The AICD Australian Governance Summit was held in Sydney on March 12. The following question and answer session followed Joe Longo's keynote speech.
Mark Rigotti: And thank you for everyone who's contributed. There are three upvoted questions around simplification and not-for-profits, and I'll do my best to paraphrase the tenor on them. But people are interested to hear, I think, your thoughts on regulatory complexity and the job that you've given this committee to do, and how that applies to NFPs. How are you potentially involving the ACNC, the NFP peaks, and the likes? Is that something you could talk to, the peak bodies, the NFP peak bodies?
Joe Longo: In the speech, I talk about this problem being in the water. So, we all need to step back and say, why are we where we are? And the fact of the matter is, this is a wicked problem, and we all contribute to it.
And what do I mean when I say that? As a society, when things go wrong, we tend to respond with regulation. So, parliament plays a role. Society plays a role. The legal profession plays a role. So, we all contribute directly or indirectly to what we've got. And so, we are where we are, and you say, well, how do we approach this problem? So, it's a wicked problem.
So, my personal view is that it has to start with ASIC. And there have been multiple reports on the Corps Act. There's the major report on Chapter 7 by the Australian Law Reform Commission, a superb piece of work, over several years. Before that, they did a report on corporate criminal responsibility and misconduct. And there have been multiple reports historically. So, it's not as if we don't have some idea as to what to do.
But from my approach, I believe we need to start with ourselves. There's a lot that … ASIC administers the law in all sorts of ways. We have all sorts of approaches. And I think the work with the simplification group is to look for ways that ASIC can improve the administration of the Act and make it more efficient and accessible.
And sort of underlying that approach is that it's very difficult, just to be realistic, it's hard to get law reform. As I said last year, with good faith and intent, successive governments amend the Corps Act rely on legislation to solve the problem. And it's the cumulative effect of that is where we are today. So, wholesale law reform to the Corporations Act, I think, is going to require a very significant bipartisan effort.
Mark Rigotti: Well, this is good news.
Joe Longo: It is.
Mark Rigotti: The audience has spoken, and they've upvoted a question from a young fellow called John Green. Which I think it's more of a statement.
Joe Longo: Is he still talking about fuzzy law?
Mark Rigotti: He'll talk about anything. Look, it was an interesting idea he said, that would ASIC simplification involve the use of AI and putting all those pages of the Corporations Act into an AI tool.
Joe Longo: I'd call that a quantum leap. At the moment, I've said it to a number of people in my area about legislative instruments that can't be found, and that don't make any sense. And it wouldn't it be a great idea if we just got rid of them all and had one basic instrument that people could find? So, I think that we need to get some baby steps that we have to take. And I think part of that is I want people to feel that if we've got a problem and a suggested solution, how ASIC can be of use to the law better. But I want to hear it, I'm looking for actionable ideas.
I think AI would be revolutionary. But the way I would turn around John's question of that question, and I've said this publicly several times, I think as the regulator, if we ourselves don't successfully embark on a digital transformation, and ourselves have a technology capability, over time we will become irrelevant. And I see that as an existential risk.
Mark Rigotti: Look, it's good to see ASIC taking the leadership and being open to change itself. And I guess the onus is then on us to come up with actionable ideas, as you mentioned. It's much easier to work on specific things than sort of a statement of intent.
I did want to come back to sort of the NFP theme, because, again, just to give us all some ideas. So, if this group produces some good ideas and you want to take them forward, what level, or do you see there is an opportunity to interact with other agencies? Typically, APRA, people like that. Just to make - we pick something in one place in government and then….
Joe Longo: The focus will be ASIC, but the Treasury are observers on this group, as are Julie Abramson from the Productivity Commission. So, it's a broad group, if I can put it that way. The expert panel is made up of a number of individuals, and it's one or two in this room. And the idea, in a nutshell, is that there will be proposals, ideas, and then you can send them off to a group and you can work out an approach with the help of the ASIC Secretariat.
So, the idea is, in the coming months, we need to translate a complaint, a feeling, an idea, a frustration into something actionable. And that's what I'm really pleased with the number of people who have approached us, who approached me to be on this panel. There's a lot of support, and it's voluntary. I really, really appreciate that. And that's how it's going to work. We already have, I think, at least half a dozen, I would call them actionable ideas, and now they have to be worked up.
And I'm really pressing the team hard at ASIC, and Nick Evans is a very passionate supporter of this work. So, I'm pretty optimistic that we'll come up with some ideas. They may not be profound, but I'm hoping they'll be practical, and they will signal a real intent to the market that we're serious.
Mark Rigotti: Look, I think there'll be a lot of support for that on the ideas. I mean, maybe just to stay with this, and then we'll get to directors being distracted, stay focused, know your business, those sorts of things around what we can each think about. But there is one suggestion from Pauline Collins about having a legislative drafting expert involved. And I think the point that she makes is to keep it simple. Some of the best and most powerful pieces of regulation aren't actually trying to cover the field. They're setting the tone.
