James McConvill and Professor Mirko Bagaric of Deakin University Law School said there are weaknesses in Australia’s corporate governance regulatory framework relating to the responsibilities of supervisory, regulatory and enforcement agencies.

The Organisation for Economic Cooperation and Development’s (OECD’s) principles on an effective corporate governance framework are currently not being met with respect to the division of responsibilities. The answer, McConvill said, could be a memorandum of understanding (MOU) between ASIC and the ASX.

“From a day to day practical perspective, if ASIC is doing surveillance of a listed public company and discovers that practices infringe the ASX principles in addition to a breach of the Corporations Act, the question is what should it do about it?” McConvill said.

“Should there be formal arrangements in place? There is a memorandum of understanding between ASIC and the ASX, but that preceded the most recent developments in corporate regulation. Now we are in the post Enron, post HIH period, where corporate governance is heavily regulated, the suggestion is that some thought should be given to how the relationship between the ASX and ASIC should play out in practice given that they are two key regulators with an important mandate in the governance area.”

The ASX principles of good corporate governance are voluntary, and companies choosing not to comply must explain why in their annual reports. It is then left to shareholders to decide whether any action is necessary. However, according to McConvill, they are based on an ASX listing rule. “The question is if there is a violation of an ASX principle and the ASX doesn’t want to do anything about it, can ASIC take any action in terms of its tough stance on corporate governance and intervene?” said McConvill.

“It becomes quite tricky because while the ASX principles are voluntary, they are based on an ASX listing rule (10.3) so an actual contravention or failure to comply with a principle actually gives rise to a breach of the listing rules if the company doesn’t adequately disclose why they haven’t complied. In that situation, ASIC can enforce a breach of listing rules under the Corporations Act.”

While there has always been healthy communication between ASIC and the ASX, formalizing that relationship could shore up corporate governance regulation. “ASX and ASIC will probably have some informal arrangement whereby one particular department can speak to another in ASX and ASIC and vice versa about a particular matter and they can share information,” McConvill said.

There is also a case for the Australian Prudential Regulatory Authority (APRA) to be included. While APRA has taken some criticism of its forays into the corporate governance area, it is likely to continue. APRA has an MOU with ASIC on information sharing and mutual assistance.

Stuart Fagg is the Editor of Risk Management magazine,Lawyers Weekly’s sister publication.