A Proposal for a More Responsive Approach to the Regulation of Corporate Governance
Author | Angus Corbett |
DOI | 10.22145/flr.23.2.5 |
Published date | 01 June 1995 |
Date | 01 June 1995 |
Subject Matter | Article |
APROPOSAL FOR AMORE RESPONSIVE APPROACH TO
THE REGULATION OF CORPORATE GOVERNANCE
Angus Corbett*
INTRODUCTION
One
of
the
primary
consequences of the difficulties experienced
by
companies
and
by
regulators
in
the
decade
of the 1980s
has
been
agreater focus
on
corporate
governance.1The precise
meaning
and
content of this expression is far from clear. It
see~s
to
be
a
term
used
to describe a
number
of related
phenomena
that
are
influencing
the
way
in
which
companies are
being
managed,
governed
and
regulated.2
The
mode
of governance of companies is
being
influenced
by
the
growth
in
institutional investment,3
an
increased focus
on
the role of the
board
of directors,4
1
2
3
Angus
Corbett, BA
LLB
(Macq), LLM (U
Wise-Madison)
Visiting Senior Lecturer
in
Law,
Faculty
of
Law,
University
of
Sydney
..
American
Law
Institute,
Principles
of
Corporate
Governance:
Analysis
and
Recommendations
(1992);
Committee
on
Financial Aspects
of
Corporate
Governance,
The
Financial
Aspects
of
Corporate
Governance
(Report
of
the
Cadbury
Committee) (1992);
Working
Group
on
Corporate
Practices
and
Conduct,
Corporate
Practices
and
Conduct (3rd
ed
1996) (cited as
Corporate
Practices
and
Conduct).
Eg, B D 0Binder, Strengthening
Corporate
Governance
(1994)
at
3:
"Corporate governance" is
defined
as
"[
t]he
system
by
which
companies
are directed
and
controlled". This is a
broad
definition
and
includes
the
processes for
management
of
the
company
as
well
as
matters
relating
to
the
role
of
the
board
of
directors. This
use
of
the
term
is
so
broad
that
it
extends
well
beyond
the
realm
of
regulation
through
the
Corporations
Law.
However,
the
term
often
seems
to
be
used
in
a
narrower
sense to refer to "monitoring
and
control
mechanisms
that
are
put
in
place
by
companies
with
the
objective of
enhancing
shareholder
value":
Australian
Stock Exchange, Discussion
Paper
Disclosure
of
Corporate
Governance
Practices
By
Listed
Companies
(1994)
at
I,
n 2 (cited as ASX Discussion
Paper,
Disclosure of
Corporate
Governance
Practices).
See also, eg, H
Ford
and
RAustin,
Ford
and
Austin's Principles of
Corporations
Law
(7th
ed
1995),
ch
7.
It is
in
this
sense
that
the
term
is
used
throughout
this
article.
See MBlair
and
IRamsay,
"Ownership
Concentration, Institutional
Investment
and
Corporate
Governance:
An
Empirical Investigation
of
100
Australian
Companies"
(1994) 19
MULR 153; JHill
and
IRamsay, "Institutional
Investment
in
Australia:
Theory
and
Evidence"
in
G
Walker
and
BFisse (eds), Securities Regulation
in
Australia
and
New
Zealand
(1994) 289
at
293-297; P
Redmond,
Companies
and
Securities
Law
Commentary
and
Materials
(1992)
at
89-90.
There
has
been
aWidespread
debate
about
the
role
of
institutional
investment.
For
an
assessment
of
the
role
of
institutional investors
in
improving
corporate
governance
practices, see, eg, BBlack, "Agents
Watching
Agents:
The
Promise
of
Institutional Investor Voice" (1992) 39 UCLA LRev 813; RGilson
and
R
Kraakman,
278
Federal
Law
Review
Volume
23
increased levels of disclosure of financial information,S as well as
by
the
chal1ging
and
developing
roles of regulatory
bodies
such
as the Australian Stock Exchange (ASX),6
4
S
6
"Reinventing
the
Outside
Director:
An
Agenda
for Institutional Investors" (1991) 43 Stan L
Rev 863; ERock, "The Logic
and
(Uncertain) Significance
of
Institutional
Shareholder
Activism" (1991)
79
Georgia
LRev 445. For acomparative-law analysis
of
the
role
of
institutional investors, see, eg, BBlack
and
JCoffee, "Hail Brittania?: Investor Behaviour
Under
Limited Regulation" (1994) 92 Mich LRev 1997; RBuxbaum, "New
Owners
and
Old
Managers: Lessons
From
the Socialist Camp" (1993) 18
Delaware
Jof
Corp
Law
867. For
an
historical analysis
of
the
limited role
of
activist
shareholders
in
the
United
States, see, eg,
MRoe, "A Political Theory of American
Corporate
Finance" (1991)
91
Colum
LRev
10;
ABoyer, ".A.ctivist Shareholders,
Corporate
Directors,
and
Institutional Investment: Some
Lessons from
the
Robber Barons" (1993) 50
Wash
and
Lee
LRev 977.
