than 12 months by more than seven days irrespective of whether during an entity's previous five financial years the directors have determined that the financial year is shorter than 12 months by up to seven days or determined to synchronise the financial year to prepare consolidated financial statements. Labor supports the measures in this bill that clarify the circumstances and conditions under which directors can alter and determine the financial year is shorter than 12 months by more than seven days. This remove the unintended confusion arising from changes in 2010 that were intended to make it easier for directors to alter financial year end dates.
The next issue is streamlining auditor appointments for companies limited by guarantee. Items 7 to 9 of schedule 1 to this bill amend the Corporations Act 2001 to exempt certain companies limited by guarantee from the need to appoint or retain an auditor. Currently all public companies, including companies limited by guarantee, are required to appoint and retain an auditor. This bill changes this so that small companies limited by guarantee and those companies limited by guarantee that have their financial reports reviewed are not required to appoint or retain an auditor. This means that companies that are not required to undertake an audit are no longer required to appoint and retain an auditor. All other public companies are required to appoint and retain an auditor as is current practice. Labor supports these changes that remove unnecessary costs on business by supporting the requirement for companies to appoint and retain an auditor even if they are not required to conduct an audit. This change is expected to provide the greatest benefit to not-for-profit community organisations, allowing them to better service our communities.
The next issue is the Takeovers Panel. Part 1, items 1 and 2 of schedule 2 to the bill amends the Australian Securities and Investments Commission Act 2001 to improve the operation of the takeovers panel by allowing takeover matters to be dealt with more efficiently. Currently, the president and members of the Takeovers Panel may only participate in proceedings if they are within Australia. These changes mean the President of the Takeovers Panel may give a direction in respect of members who are to constitute the panel whether or not the president is in Australia. Further, members of the Takeovers Panel may participate in proceedings whether or not the members are in Australia. As technology improves and the world becomes ever more connected, it is sensible to alter legislation to reflect that change. This bill will allow members of the Takeovers Panel to participate in proceedings if they are physically located outside of Australia at the time. Labor supports this sensible change to allow the more efficient resolution of disputes.
Now I turn to the Remuneration Tribunal. Part 1, items 3 to 8 and part 2, item 9 of schedule 2 to this bill amend the Australian Securities and Investments Commission Act 2001 to extend the Remuneration Tribunal's remuneration-setting responsibility to include certain Corporations Act bodies. Currently, the ASIC Act provides that the responsible Treasury portfolio minister determines the terms and conditions, including remuneration, of the chairs and members of the Financial Reporting Council; the Chair of the Australian Accounting Standards Board; and the Chair of the Auditing and Assurance Standards Board. The ASIC Act also provides that the Financial Reporting Council is responsible for determining the terms and conditions, including remuneration, of the offices held by the members of the Australian Accounting Standards Board and the Auditing and Assurance Standards Board.
This bill brings responsibility for determining the remuneration and full-time member recreation leave entitlements of the chair and member positions of the Financial Reporting Council, the Australian Accounting Standards Board and the Auditing and Assurance Standards Board within the Remuneration Tribunal's jurisdiction. The Remuneration Tribunal has specialist skills in reviewing and determining remuneration and is therefore better placed to determine the remuneration of these offices. Moreover, it will ensure consistency in the remuneration setting arrangements between the three bodies and other statutory office holders.
Currently, the responsible Treasury portfolio minister determines the terms and conditions, including remuneration, of the chairs and members of the Financial Reporting Council, the Chair of the Australian Accounting Standards Board and the Chair of the Auditing and Assurance Standards Board. The ASIC Act also provides that the Financial Reporting Council is responsible for determining the terms and conditions and the offices held by the members of the Australian Accounting Standards Board and the Auditing and Assurance Standards Board.
Labor supports the provisions in this bill that brings responsibility for determining the remuneration and full-time-member recreation leave entitlements of the chair and members within the Remuneration Tribunal's jurisdiction. There is no question that that is the best place for them and where they ought to be. The changes that are contained in this bill are supported by Labor. They were changes that Labor was progressing through and matters that had been worked on with bipartisan support across both sides of this chamber, and within the industry and the sector itself. It is good, sensible policy. I offer Labor's support for these measures, and for the bill as a whole.
I want to add my words in support of the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014. In the year and a half since coming to office, the Abbott government has done significant things for our nation. We have repealed the carbon tax—that Labor want to bring back; we have repealed the mining tax that, of course, made no money; we have stopped the boats and the deaths at sea; we have signed free trade agreements with our Asian partners and we are getting on with the job of fixing the debt and deficit legacy of the Labor government.
