Recent media on the Treasurer’s temporary changes to continuous disclosure laws has pitted the “business lobby” against investors and regulators. The express criticism is that the changes represent a significant ‘watering down’ of disclosure requirements pushed through under the cover of the COVID-19 darkness.
To be clear, the AICD supports Australia’s continuous disclosure regime. Continuous disclosure is fundamental to a functioning market. The AICD is not advocating for a ‘watering down’ of disclosure laws. A significant proportion of Australia's $2.7 trillion of superannuation – yours and mine - is invested in listed Australian companies, so high quality, timely market disclosures are in all our interests.
So why did we endorse the temporary measure?
In March, the COVID-19 pandemic transformed into dual health and economic crises.
Disclosure challenges were immediately identified as a concern by directors of listed entities given the pace and severity of the crises. The situation has worsened since.
For listed companies, disclosure decisions can require fine judgment calls at the best of times. Australia’s unique approach to strict liability on disclosure – specifically that breaches require no direct fault or proof of wrong-doing – are amongst the most onerous in the world.
The AICD raised our concerns with regulators, government and stakeholders from the start. We raised our concerns openly through the media, editorials and formal submissions. Given the issue’s importance, there has been ongoing dialogue with Treasury, ASIC, the Government and Opposition. Suggestions of a deal done under the cover of COVID-19 darkness are misleading.
We were not alone in raising these concerns. Omni Bridgeway, Australia’s largest litigation funder, backed a moratorium on new class actions associated with COVID-19 disclosures and has since acknowledged the Federal Government’s concern for companies managing the effects of the COVID-19 pandemic. It was recognition that the unique circumstances of COVID-19 required a regulatory response. Companies should be encouraged to make appropriate disclosures to the market without fear of speculative class actions challenging this disclosure with the benefit of hindsight.
The AICD’s proposal for temporary relief called for ASIC – not private securities class actions – to enforce disclosure laws during COVID-19 uncertainty. Under our proposal ASIC and the ASX would continue to ensure laws and listing rules – including the obligation to disclose material impacts – are maintained. Particularly given expressed concerns with preserving market integrity, you would expect that the ‘conduct regulator’ would assign the highest priority to regulating the conduct of entities making disclosures to the market.
ASIC described the current disclosure arrangements as appropriate because “many have made a number of announcements, including to withdraw earnings guidance, in response to the Covid‐19 pandemic”. Recent media reporting and commentary have joined the chorus. We disagree. There is no logic in the argument that the market will be best served by companies simply withdrawing guidance indefinitely and not making any forward looking statements.
The Securities and Exchange Commission in the United States took a different view. The SEC encouraged US companies to get more disclosure to the market. US companies can rely on safe harbours that already exist to protect good faith forward-looking statements from law suits. You simply could not make the same judgement call under current Australian laws.
No evidence has been presented that the Treasurer’s temporary changes to disclosure laws have prompted poorer quality disclosures as some commentators suggest. The irony is many legal experts are of the view that there are considerable limitations to the temporary changes and that they do not go far enough to achieve the policy objective of encouraging forward looking disclosures.
Boards have a key role in overseeing their organisations’ continuous disclosure frameworks. And while the ASX has said that timely and effective enforcement of our continuous disclosure framework rests on the ASX’s and ASIC’s actions in monitoring and enforcing compliance, not on civil damages proceedings, this is at odds with ASIC’s reliance on private actions for enforcement outcomes. Who is really safeguarding investors interests here?
The Treasurer’s economic update last week highlighted the grim reality confronting the economy with spending by firms predicted to slump by 12.5 per cent in the next 12 months. Increasing this investment will require risk-taking which involves an inherent level of uncertainty, greatly exacerbated by our economic outlook and the day-to-day operating uncertainty of COVID-19.
Even putting the COVID-19 issues aside, concerns remain that our settings are out of step with global regulatory practice and driving adverse consequences for businesses, shareholders and the economy generally.
Consideration of permanent reform should not be prejudiced by suggestions that any reform is ‘watering down’ laws or reducing accountability. Our focus should be strengthening the focus and application of the law, ensuring our regulatory settings are balanced and targeted at those that do the wrong thing, and diligently enforcing the law in the public interest.
Managing Director and CEO
Australian Institute of Company Directors