The Australian Prudential Regulation Authority’s (APRA) standards covering risk management and governance issues should be aligned with the Australian Stock Exchange’s voluntary governance principles, according to a Government-established task force.
APRA’s perceived prescriptive approach to the regulation of governance matters has triggered heated debate. Some see it as an invasion of the Australian Securities and Investments Commission’s (ASIC’s) territory, while others believe it adds a further layer of compliance. APRA for its part said a year ago that companies cannot be trusted with self-regulating on governance nor can the sharemarket. It launched a series of governance reforms throughout last year, which are continuing.
However, according to the Regulation Taskforce, “The APRA corporate governance guidelines should be consistent with the principles of the Australian Stock Exchange Corporate Governance Council regime and incorporate a similar level of flexibility. There should also be scope to update the requirements to reflect contemporary corporate governance practices.”
However, anecdotal evidence suggests that the ASX principles – which operate on an ‘if not why not’ basis where companies must explain why they have not complied with the guidelines and allow shareholders to pass judgment – have not significantly altered governance reporting practices. Most listed Australian companies have not used the advent of the Australian Stock Exchange’s corporate governance guidelines to increase disclosure on risk management issues, a KPMG report found last year.
The accounting firm studied the annual reports of the top 130 ASX-listed companies and found many firms chose to provide only “limited, generic”information regarding their compliance with the requirements of principle 7 (recognise and manage risk), particularly recommendation 7.2, the CEO and CFO sign-off to the board on financial statements and risk management.
However, KPMG found only 44 per cent of the top 130 listed firms disclosed that the board received the CEO/CFO sign-off and just 45 per cent disclosing firms provided any details of the sign-off, despite details being key to the reader of the reports making a judgment on the companies’ risk and internal control systems.
While non-disclosure does not equate to non-compliance, or mean that non-disclosing firms do not have confidence in their risk and internal controls systems, it could cause problems, KPMG reported.
However, within the Regulation Taskforce there is widespread concern over duplication and inconsistency among the three regimes – APRA, ASIC and the ASX. “The Taskforce’s view is that if APRA considers it necessary to impose regulation in this area, it should have regard to the principles underpinning the Australian Stock Exchange Corporate Governance Council regime and incorporate a similar level of flexibility,” read the Taskforce’s recommendation. “The Taskforce considers that the requirements should be implemented flexibly to ensure arrangements can be tailored to individual entities. There should also be scope to update the requirements to reflect contemporary corporate governance practices.”
Treasury’s response to the recommendation was to “refer this recommendation to APRA.”
Elsewhere in the report, which covered all regulatory spheres, there were a huge number of recommendations. In terms of financial and corporate regulation, the Taskforce said APRA and ASIC are seen as overly risk averse and that risk averse culture at the regulators contributes to enforcement action that may be disproportionate to the risks involved. It also accepted industry demands, led by AXA Asia Pacific, that regulators should be subjected to performance indicators.
The Taskforce also accepted industry complaints that regulatory staff do not have enough industry experience. AMP chief Andrew Mohl had said “a lack of industry experience, coupled with more often than not a strong legal workforce, results in the regulators often being intent on governing the industry on a very strict legal interpretation of the regulations (form over substance), which can be at odds with the purpose and intent of the regulations.”
However, observers said that the taskforce was skirting around the issues. “The general response seems to be a yawn at the moment,” said James McConvill, a corporate law expert at LaTrobe University. “In relation to corporate law and governance, they are really just tinkering around the edges rather than dealing with the big issues- should we inject greater contractual freedom in corporate law and if so how, are corporate governance mandates really necessary, should ASIC be subject to greater competition, and is the present division between shareholder participation and managerial power right?”