According to a 2006 Technical Note published by the International Monetary Fund (IMF) as part of the Financial Sector Assessment Program, the corporate governance framework in Australia is "largely healthy and dynamic" and built on a solid legal and regulatory foundation. The report finds that shareholder activism is high and periodic disclosure requirements are in line with international best practices and exceeds the requirements in many other countries. Overall, implementation and enforcement of disclosure and corporate governance requirements was found to be strong, specifically among the top tier listed companies but there seems to be a significant gap in corporate governance disclosure compliance between larger listed companies and smaller companies. The IMF notes that following the implementation of the reforms introduced under the Corporate Law Economic Reform Program Act (CLERP 9) of 2004, the Australian government strengthened auditor independence, and improved financial reporting and disclosure. In addition, in 2003, the Australian Stock Exchange (ASX) Corporate Governance Council released its Principles of Good Corporate Governance Practice and Best Practice, which were updated in August of 2007 in a Second Edition of Corporate Governance Guidelines. The ASX Principles are not prescriptive and listed entities follow a comply-or-explain approach towards compliance. The oversight authority for corporate governance is the Australian Securities and Investments Commission which has wide-ranging enforcement powers.

General Overview

Australian efforts to enhance its corporate governance practices started with the establishment of the Australian Stock Exchange (ASX) Corporate Governance Council (hereafter referred to as the Council) in August 2002. The Council undertook an extensive work program which included producing corporate governance guidelines, dissemination of corporate governance practices among listed entities, reviewing the legislative framework for corporate governance and also reviewing disclosure of corporate governance practices by listed companies. In March 2003, following the review of corporate governance related issues, the Council developed a principles-based framework for corporate governance and released the Principles of Good Corporate Governance Practice and Best Practices Recommendations for listed companies. These Principles and Recommendations are not prescriptive and as explained in a 2006 ASX Council Explanatory Paper follow a comply-or-explain approach towards compliance. A 2006 Technical Note published by the International Monetary Fund (IMF) as part of the Financial Sector Assessment Program (FSAP) explains that ASX's flexible approach towards compliance and more generally the Australian authorities more principles-based approach to legislation and regulation is well suited for the Australian market which comprises a wide range of listed companies for which uniform corporate governance requirements would be difficult to adapt. In 2006, the Council undertook the review of the ASX Principles 2003 (first edition) to incorporate the various legislative changes and released the Second Edition Corporate Governance Guidelines in August 2007, effective January 1, 2008.

The Corporate Law Economic Reform Program Act (CLERP 9) of 2004 introduced significant changes to the regulation of corporate governance in Australia. More specifically, these changes impacted auditor qualifications and independence, financial reporting, director and executive remuneration and disclosure. The 2006 Technical Note by the IMF on Investor Protection, and Disclosure in Australia confirmed that following the implementation of the reforms introduced under CLERP 9, the Australian government strengthened auditor independence, improved financial reporting and disclosure. Overall, the IMF's note, while not directly addressing compliance with the Corporate Governance Principles developed by the Organization of Economic Cooperation and Development, notes that the corporate governance framework in Australia is "largely healthy and dynamic" (p. 4), The report goes on to note that "this dynamic corporate governance environment is built on a solid legal and regulatory foundation. The legislative and regulatory framework in Australia includes disclosure requirements that meet or exceed the requirements that exist in many other countries" (p. 4). In addition the report asserts that shareholder activism in Australia is high and periodic disclosure requirements are in line with international best practices. Further, implementation and enforcements of disclosure and corporate governance requirements was found to be strong, specifically among the top tier listed companies.

