Reaching a consensus on the need to reform the Corporations Act
19 September 2017 | Simon Wilkins, LexisNexis
As with many pieces of legislation, the Corporations Act is built upon a 19th Century regulatory model and was conceived in a pre-digital economy to cater to now-obsolete corporate structures. Over its lifespan, the legislation has been sporadically amended to keep up with change and to update its framework to fulfil the requirements of modern corporations.
Given the origins of the legislation and the ad hoc nature of amendments since its enactment, LexisNexis and the Governance Institute of Australia carried out research to gauge the views of the Institute's members as to whether they believe a review and holistic reform of the current Corporations Act is necessary.
Those surveyed were predominantly from publically listed, proprietary, or not-for-profit organisations. Approximately 46 per cent of the respondents filled the role of Company Secretariat while remaining respondents consisted of Board Members, General Managers, Governance Advisory or Risk Management professionals.
This research follows submissions by the Governance Institute of Australia to Treasury on the need to reform the Corporations Act with the aim of creating technology-neutral legislation, consistency of liabilities and defences under the law, and ultimately ensuring that Australia has corporate structures that are fit for purpose in the 21st Century.
Members of the Governance Institute who responded were divided in their views on the need for reformation, where two-thirds believed that there should be a wholesale review of the Act.
In response to the question 'how would you rate Australia's current regulatory framework with those in other jurisdictions including those in the US and UK?' members were similarly divided, with 44 per cent believing the current Act to be 'not so good' in relation to those of the US and UK.
An example is that some members believe that the Act discourages directors from being forthright and open about their view of the future because of the liability and continuous disclosure requirements within the Act. They believed that we would be much better served with a more open and liberal regime similar to that in the UK.
The view was also offered that the Act struggles to facilitate agile corporations or to allow new corporate structures to emerge, and opinions were evenly split with half of the respondents believed that the current Act stifles innovation and entrepreneurship in Australia.
With the findings of this research as a foundation for discussion, LexisNexis and the Governance Institute of Australia hosted a roundtable of senior governance and risk professionals in May 2017.
The nature of amendments made to the Act were indicated in a nature that would make the Act more available for the layperson without the assistance of legal counsel. As many actors affected by the Corporations Act include sole traders, directors and company secretaries, legislation of this nature must be made accessible and intuitive in order to encourage greater compliance.
An example in which the Act needs to be simplified relates to employee share schemes. While such reward programs are currently limited by insider trading laws under the Corporations Act, they are an effective means of encouraging innovation and entrepreneurship in Australia. Removing barriers to such initiatives could help foster economic growth.
There was concern among members that advocating for a wholesale review of the Act could impact public perception of big business. There's a need to ensure that the goals of any review are to encourage companies to act responsibly and increase transparency, in order to counter the emerging view that companies are continually losing the trust of stakeholders.
The role of technology
The panel was in general agreement that the Corporations Act is restrictive of the processes surrounding annual reporting, the annual general meeting (AGM) and financial reporting and that it is lacking in terms of what is expected by shareholders.
The AGM in particular was cited by roundtable participants as an area in need of reform. Shareholder participation is a key component of a successful AGM, yet attendance continues to decline at an alarming rate. Research conducted by Computershare found that attendance in 2015 decreased 25 per cent over ten years, even though the cost of AGMs continues to skyrocket.
The government's technology-neutral proposals limit communications between organisations and shareholders to those considered to be universal or near-universal channels, which limits the delivery of communications to mail delivery and text messaging. Email and the internet are currently excluded as less than 90 per cent of Australians have access to the internet at home. This exclusion restricts communication and does not reflect the way Australians currently engage with digital technologies.
While text messaging is listed as a key channel for communication, shareholders are not actually required to provide their mobile phone numbers to the companies in which they invest. It is hard to imagine, but companies generally hold mobile phone numbers of less than one per cent of their shareholder base making communication via text messaging impractical.
Moving the notice of meeting and meeting materials into the digital world is hopefully a first step to a technology-neutral corporations law and a simplified regulatory framework that accommodates evolving technologies for shareholder engagement.
Beyond AGMs, it is clear that technology experienced in the 21st century has altered the corporate landscape significantly and these changes have not been fully reflected in the law. Cloud technology, the internet and email have formed the new norm of how companies operate, and cyber security and privacy breaches have emerged as new threats which need to be mitigated.
Also, while the current Act presumes that documentation only comes in hard copy, the processing and handling of information has changed. Signatures and documents are increasingly being accepted in electronic form due to the increased preference and reliability of digital over hard copy.
The future of the Corporations Act
It was agreed that the piecemeal nature of amendments to the Act over many years, such as changes made following the Global Financial Crisis, and the range of regulatory guidance and class orders put in place by ASIC, have rendered the Act no longer fit for purpose.
The panel believed that the Act should be replaced with legislation that is simpler, easier to understand and more relevant in terms of its consideration of technology, communication and shareholder engagement. The survey mirrored this viewpoint, with 85 per cent of respondents believing that the Act needs to be updated to address aspects of doing business in the 21st century that are not adequately addressed.
However, the roundtable discussion determined that, even though a review is unlikely to be a priority for the current government at this time, efforts should be made to convince policy makers, regulators and the business community that modernisation of the Corporations Act needs to become a political priority in the near future.
Due to a lack of political will to carry out wholesale reform, it was considered that it may be better to take a modernisation approach. This would entail picking out one or two of the bigger themes as the spearhead for the process, such as technological neutrality or simplification, in much the same way the Corporations Law Economic Reform Program recommendations were implemented, and could exist under the title of the Corporations Law and Governance Taskforce. In this way, specific issues would be addressed by people with the necessary business and legal skills, expertise and experience to make considered, commercially oriented recommendations to government.
Thank you to the participants of the research and roundtable for your contributions to this discussion, and thank you to Governance Institute Chief Executive Steven Burrell for facilitating this process.
Download the full findings of Governance professionals call for a review of the Corporations Act.