To Ms Catherine Officer, National Counsel - Investors and Companies, Australian Stock Exchange Limited
7 March 2001
Ms Catherine Officer, National Counsel - Investors and Companies, Australian Stock Exchange Limited
AUSTRALIAN INSTITUTE OF COMPANY DIRECTORSSubmission to Australian Stock Exchange on Proposed Listing Rule Amendments proposed to take effect on 1 July 2001
Dear Ms Officer:
The Australian Institute of Company Directors (AICD) encloses its submission in relation to the Proposed Listing Rule Amendments.
AICD would be pleased to further discuss the matters raised in our submission at your convenience.
Chief Executive Officer
The Australian Institute of Company Directors (AICD) is the peak organisation representing the interests of company directors in Australia. Current membership is over 15,000, drawn from large and small organisations, across all industries, and from private, public and the not-for-profit sectors. Membership is on an individual, as opposed to a corporate, basis. The AICD is a federation of seven State divisions, each of which is represented on a National Council. Overall governance of the AICD is in the hands of its National Council which is comprised of the seven division Presidents, plus a National President, two National Vice-Presidents and a National Treasurer. AICD has several national policy committees, focusing on issues such as corporations law, accounting and finance, environment, taxation and economics, and national education, along with task forces to handle matters such as corporate governance.
The key functions of AICD are:
- to promote excellence in directors' performance through education and professional development;
- to initiate research and formulate policies that facilitate improved director performance;
- to represent the views and interests of directors to government, regulatory bodies and the community;
- to provide timely, relevant and targeted information and support services to members and, where appropriate, government and the community;
- to maintain a members' code of professional and ethical conduct;
- to uphold the free enterprise system;
- to develop strategic alliances with relevant organisations domestically and internationally to further the objectives of the AICD.
The AICD's submissions are set out below.
1. Continuous disclosure - nomination of person responsible for communication with ASX
The Executive Summary states that "the ASX proposes two listing rules initiatives to support the concepts underlying the guidance principles." "They are" a requirement for an entity to appoint a person who is responsible for communications with ASX......it is anticipated that the person would have a high degree of familiarity with an entity's operations or ready access to senior management in that regard. The person would also have the appropriate seniority and authority to deal with ASX on a range of issues."
Whilst the AICD is in favour of the ASX seeking administrative convenience in having the names and contact details (including home and mobile contact numbers) for certain senior officers (including the Company Secretary) it does not agree with the concept of an individual being required to be nominated for "responsibility" for continuous disclosure and the authority to deal with the ASX on a range of issues. The AIDC also does not believe it is practical for a single person, eg. the Company Secretary to have authority to deal with the ASX on all issues.
The AICD's concerns with the above proposal are:
2. Continuous Disclosure – Annual Report
a.It is unreasonable for the ASX to impose a requirement which may have the potential to increase substantially the legal liability (civil and criminal) for a senior executive of a listed entity. This will be the case despite the fact that section 1001A imposes liability for breach of the continuous disclosure obligations on the listed entity, because s79 of the Corporations Law imposes liability on an individual as does s1309 of the Corporations Law.
The AICD believes the whole issue of entity and individual liability in relation to continuous disclosure needs to be addressed and the AICD believes that the ASX should take no steps which could exacerbate or increase the liability of officers of listed entities beyond those which already exist. We note that the Companies and Securities Advisory Committee in the Report on Continuous Disclosure, (November 1996) addressed the issue of civil and criminal liability for breach of continuous disclosure obligations and recommended that the Corporations Law be amended to clarify the position of entities and individuals (see pages 40 to 42 and Recommendations 11 and 12).
b.The concept of a single person having authority to deal with ASX on all issues will, in many cases, be impractical. There are many circumstances where a Company Secretary or other person entrusted with dealing with the ASX may have been excluded from sensitive discussions altogether and/or would not have authority to deal with the ASX, other than perhaps solely in a clerical sense. The responsibility and authority for dealing with some disclosure issues in some cases would, quite properly, reside with other persons eg the Chairman, the Managing Director or members of the Board.