Those of us on this side of the chamber are also committed to removing unnecessary red tape on business—red tape that hurts productivity, halts investment and innovation and stifles job creation. It bears repeating that, since the 2013 election, the coalition government has more than doubled our election target of red-tape reduction, announcing over 400 measures across the whole of government at a net reduction of over $2.1 billion in compliance costs. As part of the 2014 spring repeal day on 29 October, the government continued this work by removing nearly 1,000 pieces and over 7,200 pages of legislation and regulation. This continues the work of the first repeal day in March, when the government removed over 10,000 pieces and 50,000 pages of legislation and regulation—over $700 million of compliance costs.
In contrast, under the previous government we saw Labor introduce more than 21,000 additional regulations, putting roadblocks in the way of investment and job creation, despite Kevin Rudd's promise of a 'one regulation in, one regulation out' policy. Of course, we all remember Craig Emerson saying in 2008 that Labor would take a giant pair of scissors to the red tape that was strangling small business.
This is important work that is ongoing, and it is important to remember that it is not deregulation for its own sake. This is removing regulations to boost productivity, to build jobs and to build the economy. It is not just about removing regulations, though; it is also making regulations better. We on this side do agree that sometimes regulation is necessary, but when it is it needs to be targeted and it needs to be effective. Businesses have told the government that there is work to do in improving regulations and there are ways we can build regulations to build productivity. We know that productivity has been flatlining in this country. We know that in 2014 Australia ranked 124 out of 148 countries for burden of government regulation in the World Economic Forum global competitiveness index. Whilst we did go forward four spots last year, we are still well behind where we need to be.
The Productivity Commission has also estimated that regulation compliance costs could amount to as much as four per cent of Australia's GDP, so it is vital we do more to help free businesses of unnecessary burdens and costs so they can contribute to our economy and build growth. This reform package reduces the regulatory burden imposed on Australian businesses and it is estimated it will reduce business compliance costs by around $14 million per year. The bill also contains measures to make government processes more efficient, reflecting the government's commitment to seek opportunities to improve efficiencies in whatever way we can. The measures contained in the bill will better balance the rights of shareholders to raise issues with a company and the cost to companies of being required to call and hold a general meeting. It will improve and reduce remuneration reporting requirements, clarify the circumstances in which a financial year may be less than 12 months, exempt certain companies limited by guarantee from the need to appoint or retain an auditor, improve the operation of the takeovers panel and extend the Remuneration Tribunal's remuneration-setting responsibility to include certain statutory bodies.
I would like to talk about each of these measures in turn. Firstly, the abolition of the hundred-member rule: as part of this package the government is removing the requirement for directors of a company to hold a general meeting on the request of 100 shareholders. This seeks to strike a better balance between the interests of minority shareholders and shareholders as a whole. In large corporations, the hundred-member rule allows groups holding less than one per cent of voting shares to force a company to incur the significant costs of holding a general meeting. Often they do this and have the vast majority of shareholders reject their motion. For example, in 2012 the hundred-member rule was used by GetUp! to require Woolworths to spend nearly $2 million to hold a general meeting at the behest of just 210 shareholders, or 0.05 per cent of all shareholders. At the general meeting the resolution put forward by this group was rejected by over 97 per cent of shareholders. It is certainly important that all shareholders have their say, and it will still be the case that they can with this reform; however, it is also important that these situations do not impose disproportionate costs on business. One hundred shareholders will continue to be able to put a resolution on the agenda at a general meeting and circulate a statement to other shareholders; in addition, shareholders with at least five per cent of the votes that may be cast at a general meeting will continue to be able to require the directors hold a general meeting. This measure is supported by both industry stakeholders such as the Australian Institute of Company Directors, the Governance Institute of Australia and the Business Council of Australia as well as shareholder groups such as the Australian Shareholders' Association. It is estimated this measure will save business around $1.5 million per annum in compliance costs. I am aware that some senators, particularly Senator Xenophon, have raised questions and concerns about this provision. I assure Senator Xenophon and others who may be concerned that the government still believes shareholders should have their say, and they will have their say. That is why five per cent of shareholders can still trigger a general meeting, and a group of 100 shareholders will still be able to circulate statements and put resolutions on agendas for general meetings; they will still be heard.