On
the
related issue
of
"relational investing", see IAyres
and
P
Crampton,
"Relational Investing
and
Agency
Theory" (1994) 15
Cardozo
LRev 1033. They define "relational investing" to
include
the
decision "to
buy
and
hold
significant blocks
of
acorporation's stock"
where
such
investors
"commit
not
to
tender
their
shares
to hostile bidders" (at 1034). See also ERock,
"Controlling
the
Dark
Side of Relational Investing" (1994)
15
Cardozo
LRev 987.
More
generally, see "Conference
on
Relational Investing, Institutional Investor Project
of
Center
for
Law
and
Economic Studies, Columbia University School
of
Law,
New
York, NY, 6-7
May,1993.
Above n1,
in
particular,
Corporate
Practices
and
Conduct. See also,
Daniels
&
Ors
(formerly
practising
as
Deloitte Haskins
and
Sells)
v AWA (1995) 16 ACSR 607
at
652-658
per
Clarke
and
Sheller
JJA.
The
judgment
of Rogers J
in
AWA
Ltd v
Daniels
(tlas
Deloitte Haskins
and
Sells
and
Ors)
(1991) 7ACSR 759
at
864-869
had
been
the
focus for discussion concerning
the
role
of
the
Board of Directors. See also FHillmer (Chair
of
Committee
of
the
Sydney
Institute), Strictly
Boardroom
Improving
Governance
to
Enhance
Company
Performance
(1993)
at
3(cited as Strictly
Boardroom).
This
report
focuses
on
"commercial
best
practice"
in
relation
to
the
functions
of
a
board
of directors. See also RTomasic
and
SBottomley, "Corporate
Governance
and
the
Impact of Legal Obligations
on
Decision
Making
in
Australia" (1991) 1
Aust Jof
Corp
Law
56
at
62-84.
The
Corporate
Law
Reform Act 1994 (Cth)
introduced
increased levels
of
disclosure for
"disclosing entities": Corporations Law, s
lIlAC.
Disclosing entities
are
required
to
produce
financial statements (Part 3.6) for each six-month
period
and
are
subject to a
"continuous disclosure" regime: Corporations Law ss 111AO, 111AP, 1001A
and
1001B.
The Attorney-General
in
the
Second Reading Speech for
the
Corporate
Law
Reform Act,
stated: "Timely disclosure
of
relevant information is essential for investors to
have
confidence
in
the
integrity of
the
marketplace
and
to
make
informed
investment
decisions.
This
must
be
the
central feature of
an
efficient
and
fair securities market." (H Reps Deb
1993, Vol 13
at
4084).
The role
of
the
ASX
has
been
affected
by
a
number
of provisions
in
the
Corporations
Law;
see eg, s1001A (special status of LR
3A
as aresult of
operation
of s1001A), s779 (qualified
privilege
allowed
to
ASX
in
some
circumstances)
and
s1114(8)
(ASX
seeking
orders
in
relation to contravention
of
listing rules
not
required
to given
undertaking
as to damages).
The role
of
the
ASX as a"co-regulator"
has
been
enhanced
by
the
adoption
of
LR 3C(3)(j)
which
requires
companies
to disclose "the
main
corporate governance practices
that
a
company
has
had
in
place
during
the
reporting
period". This listing rule
was
adopted
as a
result
of
the
decision
of
the
ASX
"to take a
leadership
role
in
helping
to
promote
corporate
governance
standards
for listed companies":
Australian
Stock Exchange, Discussion
Paper
Disclosure of
Corporate
Governance
Practices
By
Listed
Companies
(1994) above n 1
at
1.
The
Discussion
Paper
states
that
the
decision "to take aleadership role
in
helping
to
promote
corporate
governance
standards
for listed companies
has
been
prompted
mainly
by
the
fairly
poor
response
by
some
listed companies to guidelines
developed
by
the
Working
Group
on
Corporate
Practice
and
Conduct" (at 4). More generally, see RSchoer, "Self-
1995
A
Proposal
for
a
more
Responsive
Approach
to
the
Regulation of
Corporate
Governance
279
the
Australian
Securities Commission(ASC),7
and
the
Australian
Competition
and
Consumer
Commission (ACCC).8
Amidst
these concerns
about
corporate governance there is a
deepening
level of
anxiety
about
some of the often
used
and
well accepted
approaches
to regulation.
