ASIC to go harder, looking at misbehaviour and pay

John Price, Commissioner of the Australian Securities and Investments Commission (ASIC), gave a Keynote speech at the G100 Melbourne Dinner on February 26. He touched on the Financial Services Royal Commission final report, issues for listed companies arising from the recent annual general meeting (AGM) season, ASICs expectations around financial reporting and some of the regulatory issues developing overseas and their potential impact in Australia.

Mr Price started off with the, by now, all too familiar themes of the Royal Commission:

  • Culture, the way we do things
  • Governance, the systems and processes that people should follow, and
  • Remuneration practices, what people get paid to do

Issues related to these three themes all strongly influence people’s behaviour. Mr Price notes that “one of the most important roles of a regulator is to change behaviour”.

We would have thought that the job of the regulator was to ensure complying behaviour, rather than changing behaviour. Unless of course, Mr Price believes that all current behaviour is not complying and needs changing. We trust that this is not the case.

ASIC plans to address these behaviour rooted problems through close and continuous monitoring, asking themselves the question “why not litigate?” for all the misconduct and employing a strong focus on corporate governance.

Close and continuous monitoring will involve having ASIC staff placed onsite in major financial institutions to closely monitor their governance and compliance with laws. This is in an effort to modify the behaviour of large institutions and to further encourage them to place consumers at the forefront of their decisions.

By way of litigation, ASIC has set up a functionally separate Office of Enforcement that will focus on deterrence, public denunciation and punishment. Greater penalties and a greater likelihood of detection “should be very powerful reasons not to engage in wrongdoing in the first place”.

For ASIC’s strong corporate governance focus, they have already sought and received funding to pursue “targeted reviews” of the existing corporate governance practices of large listed entities. This is in an effort to expose “good and bad practices observed across these entities.”

As part of this change in behaviour approach, Mr Price made mention of three more issues.

The role of the board and officers in the oversight (and for officers, the management) of risk needs to be reviewed to determine how directors are exercising their stewardship functions, particularly in relation to non-financial risk.

Executive remuneration practices (which are a clear driver of conduct) need to be checked to ensure they are driving the right behaviours and accountabilities of executives in companies.

In this regard, we note that ASIC has a task force in place examining instances of poor conduct, board effectiveness and remuneration. Over 20 companies are understood to be undergoing review.

Finally, ASIC will consider the adequacy of periodic corporate governance disclosures to ensure investors are receiving meaningful disclosures. Currently, disclosures focus on the policies and procedures in place, rather than how they are actually reflected in practice.

Overall, the main takeaway from the Royal Commission and ASICs role moving forward is that the problems were rooted in behaviour and as such, ASIC will be focusing on closer monitoring with more litigation, while ensuring corporate governance procedures are actually enacted throughout the entity.

Mr Price moved on to talk about ASICs findings from the AGM 2018 Season (ASIC published Report 609: Annual General Meeting Season 2018 see HERE .

It is a pity that ASIC did not re-visit their assessment of proxy adviser engagement practices, as several Guerdon Associates’ clients have reported to us that they have found trying to engage more difficult.

Compared to prior years across the ASX 200, there was a decrease in support for remuneration reports. However, votes on remuneration reports were used to demonstrate discontent with boards more broadly, rather than executive remuneration.

Finally, shareholder attention continued to be attracted to environmental, social and governance (ESG) issues with sustainability and climate change risk being the most prominent .

© Guerdon Associates 2023
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