The next important element of this package is that the government is improving the disclosure of executive remuneration information in Australia by ensuring the information provided is useful for shareholders and investors. This measure removes the requirement for unlisted disclosing entities to prepare a remuneration report. It is estimated that this measure will save unlisted disclosing entities around $8.5 million per annum in compliance costs. The remuneration report is simply not relevant for unlisted disclosing entities such as, for example, unlisted companies, unlisted debenture issuers such as Banksia Securities, and unlisted managed investment schemes. Unlike listed entities they are not required to have their remuneration report adopted by shareholders through a non-binding resolution and are not subject to the two-strikes test. Australia's two-strikes rule allows shareholders to vote to spill the board if the remuneration report receives a 'no' vote of 25 per cent or more, two years in a row. This measure also improves the usefulness of information on options granted to key management personnel. It has been informed by feedback from users of remuneration reports. Rather than reporting the value of lapsed options, this will be replaced with a requirement to disclose the number of lapsed options and the year in which the lapsed options were granted. The requirement to disclose information on the percentage of remuneration consisting of options will be removed, as this can already be calculated from other information in the remuneration report. The government is also clarifying when entities—companies, registered schemes and disclosing entities—can change their year-end dates.
Sitting suspended from 18:30 to 19:30
I believe I was just starting to speak about the aspects of the bill relating to changing financial year-end date. As I said, the government is clarifying when entities—companies, registered schemes and disclosing entities—can change their year-end dates. This measure will put beyond doubt the conditions under which directors can determine that a financial year is to be shorter than 12 months by more than seven days. The bill clarifies but does not change the legal operation of the existing law. These are technical amendments which will only affect a small number of businesses. They will predominantly affect entities that have had to amend financial years due to structural changes.
The government is also removing the requirement for certain companies limited by guarantee that are not required to undertake an audit to appoint or retain an auditor. Currently all public companies are required to appoint an auditor even if they are not required to conduct a full audit of their financial reports. This is a nonsensical and completely arbitrary piece of regulation that unnecessarily imposes a $4 million cost burden on business. We expect this change will largely benefit companies with a not-for-profit focus—for example, sports and recreations related organisations, community services organisations, education related institutions and religious organisations. This measure will ensure that these organisations can focus on providing services for the community rather than wasting money and time on needless red tape.
An additional measure is extending the Remuneration Tribunal's jurisdiction. This measure gives the Remuneration Tribunal the authority to set the remuneration of the chair and members of the Financial Reporting Council and the Auditing and Assurance Standards Board. The Remuneration Tribunal is an independent body that has specialist skills in reviewing and determining remuneration. This measure will bring the setting of remuneration of those office holders into line with the remuneration setting of public officers more broadly, and will improve the efficiency of government processes.
Finally, measures to improve the efficiency of the Takeovers Panel. This measure will allow Takeovers Panel members to perform panel functions while overseas. This removes an outdated procedure and reflects the reality that the vast majority of panel members are engaged in employment separate to their Takeovers Panel commitments, which can include a significant amount of overseas travel. This will likely have a positive impact on business through the more efficient resolution of applications being considered by the Takeovers Panel.
In conclusion, there are whole range of measures in this bill—some technical, some highly practical—but each of them goes some way to reducing the burden of regulation that keeps our economy from reaching its full potential. The government is committed to reducing these burdens and to building a strong economy. We want to build on the gains that we have seen: by removing thousands of pieces of regulation in the past; by getting rid of burdensome taxes, like the carbon tax and the mining tax; by freeing up hundreds of billions of dollars of growth through environmental approvals. This latest piece of legislation is simply another piece of the puzzle that will help to grow our economy and help to make it easier for businesses to thrive in this country. I commend this bill to the Senate.
My brief contribution relates to two aspects of this legislation that I have very serious concerns about—in fact, I oppose them—and I want to state that on the public record.
There is one amendment that relates to the issue of stock options. At the moment a listed entity needs to disclose stock options that key management personnel are given; whether they are offered and whether they have lapsed or not. That is something that the market knows about, something that the market hitherto has been aware of, but this bill seeks to remove that. I think that is a retrograde move. I think we need to know about those stock options, even if they are not taken up, in the context of a company's behaviour and the inducements given to senior personnel. If it is not taken up, there may well be a reason for that that could be informative of the marketplace.
The other amendment that I am particularly concerned about relates to the 100-member rule contained in the Corporations Act. This rule bestows certain powers on members of a company who are entitled to vote at a general meeting of that company. These powers include the ability to require directors of a company to hold an extraordinary general meeting, to put a resolution on the agenda of general meetings and to circulate material to other members of the company. This bill will remove the first of those powers—namely, the ability of 100 members to call for an extraordinary general meeting of the company. Instead, an extraordinary general meeting could only be called when members making up five per cent of the total shareholding of the company agree to call one.