In
particular, a
number
of writers
have
focused
on
the tendency for regulatory authorities
and
governments
to
move
between
policies of de-regulation
and
what
is often referred
to as
"command
and
control regulation".9 Policies of de-regulation are often concerned
with
reliance
upon
market
mechanisms in
order
to
ensure
efficient
production
and
delivery of
goods
and
services.
When
the
market
mechanism
is
deemed
to
have
failed,
the
policies of
market
regulation are replaced
by
policies
which
seek to interfere with,
control
or
impede
the operation of the relevant markets. The mechanisms for
such
interference are
most
often the imposition of rules
upon
specific participants al1d
the
enforcement of those rules
by
reliance
on
the application of sanctions
or
penalties.10
7
8
9
10
Regulation
and
the
Australian Stock Exchange"
in
PGrabosky
and
JBraithwaite (eds),
Business Regulation
and
Australia's Future (1992) 107.
There
has
been
an
extensive debate
whether
the
ASC
should
adopt
a
an
enforcement
policy
based
upon
civil litigation
or
criminal prosecutions; see, eg, AHartnell, "Regulatory
Enforcement
by
the
Australian Securities Commission:
An
Inter-Relationship
of
Strategies"
in
P
Grabosky
and
JBraithwaite, above n
6,
25.
In
1992
the
Commonwealth
Attorney-
General
sought
to resolve this debate as to
the
appropriate
enforcement policy for
the
ASC
by
issuing
Guidelines to
the
ASC
and
the
Director of Public Prosecutions
which
stated
that:
"[C]ivil proceedings,
should
not, as ageneral rule,
be
regarded
as
an
alternative to criminal
proceedings,
but
each
should
be
seen as
complementing
the
other": Memo
issued
by
the
Attorney-General,
Mr
Michael Duffy, to
the
ASC
and
the
Director
of
Public Prosecutions,
"Serious
Corporate
Wrongdoing: Direction Relating to Investigation
and
Enforcement"
(30
September 1992),
reproduced
in
CCH
Australian Securities Commission Releases
<jI95-109
at
160,133. More generally, see CDeBit
and
BFisse, "Civil
and
Criminal Liability
under
Australian
Securities Regulation: The Possibility of Strategic Enforcement"
in
G
Walker
and
BFisse, above n3, 570. For a
broad
discussion of
the
role of
the
ASC, see IRamsay,
"Corporate Law
in
the
Age
of
Statutes" (1992) 14 Syd LRev 474
at
483-495. The
author
analyses
the
"respective merits
of
courts
and
the
ASC
in
interpreting
and
implementing
legislation" (at 486).
There
has
been
a
broad-ranging
debate
about
whether
there
is a
need
for
the
Trade
Practices
Commission
to
be
given access to a
broader
range
of remedies to
seek
compliance
with
the
Trade
Practices Act 1974 (Cth). See Australian
Law
Reform Commission,
Compliance
with
the
Trade
Practices
Act 1974 (Report
No
68, 1994). While
noting
that
the
Trade
Practices Commission
had
generally
been
seen as effective, the
Australian
Law
Reform
Commission
identified
the
need
for
new
mechanisms to
deal
with
non-compliance
with
the
Act (at 1-3). For
an
analysis of
the
changed
role
of
the
Trade
Practices
Commission
in
the
context of
amendments
to s50 of
the
Trade
Practices Act, see LPasternak,
"New
Merger
Guidelines
and
Section 50 of
the
Trade
Practices
Act" (1994) 17 UNSWLJ
73
at
95-
103. See also JTamblyn, "Progress
Towards
a
More
Responsive
Trade
Practices Strategy"
in
P
Grabosky
and
JBraithwaite, above n
6,
152; BFisse
and
JBraithwaite,
Corporations,
Crime
and
Accountability (1993)
at
230-237. The Competition Policy Reform Act 1995 (Cth)
created
the
Australian
Competition
and
Consumer
Commission
which
replaced
the
Trade
Practices
Commission
on
6
November
1995.
I
Ayres
and
JBraithwaite, Responsive Regulation Transcending
the
Deregulation
Debate
(1992)
at
7-18; CShearing, " A Constitutive Conception of Regulation"
in
P
Grabosky
and
JBraithwaite, above n
6,
67 at 68-72.
GTeubner, "Corporate Fiduciary Duties
and
Their Beneficiaries: AFunctional
Approach
to
the
Legal Institutionalisation
of
Corporate
Responsibility"
in
K
Hopt
and
G
Teubner
(eds),
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