Introduction
The famous crime novelist and screenwriter, Raymond Chandler, once said that his greatest weapon was not a gun or a knife, but a $20 bill. It’s a very American quote! But it got me thinking about the diverse tools we have at our disposal, and how often we use them.
I think one of the best ‘tools’, so to speak, for any publicly traded company, is maintaining strong relationships with shareholders and potential investors. In a word, investor relations. But for those of you who perform that role, what’s your proverbial $20 bill? I think there are two: transparency, and engagement.
Engagement, of course, is at the heart of investor relations. Your goal is to build trust and transparency between the company and its shareholders. That will be familiar territory to you. Today I would like to spend some time talking about three specific areas in which greater transparency and engagement are needed and useful:
Continuous disclosure
Sustainable finance
Stakeholder responsibility and activism
Let me take each in turn.
Continuous disclosure
First, continuous disclosure. This is fundamental to maintaining market integrity, and keeping that market fully informed. Without it, there can be no transparency or equal access to information. ASIC will take action against poor practices in this area.
As an example, in February this year, the Federal Court handed down the largest ever penalty against a company for breaching continuous disclosure laws. GetSwift Limited was ordered to pay $15 million in penalties. This was for an “unlawful public-relations-driven approach to corporate disclosure,” where the judge noted that one of the directors “had a laser-like focus on making money for himself.”[1] Another was described as having “little understanding or regard for his legal obligations as a director, when they get in the way of pursuing a strategy to make money.”[2] These penalties show the extent and seriousness of misconduct in this matter and the importance of deterring others from engaging in similar behaviour. ASIC will continue to take action to hold companies and individuals to account for corporate misconduct of this kind.
Let me give you a second example of the importance of continuous disclosure. Just last month, ANZ was found to have breached the continuous disclosure laws when it undertook a $2.5 billion institutional share placement in 2015. The breach happened as a result of failing to disclose material allocations to underwriters. This was a landmark case. It clearly confirms that a significant take-up of shares by underwriters in a capital raising may be considered price sensitive information requiring market disclosure.
It’s also worth remembering that, in addition to ASIC action, anyone who suffers loss because of the breach can bring a civil action for damages. This isn’t just against the entity; it includes any officer of the entity who was involved in the breach.
We’ve also recently observed an increase in media reporting ahead of fundraising and merger and takeover activity. I’d like to remind all market participants to be vigilant to the risk of leaks or mishandling of information. Entities involved in fundraising and control transactions should proactively manage information about the transaction. This includes:
requiring consultants and contractors to enter confidentiality agreements;
having appropriate arrangements to handle inside information, including on a ‘need to know’ basis;
recording who’s been provided with the inside information – and when; and
ensuring that continuous disclosure obligations are being actively monitored and met in relation to fundraising and control transactions.
Entities should also have a formal leak policy outlining steps to monitor and react to any leaks of proposed transactions.
As I said in my opening remarks to the ASIC Annual Forum last week, ASIC’s role is to ensure a fair, strong, and efficient financial system for all Australians. And market integrity – and confidence in that integrity – is an essential part of that. This is why continuous disclosure should be continuously front-of-mind – to build and maintain confidence and integrity.
Sustainable Finance
It’s clear that transparency and trust are at the core of continuous disclosure. They’re also at the heart of questions of sustainable finance. In June this year, the International Sustainability Standards Board (ISSB) released its standards for general sustainability-related disclosures and climate-related financial disclosures. The International Organisation of Securities Commissions (IOSCO), of which ASIC is a member, subsequently endorsed these standards. IOSCO has now called on its member jurisdictions to consider how they might adopt, apply or otherwise be informed by these standards.
At the start of this month, the Australian Government published a consultation paper on its proposed sustainable finance strategy. This is intended to support Australia’s transition to net zero, to reduce barriers to investing in sustainable activities and to improve the extent that climate and sustainability-related risks and opportunities are understood and managed.
There are a number of key policy priorities under this proposed strategy. These include the proposals to develop an Australian sustainable finance taxonomy, and to develop an ESG labelling system for sustainability-related investment products. Also the proposal to establish a framework for sustainability-related financial disclosures, starting with the introduction of mandatory climate reporting in Australia for large businesses and financial institutions.
At about the same time, the Australian Accounting Standards Board (AASB) began consulting on its draft climate standards that are intended, once settled, to form the basis for mandatory climate reporting in Australia. These are largely modelled off the ISSB’s climate disclosure standards, with some proposed modifications for the Australian context.
There’s a lot happening in this space. And, again, transparency is the focus. ASIC encourages companies to begin engaging with the proposed climate disclosure requirements. Start considering what systems, processes and governance practices will need to be put into place to ensure your company is well placed to start reporting under a mandatory climate reporting regime in Australia.
Trust, too, has its place here. When companies don’t or can’t substantiate what they’re saying to investors and the market, this erodes trust. I’m talking, of course, about greenwashing. This has been an enforcement priority for ASIC for some time now – so it’s up to you to make sure you can and do substantiate any and all claims relating to sustainable finance.
Stakeholder responsibility and activism
Sometimes, when things go wrong, there’s no scope for pursuing action against the board or the directors from a regulatory perspective. ASIC’s regulatory role is to foster good corporate governance, and we’re proud of our work to hold companies and directors to account. But, while we can encourage good practices and address past breaches of the law, Australia’s corporate governance framework has many components, and ASIC’s regulatory role is only one of them. As such, our work simply can’t focus on future improvements to individual company performance.
This is when we need to rely on the broader community – that is, the shareholders and potential investors – to make company boards accountable. That’s the realm for another important aspect of corporate governance: shareholders. Here again, what gets us a lot further than anything else is transparency and engagement.
For listed companies, different types of shareholders will have different demands of information and engagement, within the context of what information must be disclosed to the market. The AGM is obviously the primary, formal means for shareholders to engage with their companies. While ASIC has a role to ensure the meeting rules are adhered to, and shareholders receive adequate information, it’s ultimately up to the shareholders to exercise their rights at company meetings.
In Australia, they do. And, if we want a market with integrity and populated with well-performing companies, they must. I’m not just talking about activist shareholders, or institutions, but retail shareholders as well. These shareholder efforts complement ASIC’s regulatory role to foster good corporate governance.
The two-strike rule on executive remuneration is one example of this. Obviously, ASIC has no formal role in relation to this vote, and the vote is non-binding and focused on remuneration. But, as everyone here will appreciate, it’s used more widely for shareholders to let the company know their views about the company’s performance. One might think of the 83% vote against the Qantas remuneration report as an example. This vote, and broader engagement by shareholders, can change companies.
Shareholders exercising their rights should sharpen the focus of every board. And, as investor relations professionals, this managing the relationship between shareholders and companies goes a long way towards improving a company’s governance and accountability. That means ensuring shareholders have the information they need, and sharing and acting on feedback they give.
Conclusion
To sum up, transparency and engagement are at the heart of business – and especially at the heart of investor relations. This means there should be a special focus on keeping those front of mind when it comes to continuous disclosure obligations, sustainable finance reporting, and shareholder responsibility and activism.
In Raymond Chandler’s day, a $20 bill got you a lot further than it can today. I guess that’s inflation for you. But one thing it can still get you is a set of children’s building blocks from Kmart. And any kid playing with those blocks can tell you that you have to build from the bottom up, not the top down. This is just as true of an economic pyramid as a physical one. A strong, fair, and efficient financial ecosystem can only be built upon the foundations of consumer and investor confidence. And transparency and engagement are how we lay those foundations.