In its submission, the Australia Institute emphasised that shareholder rights form an essential part of corporate governance. It stated:
The removal of the rule would result in a reduction in shareholder rights, which form an essential element of corporate governance. Regardless of the retention of the abovementioned 100 member provisions, removal of subsection 249D(1) limits corporate accountability to the owners of the company. In addition, it would be an obstacle to civil society, which increasingly plays an important role using shareholder activism in pursuit of socially responsible corporate behaviour.
In November 2012, over 200 Woolworths shareholders, with the help of GetUp!, called for an extraordinary general meeting of the company in order to vote on a resolution in relation to Woolworths' ownership of poker machines. Woolworths, through its hotel arm, the ALH Group, owns approximately 13,000 poker machines and makes over $1.2 billion in poker machine losses. If successful, the resolution would have prohibited Woolworths from being involved in the poker machine industry unless it agreed to the $1 maximum bet reform as recommended by the Productivity Commission—$120 in hourly losses. I know that Senator Di Natale from the Greens and my crossbench colleague Senator Madigan have been long time advocates of this.
While the resolution was ultimately defeated, it nonetheless enabled shareholders to force Woolworths and its shareholders to consider whether profiting from poker machine losses is socially responsible corporate behaviour. I was at that meeting. The questions asked were relevant, and at least there was some engagement with the board. On that occasion, the extraordinary general meeting occurred before the AGM because there was a court case in respect of that so that the company would not have to be up for the expense of two separate meetings and the costs involved. I understand that. I would have thought allowing at least 100 shareholders the right to call a company to account on specific items that they can set on the agenda as part of an extraordinary general meeting is a good thing in corporate governance. I think it is the wrong approach to take. The barrister Peter R Graham QC in his submission characterised this bill as destructive rather than deregulatory, and I agree with him.
I cannot support those elements of the bill, both the 100 shareholder rule and the disclosure of remuneration reporting requirements, because they are not removing red tape but are actually removing accountability on the part of public companies.
Firstly, I would like to thank those senators who have contributed to this debate. The bill makes a number of amendments designed to reduce the regulatory burden in Australia. The amendments are collectively estimated to cut business compliance costs by around $14 million per year.
Schedule 1 to this bill focuses on reducing the cost to businesses operating in Australia of regulatory requirements under the Corporations Act 2001. Firstly, schedule 1 to this bill removes the ability for 100 shareholders of a company to request a general meeting. This change ensures that company resources are no longer spent on meetings requested by only a very small minority of shareholders. We have, however, maintained rights that will still allow small shareholders to engage with companies. Groups of 100 shareholders of a company will still be able to place items on the agenda of a general meeting and circulate material to other shareholders. Shareholders of a company that hold five per cent of the voting rights in aggregate will also still be able to request a general meeting.
The bill also improves the disclosure of executive remuneration in Australia by replacing disclosures that companies currently have to make in relation to options with simpler disclosures that are more useful to shareholders. Unlisted disclosing entities will also no longer be required to prepare a remuneration report.
The bill also clarifies when entities can change their financial year end dates, allowing entities to confidently utilise the provisions in the Corporations Act to alter the length of their financial year. Stakeholders have been calling for this clarity for a number of years and are fully supportive of this amendment.
Finally, schedule 1 to this bill removes an anomaly under the Corporations Act that requires certain companies limited by guarantee that are not required to undertake an audit to nevertheless appoint an auditor. This change will benefit smaller companies with a not-for-profit focus in particular as the current relief from reporting and auditing requirements for such companies is designed in part to address their limited resources.
Schedule 2 to this bill focuses on improving the efficiency of government processes under the Australian Securities and Investments Commission Act 2001 reflecting the government's commitment to identifying cost savings and efficiencies within its own processes. Schedule 2 to this bill improves the efficiency of the operation of the Takeovers Panel. Schedule 2 to this bill also extends the remunerations-setting responsibility of the Remuneration Tribunal to the Financial Reporting Council, the Australian Accounting Standards Board and the Auditing and Assurance Standards Board.
In summary, this bill reduces the costs borne by Australian businesses of corporate regulations by around $14 million per year. It reflects this government's commitment to reduce the regulatory burden for Australian business and allowing businesses to focus on what it is they should be doing—that is, running their business. I commend this bill the Senate.