The largest body of institutional investors in Australia representing $1.5 trillion of super savings has slammed the government’s intention to water down the continuous disclosure regime saying it will dent market integrity.
Treasurer Josh Frydenberg announced changes on Wednesday that will reduce the powers of the corporate regulator to take action against directors for failing to disclose important information about a company and to stop the growing number of class actions faced by companies.
The Australian Council of Superannuation Investors, which represents local and offshore investment houses, said there was no consultation with major investors on the repealing of continuous disclosure laws they believe are essential.
“Continuous disclosure provisions are fundamental to market integrity and should not be diminished,” ACSI chief executive Louise Davidson.
“Investor confidence in the Australian market relies on disclosures being accurate. These changes could undermine that confidence by providing protection for companies making poor disclosures.
“Reducing accountability for poor disclosures is not the answer to addressing issues with class actions. These policy issues should be considered and addressed separately from the continuous disclosure and director liability regime.”
The new changes will mean that listed company directors will only be liable for civil penalty proceedings in respect of continuous disclosure obligations where they can prove the directors have acted with “knowledge, recklessness or negligence”. The laws are referred to as the “honest idiot defence”.
Mr Frydenberg said the new laws would discourage opportunistic class actions.
“The bill also makes clear that companies and their officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite ‘fault’ element is also proven.”
The Australian Securities and Investments Commission declined to comment on Wednesday but it has previously warned the government that “the continuous disclosure regime is a fundamental tenet of our markets”.
Damian Graham, who oversees more than $130 billion in assets as the chief investment officer of the nation’s second biggest super fund Aware Super, said investors relied on an informed market.
“I would suggest we would prefer that the strongest disclosure regime was in place,” he said. “As a principal, greater disclosure provides greater confidence and supports the highest level of efficiency of markets.”
An investment specialist advising high net worth investors who spoke on the condition of anonymity also hit out at the changes.
“I think bad companies are always going to be bad companies. Good companies largely continue to behave properly.
“The question is, what are the remedies for shareholders? I’d probably err on the side of saying – go back to the status quo, the previous status quo.”
The new laws are a permanent extension of relief given to company directors and companies during the pandemic when forecasting results became extremely difficult due to global and local economic uncertainty.
When asked about investor concerns on Wednesday, Mr Frydenberg said he was not worried the new laws would make Australia a less attractive destination for global investment – which has been a key driver of the market’s strong performance in recent years.
Maurice Blackburn class action principal Andrew Watson said the new laws would make securities class actions more difficult and make it easier for listed companies to mislead their shareholders.
“It benefits a small number of badly run companies. In any given year, less than 2 per cent of companies get sued for breaches of the continuous disclosure and misleading and deceptive conduct rules. So it helps those companies at the expense of the 98 per cent to do the right thing.”
”The Treasurer’s announcement aptly demonstrates that COVID-19 was just a stalking horse for what has been a deliberate agenda to just give corporate misconduct a free kick in terms of misleading the market.”
Ben Hardwick, the head of class actions at Slater and Gordon and spokesman for a coalition of firms that launch class actions, said the new regime was “madness”.
“Australia’s robust stock market disclosure laws mean investors can operate from a position of knowledge. Australian directors know they have to be open with the market or they might be accountable to their investors through a class action.
Australian Shareholders Association, which represents retail shareholders, said it was a bad policy.
“The fact that directors could be held personally liable was a great incentive to ensure that companies behaved in a correct manner and kept the market informed. Now the pressure is taken off. Directors … no longer need to ensure continuous disclosure is enforced,” ASA chairman Allan Goldin.
Labor financial services spokesman Stephen Jones said the new laws tipped the scales in favour of directors of public companies and against the interests of their shareholders.
“After the revelations about Crown Casino in the NSW casino inquiry, it is hard to understand why the government is going down this path.
“Shareholders are demanding more transparency, not less, to protect their investments and allow them to make rational decisions about where to put their money.”
But some investment specialists supported the government’s proposal.
Former MLC chief executive Geoff Lloyd said regulation of corporate governance in Australia was among the highest in the world and “unnecessary red tape” should be removed to encourage innovation and risk-taking in business.
“It’s time to step back and have a look at how over-regulated listed companies are in this country and the difficulty that’s having in bringing in talent to lead businesses with reasonable risk for growth.”
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