The oversight authority for corporate governance rests with the Australian Securities and Investments Commission (ASIC) which has wide-ranging enforcement powers. Furthermore, is responsible for the enforcement of relevant provisions of the Corporations Law, ASIC sets standards, issues best practice guides, and together with the ASX plays a role in disseminating information to the market. In general, the IMF finds that the monitoring by the ASX and enforcement by the ASIC is effective. The ASIC's supervision seeks to ensure that the financial services provider is well financed to meet its statutory obligations; has a financial buffer to absorb risks of loss or business failure; and is structured to incentivize compliance through fear of loss. The Australian Securities and Investments Commission Act spells out one of the functions of the ASIC as "monitoring and promoting market integrity and consumer protection in relation to the Australian financial system." The detailed IMF FSAP report of 2006 further adds that although the ASIC is a relatively new Commonwealth agency, it is generally at the forefront of international best practices in supervision and regulation, and is continuously reforming itself to improve its capacity as well as supervisory policies and practices.

With regard to the role of the ASX, a 1999 paper by the Australian Treasury explains that the ASX imposes a wide range of disclosure requirements on listed companies. Disciplinary action may be taken by the ASX against companies in breach of its Listing Rules, including suspension of an entity's securities from quotation or, ultimately, de-listing. The ASX also requires each listed company to disclose the main corporate governance practices it has had in place during the year. Therefore, the ASX does not require that particular practices be adopted or that companies report against prescribed checklists but tries to maintain disclosure of the corporate governance practices a particular company has in place.

As noted in the World Bank's 2008 Doing Business report, investor protection in Australia was slightly lower than the average achieved by member states of the OECD. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Australia scores 8 in the disclosure index against an OECD average of 6.4. It scores 2 in the Director Liability Index against an OECD average of 5.1 and 7 in the Shareholder Suits Index against an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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In 2006, the Council undertook the review of the ASX Principles 2003 (first edition) to incorporate the various legislative changes, particularly with regard to the introduction of the CLERP Act and released the Second Edition Corporate Governance Guidelines in August 2007, effective January 1, 2008. The ASIC which has wide-ranging enforcement powers is the securities market regulator. In general, the IMF finds that the monitoring by the ASX and enforcement by the ASIC is effective. The ASIC's supervision seeks to ensure that the financial services provider is well financed to meet its statutory obligations; has a financial buffer to absorb risks of loss or business failure; and is structured to incentivize compliance through fear of loss. The Australian Securities and Investments Commission Act spells out one of the functions of the ASIC as "monitoring and promoting market integrity and consumer protection in relation to the Australian financial system." The 2006 IMF FSAP assessment further adds that though the ASIC is a relatively new Commonwealth agency, it is generally at the forefront of international best practices in supervision and regulation, and is continuously reforming itself to improve its capacity as well as supervisory policies and practices. In addition, the 1999 Treasury paper adds that the ASX can impose a wide range of disclosure requirements on listed companies. Disciplinary action may be taken by the ASX against companies in breach of its Listing Rules. However, the available information does not directly address Australia's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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According to the 2006 FSAP assessment, 5 percent of the shareholders can call for an extraordinary general meeting. The Corporations Act enables all shareholders and the general public to appeal in a court of law against a company's conduct, its acts of omission and commission, or such actions or resolutions that may be discriminatory, prejudicial or oppressive against members. Furthermore, the 1999 Treasury paper explains that under the Corporations Act of 2001, the voting rights must be set out in the constitution of the company and, if the share forms part of an initial public offering, the rights must be set out in a prospectus. A substantial shareholder of a listed public company must disclose its interest to the company within two business days after acquiring the interest and serve a copy of the notice on the ASX. In addition to the substantial shareholding notification requirements, the Corporations Act 2001 enables ASIC or the company to trace the beneficial ownership of that company's shares. Shareholders have a right to inspect minutes of general meetings and to obtain copies. The Corporations Act provides various mechanisms for shareholders, and the public, to obtain information about a company's affairs. In addition, under the CLERP 9 reforms shareholders can name a corporate entity as their proxy for shareholder meetings. The appointment of a director must be confirmed by the members at the annual general meeting. The stipulations on registration and transfer of shares and other rights also seem clear. Bankruptcy proceedings also treat all members equally under the Corporations Act. Takeovers under the Corporations Act are underpinned by the Eggleston Principles that ensure that acquisition of control is competitive, informed and efficient. A takeover bid must be disclosed to the ASIC, the shareholders and the market, if applicable. Shareholders have defined rights in a takeover, as also safeguards when a company enters into a scheme of arrangement since it could lead to a change in control. Overall, corporate control is subject to the oversight and intervention by the ASIC and the Takeovers Panel that is funded by the government. However, the available information does not directly address Australia's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

