Corporate governance: 1980s revisited?
Monash Law School Foundation Lecture, given by David Knott, ASIC Chairman, 23 August 2001.
Thank you for that generous introduction and for the invitation to present this lecture.
I confess that when I was appointed as ASIC Chairman last November, I did not envisage that this subject would be quite so topical. Naturally, I was very conscious of the new economy bubble having burst and my radar was attuned to a range of related governance and regulation fallout. But I did not expect to be confronted so soon by a series of corporate failures of a magnitude not seen for a decade. Reaction to these events has ranged from hysterical foreboding to wearied acceptance – but as time passes they will attract more considered and mature analysis.
You will understand that as these failures are the subject of official enquiry I will avoid any individual discussion of them tonight. However, I have already expressed the opinion that our recent spate of corporate failures does not have the appearance of a systemic collapse of good governance in Australia. I believe that the hysterics have been overdone; and I am equally critical of those who take on a world-wearied cynicism as if to say: 'What else can you expect, nothing has changed'.
The evidence contradicts the cynics.
In my view we can differentiate our current climate from the 1980s in some important ways. We do not have the endemic governance issues which confronted us a decade ago; although there are some signs of increased credit risk, we do not have the grossly inflated balance sheet asset values which then prevailed; we do not have the structural manipulation which profiled so highly in that decade; and we do not have a climate of high inflation and excessive commercial property values which contributed to the magnitude of the 1980s collapses.
We have done a great deal since that time to address all of these issues. Our institutions and standards of corporate conduct, taken over all, lose nothing in comparison to our peer group developed countries and are regarded as a benchmark by many of our neighbours. Our ability to withstand the Asian economic crisis of the later 1990s was in part attributable to the steps taken earlier in the decade to rebuild international confidence in the integrity of our markets.
These words of comfort are not intended to convey complacency about our markets environment. The best governed of companies can still succumb to competitive and economic forces. Good governance is of itself no assurance of corporate success, any more than corporate failure necessarily implies poor standards of governance.
Throughout the 1990s there has not been a single year in which the number of corporate insolvencies, receiverships and administrations was lower than 6000 - and only a fraction of these can be attributed to failure of governance in the sense that we are talking about it this evening.
Businesses fail. They always have and they always will. The limited liability company remains the mainstay of our private enterprise system, a system based on the premise that failure alone is not culpable and that risk is to be acknowledged and shared.
We also know that business failure increases when economies contract. Accordingly, if international economic conditions get tougher we can expect insolvencies to increase, which will inevitably create additional focus on issues of governance. If that occurs it will not be confined to Australia.