27/03/2020

 
On the one hand, it feels silly talking about corporate governance when there is so much upheaval in people’s lives, both from the illness and the economic impacts.  But it might also be a really important time for it, because things are going to change and they might stay different afterwards. As Yuval Harari says in this article, many short-term measures will become fixtures, or, from the spiritual leader of the universal basic income (something not so far-fetched anymore in some places) quoting (of all people for the purposes of this article, Milton Friedman): 

A common thesis of mine lately has been that the recent overregulation of Australian corporations and their managers is misguided in its aims.  A better outcome for business and society would be driven by less prescriptive regulation in exchange for clearer commitments to stewardship-type concepts.  It’s interesting how this might unfold now, because a lot of rules will be waived in the short term and some of the new ones on the slate will be delayed at the very least.  We’re talking about a context where the Treasurer has (wisely) been granted powers to provide relief from parts of the Corporations Act to facilitate continuation of business and to mitigate economic harm.

A variety of initiatives have been discussed in the last few years to attack the business/trust divide from the other direction.  This encompasses a really broad church of measures and ideas, from the US Business Roundtable’s statement on corporate purpose, the British Academy’s The Future of the Corporation initiative, Elizabeth Warren’s Accountable Capitalism proposal, a variety of industry led opt-in ideas, all the way to the social licence debate in the ASX corporate governance principles.*  Interestingly in this moment, one concept in The Future of the Corporation initiative was that where a corporation has “particularly significant social consequences”, regulation should require alignment with social purpose. This isn’t so far the Ken Hayne comment “….is most evident in the case of the largest financial services entities. Each of the largest entities is systemically important. The long-term stability and performance of each is important to the proper performance of the national economy.” It’s fascinating to think about this in the current context, where certain businesses are proving to be seriously essential to society (and in the UK have been deemed so).

All of the above ideas are very different conceptual ways of rebuilding trust to the hitherto Australian strategy of more personalised laws and harsher penalties for breach (your objective dishonesty tests and your BEARs and FARs, if you will).

It seems to me that if regulation is relaxed during the COVID-19 crisis and business continues to genuinely do its best to help, the aftermath could be an opportunity to flip the script of the last 2 years into something more positive in governance regulation. 

Some other interesting titbits:

I talked about insolvency and the Safe Harbour defence last week – slightly overtaken by Government announcements since!  That said, the premise of the Safe Harbour defence is a good one, and hopefully its practical benefits for employees, shareholders and creditors will be better understood after this period and it can be improved further if it needs to be.  Even still, you’d think that a rule that requires directors of troubled companies to consider if trading on will ultimately lead to a better outcome will have a genuinely useful real-world application where it is a (hopefully) relatively short-term external force that is causing solvency issues. 

The deal between the New Zealand Government and Air New Zealand is interesting].  The Government (which already owned 52%) provided a $900m standby loan facility in 2 tranches with a 2-year availability period and an interest rate that steps up if the facility remains after 12 months. Air New Zealand had to cancel its interim dividend and can’t pay others while the facility is in place, and the Government can seek repayment through a capital raise after 6 months or convert the loan to equity.  NZX cooperated by granting waivers from usual listing rule approval requirements.  This deal came after Italy nationalised Alitalia, and there is plenty of speculation globally on more nationalisations/bailouts to come.  Who knows where that will all end up, but at the time of writing Australia’s 2 most valuable companies are a spun-off government department established to help an isolated island nation produce vaccines, and a privatised national bank. So, a period of government equity investment should not necessarily be the end of the world if you take a long view.  


* This article is long but a good summary.
 

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