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According to the 2006 FSAP assessment, minority shareholder interests are adequately protected, and their rights are respected. The stipulations on registration and transfer of shares and other rights also seem clear. In addition, under the CLERP 9 reforms shareholders can name a corporate entity as their proxy for shareholder meetings. Bankruptcy proceedings also treat all members equally under the Corporations Act. Takeovers under the Corporations Act are underpinned by the Eggleston Principles that ensure that acquisition of control is competitive, informed and efficient. A takeover bid must be disclosed to the ASIC, the shareholders and the market, if applicable. Shareholders have defined rights in a takeover, as also safeguards when a company enters into a scheme of arrangement since it could lead to a change in control. Overall, corporate control is subject to the oversight and intervention by the ASIC and the Takeovers Panel that is funded by the government. However, the available information does not directly address Australia's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

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The Ernst and Young report "Effective Governance Model - An Operating Framework" notes that per the Corporations Act all companies are subject to whistleblower protection. The report, however, observes that "the existence of a company policy and procedure regarding the reporting of breaches of the law, (any laws, not just breaches of the Corporations Act) would be a desirable component of an effective governance framework" (p. 8). However, the available information does not directly address Australia's compliance with this principle..

Principle V: Disclosure and Transparency

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The 2006 IMF Technical Note states that the ASX works closely with ASIC to enforce the disclosure obligations of listed companies. However, the IMF observed that the ASX's powers to act against listed companies that do not meet their obligations are limited either to suspending their shares from trading or delisting them altogether. The Technical Note explains that "these are drastic sanctions that may well result in penalizing the very shareholders the disclosure rules are intended to protect" (p. 27). Therefore, the ASX in the event of a potential breach of the Corporations Act or the Listing Rules, refers the matter to the ASIC. Further, the CLERP 9 reforms expanded the penalties for breach of disclosure requirements. Although the ASIC does not have systematic procedures for comprehensively reviewing listed company disclosure, "going forward, ASIC intends to move towards incorporating a more systematic risk-based approach into its financial statement reviews, which should increase the effectiveness of its oversight" (pp. 27-28), the IMF notes. With regard to compliance with disclosure requirements, the IMF Note points out that there seems to be a significant gap in corporate governance disclosure compliance between larger listed companies and smaller companies. Furthermore, the IMF notes that although the ASX monitors information disclosure by listed companies via its surveillance department, it does not conduct a comprehensive review of listed companies' periodic reports. The IMF finds that the ASX's comply-or-explain policy towards disclosure is strong. Australia has also adopted accounting standards based on the International Financial Reporting Standards (IFRSs) issued by the International Accounting and Standards Board. However, the available information does not directly address Australia's compliance with this principle.

Principle VI: The Responsibilities of the Board

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According to the international law firm Weil, Gotshal & Manges, principle 3 of ASX Principles promotes ethical and responsible decision-making by the board. Furthermore, it clarifies the standards required of company directors and key executives and requires that the company makes public positions concerning the issue of board and employee trading in company securities and associated products. It also requires the disclosure of policy concerning trading in company securities by directors, officers and employees. In addition, the 2004 Annual Report of the ASX notes that Principle 2 deals with the structuring of the board and states that the chairperson should be independent and the roles of the CEO and chairperson should be separate. However, the available information does not directly address Australia's compliance with this principle.