Experts have warned treasurer Josh Frydenberg’s proposal to weaken public disclosure laws will let ASX companies get away with duping retail investors.
Continuous disclosure laws make it illegal for directors of ASX-listed companies to withhold information that may affect the share price.
Last year, Frydenberg temporarily relaxed some obligations for public companies in response to the COVID-19 pandemic. This included a partial reprieve from continuous disclosure requirements.
This week, the federal treasurer proposed converting that into permanent law, by requiring that shareholders can only sue if a director violated the obligations with “knowledge, recklessness or negligence”.
In other words, claiming ignorance could become a legitimate excuse.
Slater & Gordon Limited (ASX: SGH) head of class actions Ben Hardwick called Frydenberg’s proposal “madness”.
“Funny how the pandemic crisis has apparently abated enough to stop JobKeeper, but is still serious enough to warrant permanently watering down corporate responsibility,” he said.
“The ASX is about to hit an all-time high, and the treasurer thinks it’s important to offer extra shields to company directors to avoid accountability.”
Frydenberg will give incentive for bad behaviour
In the US and UK, where ignorance is already allowed as a legal strategy, it’s called the ‘honest idiot’ defence.
Australian Shareholders Association chair Allan Goldin told The Motley Fool that it’s also called the ‘dumb director’ defence.
“Previously if there was any failure to keep the market informed under the current continuous disclosure rule, it was a simple black and white situation. Don’t tell shareholders something material, and the company and its directors were liable,” he said.
“This was great for shareholders because they do not have insider or special interest knowledge, and all they know is what they are told and what they read.”
If Frydenberg’s proposal is written into law, ASX company board members could deliberately tell staff to not tell them controversial information.
“The new instruction to management from boards could be, if you want to keep some information to yourself or exaggerate a bit, just make sure you don’t tell me – so no one can sue me,” said Goldin.
Hardwick wondered why the treasurer would oppose the Australian share market’s world-leading transparency.
“Australian directors know they have to be open with the market or they might be accountable to their investors through a class action,” he said.
“Josh Frydenberg is apparently uncomfortable with this situation.”
Why does Frydenberg want this?
So if it’s such a bad suggestion, why would the federal treasurer want it?
The lobby group representing many of the ASX’s biggest companies, the Business Council of Australia, and the Australian Institute of Company Directors (AICD) support the changes.
“The AICD welcomes the treasurer’s announcement today which comes when encouraging investment and risk-taking is crucial to Australia’s economic future,” said AICD chief Angus Armour.
“Australia’s securities class action settings have been out of step with the rest of the world, making us a lucrative market for litigation funders and driving adverse consequences for businesses, shareholders and the economy generally.”
Goldin said the changes wouldn’t benefit anyone except for privileged board members, who form a support base for Frydenberg’s side of politics.
“The only people who like this change are the AICD and the Business Council. The only ones who like it are because of self-interest,” he told The Motley Fool.
“With the Liberal Party, a lot of their supporters and donors like it.”
Hardwick agreed, saying “mum and dad investors” would lose out.
“If you truly believe in markets then you’ll consider transparency and accountability to be good things because they allow investment to flow rationally. If, however, you prefer crony capitalism and protecting corporations from consequences, then you’ll take a different view.”
He hoped that sanity would prevail and the proposal would be killed off by others in Canberra.
“I suspect the senate crossbench may have greater integrity when it comes to defending the true interests of investors and our markets,” said Hardwick.
“The last thing we should want is for Australia to develop an international reputation as a jurisdiction that’s soft on corporate misbehaviour. That’s a surefire way to dry up investment.”