The Executive Summary states that the ASX proposes a Listing Rule amendment requiring an Entity's Annual Report to contain a statement of the main practices and procedures in place for ensuring compliance with Listing Rules 3.1 and 15.7 during a reporting period. It is stated that "the requirement is modelled on the approach taken in relation to Corporate Governance issues".
In the opinion of the AICD, investors are interested in the information supplied by listed entities pursuant to the continuous disclosure rules, not the internal administrative arrangements (which may change from time to time) as to how such listed entities might seek to meet these requirements. The ASX will no doubt appreciate that it is difficult to be prescriptive about such internal processes and a short outline of a process is unlikely of itself to lead to a compliance culture. Also, the AICD is concerned that this requirement could evidence a trend for more and more of the internal corporate processes of public companies to be required to be set out in the Annual Report with the capacity to significantly "clutter" the Annual Report with information most investors do not desire or require.
3. Directors Disclosure of Securities Trading
The Executive Summary states that the ASX proposes "an obligation that an entity must provide information in relation to sales and purchase of securities by a director of an entity in a form prescribed by ASX".
This proposal raises the issue of whether it is appropriate for the ASX to impose much stricter requirements than have been specifically mandated by the Commonwealth Parliament on the same subject matter (see Section 205G) for listed companies.
The ASX notes that investors have a legitimate interest in knowing details of the holdings of directors and that in order for this information to be useful it must be kept up-to-date. Whilst the AICD has no disagreement on the ASX's intentions on this matter it has two major concerns about the proposed changes to the Listing Rules:
4. Policies in relation to trading in an entity's securities by directors and employees
a.The requirement of a director to lodge a notice under Section 205G of the Corporations Law and impliedly under the proposed new Listing Rule 3.19(A) and 3.19(B) is referable to a relevant interest. Accordingly, Section 205G (and the proposed new Listing Rule) has the potential to apply to, amongst other things, a family company or a family trust and a wider range of dealings than just dealings by the director him or her self. In relation to dealings in securities it may often not be known by a director whether there has been a change in the director's interests until, for example, a contract note is received from a broker – this may be many days after a trade has occurred and Section 205G presently requires the notification to the ASX to occur two days after the trade, not after the receipt of a contract note by a director.
Clearly Parliament took into account such practical circumstances in allowing a period of 14 days for directors to notify their dealings in securities.
If a director gave an order requiring a broker to sell at a particular price it is possible that the shares would be sold over a number of days and that a contract note would issue at the end, when the order had been fulfilled with delay of a number of days until the contract note was received by the director in the mail. Under the proposal of the ASX that director would find him or her self already in breach of the listing rule with the serious adverse perception of "non compliance" being drawn in the media, by the ASX and others, including shareholders.
The intention of Parliament is set out in Section 205G and we believe there is no reasonable basis for the ASX to, in effect, amend it, thereby effectively overriding the will of the Commonwealth Parliament.
b.The ASX has no contractual relationship with company directors and therefore this is not a matter which is appropriately dealt within the ASX Listing Rules.
Finally, we note that the form of disclosure has not been set out by the ASX and as this is a matter of significance to the AICD it is requested that if the ASX determines it will proceed with this proposal (despite the objections of the AICD) then the AICD should be given the opportunity of commenting on this form.
The ASX has suggested that the annual report contain policies in relation to share trading by directors and employees as an aspect of corporate governance, including any policy in relation to trading windows.
The AICD queries the benefit of such disclosure in the Annual Report because of the many misconceptions held by investors and others, including the business media, about so called "trading windows" and insider trading generally.
The so-called "trading windows" are a misnomer. The insider trading provisions of the Corporations Law do not make provision for "trading windows" and directors and their employees may be led into the mistaken belief that they can deal in securities during a "trading window", when to do so may constitute a breach of the insider trading provisions of the Corporations Law, if at that time the relevant officer was in possession of inside information. That is not an uncommon situation.
The insider trading provisions of the Corporations Law are extremely complex and in our view it is not helpful to seek to oversimplify their application through the publication of "policies" which may be little more than broad guidelines.
Further misconceptions can arise in relation to trading by officers of corporations outside of "trading windows". Shareholders and the media often have a simplistic impression that trading outside such periods must of necessity involve insider trading. Again the position at law may be different. There are many occasions when officers of corporations will need to trade outside of the "trading windows" and in all the circumstances will not be in breach of the insider trading provisions of the Corporations Law. On a policy basis the AICD believes that there is no reason why that should not be permitted, perhaps with the approval of an appropriate senior officer or, in the case of a managing director, with approval of the chairman or deputy chairman of a board.
In the experience of the AICD, whilst many listed entities have some broad and loose policies covering dealing in securities of the entity, they are normally heavily qualified to require a responsible officer to ensure compliance with the Corporations Law and the so-called "trading windows" are merely a guide as to when it may be safe to trade.
In the opinion of the AICD there is little or no benefit to investors and indeed it is likely to be misleading to include information on "trading windows" and other aspects of their policies on dealing in securities in the Annual Report. The focus of listed entities should be on education of their officers as to their legal obligations in relation to insider trading.
It would be of serious concern to the AICD if the imposition of the proposed rule were to lead to even further misconceptions about the law of insider trading with the danger to the reputations of individual directors and officers which could arise.
Alternatively, these policies will be expressed so broadly as to virtually restate the Corporations Law and to disclaim the implication that a "trading window" is indeed a safe period when directors and officer may trading. This is unlikely to be helpful to investors.
5. Procedural Requirements
In the Executive Summary, the ASX has stated that it can achieve greater flexibility by moving certain requirements for listed entities to provide information to ASX out of the body of the Listing Rules and into "procedural requirements". The AICD opposes this proposal on the grounds that:
6. Amendments to Guidance Note 8
a.there is no acceptable definition of what is "procedural" as against what is substantive. The disclosure of securities dealings by directors may be regarded by the ASX as procedural but as set out above it is a matter of significance to the members of the AICD;
b.the AICD wishes to continue to be consulted on changes to ASX Listing Rules and to be afforded opportunities to comment on them; and
c.whilst the AICD recognises that some requirements are not of significance to its members (eg applications for admission and quotation of securities) other examples cited by the ASX as examples of "procedural" matters eg Timetables and Appendix 4 corporate governance matters are matters of significance to AICD members and this highlights the difficulty for the AICD of establishing an acceptable definition of "procedural requirements".
We confirm our oral comments that the proposed new paragraph headed "Mosaic Information" in the opinion of the AICD is inappropriate. Many listed entities would not have the capacity to know all of the information which is public at any given time, despite their best efforts to do so. The duty on a public company is to disclose information in accordance with listing rule 3.1 and the Corporations Law. The proposed new paragraph could be redrafted to provide that in some circumstances listed entities may need to have regard to what information is in the public domain in determining the nature of disclosures which they are required to make, as a reminder to listed entities of this dimension. Otherwise, the statement is not consistent with the law.
ASX Commentary Regarding Variation From Forecast
The AICD believes that there are many difficulties that arise in practice in relation to proposed amendment regarding a variation from a forecast or the previous corresponding period in excess of 15%. The difficulty is that a couple of months of bad trading can be made up by later trading which is in excess of the management forecast, with the consequence that the overall result for a half year, for example, has not diminished. Directors often face difficulty questions when there is a departure from forecasts or the performance of the previous year and the ASX commentary in this respect it is believed too prescriptive and not helpful. Furthermore, we do not believe that this commentary is consistent with listing rule 3.1 and in particular the application of the carve outs for information generated for the internal management purposes of the entity or information which comprises some matters of supposition which is insufficiently definite to warrant disclosure.
The question for the directors will always be a difficult judgment as to when a period of adverse trading will be reflected in the final result for the year. In the view of the AICD it must be remembered that if disclosure is made too early there may be shareholders who are disadvantaged because they sell their shares on the basis of such information when if they waited several months their confidence in the stock could have been restored. The AICD believes that the question when a definite trend has emerged and when there are matters which require disclosure is a matter for significant experience and judgment to be applied by the board and that the ASX commentary is far too prescriptive. Furthermore, it raises the spectre of there being almost month by month reporting! Finally, we believe that new paragraph 58 of the Guidance Note is in the context of removal of other examples hardly worth retaining in the Guidance Note and, in the view of the AICD, does not appear to reflect a major problem of compliance. The example raised only leaves open the possibility of "off market" trading, which the AICD is not aware of being a major difficulty with continuous disclosure.