And I guess while you're on that, you might try and also just give us your thoughts on this tension between principles-based regulation and rules-based regulation, which is where I think the ASIC's corporate governance principles have maybe gone off, the guidelines have gone off piste a bit.
Joe Longo: Yeah, the Office of Parliamentary Council is responsible for drafting federal legislation. They've actually published the material on simplicity. Although that's not always entirely evident when you open up the Corporations Act and related regulations. So, I think we have to start with the right idea for change and operationalising.
But the prescription, the principles versus prescription issue, I'm a firm, broadly speaking, I believe the principles are better than prescriptive regulation. And in fact, in the area of directors' duties, those concepts that we see in the Corps Act, they're my favourite examples of any ordinary person can read those sections, and they can actually understand what they're reading. And it reflects hundreds of years of jurisprudence. Those concepts of due care and diligence, they all come from the case law.
So, the only other thing - so I am personally more in favour of a principles-based approach. But again, I think we all need to have some self-awareness here and look in the mirror. Because we've, Mark and I, we've been lawyers for a long time. And I think there's a real phenomenon in business where it's a bit schizophrenic. There are some problems, and we just want the principles. And then there are other times when, can you just give us more guidance? Can you just tell us what we have to do? Can you give us more certainty?
And there's a whole body of practice and thinking around our regulatory guidance. There are several schools of thought. There's one school of thought, oh, they're too long, too prescriptive. There's another school of thought that's, no, they're about right. And there's another school of thought that would like them to be longer still. Will you please include more case studies and examples so we know exactly what to do? So, I think there's an underlying cultural issue there somewhere. And I think as a society we like certainty. But that comes at a price.
Mark Rigotti: That's a very interesting comment. There's been a question from Will in here I was just trying to find, who's also, who's written in the California Management Review, where there's been some studies done which have found excessive regulation can actually create perverse outcomes. Because people think it does cover the field. So, if I'm not picked up, I'm OK. So look, it's a tension, and the regulator really has to try and navigate it.
Joe Longo: Yes, and also, it's an issue about the advisors. I mean, it's all part of an ecosystem. If you have a culture that encourages conservative, defensive lawyering or compliance advice, well then that's going to be reflected in long, complex documents that I would call defence documents. The real audience isn't ordinary people like you and I; it's a judge. So, if things go wrong, you can point to this paper trail or document. And I think that's, I hate to say it, I think that's part of the problem.
Mark Rigotti: I mean, maybe there's some examples issue by issue or sector by sector, because you can create higher levels of trust between, almost a compact between the private sector and the regulator representing the consumers and the citizens. You can get more done. And they're good. We were talking about this example before during COVID. The ACCC and the authorisations they gave to the banking industry, and arranging virtual meetings, all of those things.
Joe Longo: They get stuff done, but hopefully you don't have to wait for a crisis every time.
Mark Rigotti: No, let's do it without a crisis. Let's not go back to COVID. Five years declared yesterday, it's enough. Yeah. Maybe just changing topics a little bit, because you started out by talking about directors, your advice to us as directors should focus on the foundational issues. Don't get distracted. What are some of the distractions you think might be where we take our eye off the ball, are getting drawn down into rabbit holes? What are the sorts, did you have anything in mind?
Joe Longo: My intent in putting it that way was that should be reassuring. I think in Australia we had some well understood values, principles, expectations of directors. It can actually be easily summarised in a couple of paragraphs. And I suppose what I'm saying to everyone is, in these extraordinary times, where you've got all these demands being put on you, just keep an eye on those foundational values and principles. I think John Mullen was making that point yesterday as well. I mean, I thought he gave a terrific speech, and I think John Green as well. Keep your eye on those basics. And I'm not saying it's going to be perfect, your business is going to be perfectly profitable. But you should be staying out of regulatory trouble if you keep an eye on those basics.
Now, and the other - and so that's sort of really where I was coming from. Having said that, I think some things do have to change. I do worry about technology. I mean, I worry about it at a range of levels.
Mark Rigotti: Hence your more science in the boardroom.
Joe Longo: Yeah, but just as an expectation, I think so many of us, our children, we're now living in an age where digital platforms, social media, technology, the way in which we absorb information, the way in which we entertain, the way in which communication happens, that whole subject, it seems to me, poses challenges for all of us at all levels.
Now, the AI regulation, or AI, I think is a fantastic example of it. I find that a totally overwhelming topic, and I get briefed about it regularly. I've got a terrific internal team. ASIC has great connections with academic institutions around Australia. We're plugged in internationally. And as John pointed out yesterday, we've taken an interest AI. And that's just exploded in the last few weeks. As I was told yesterday when I asked for some help on that topic. So, I don't think there's any easy answer to that.
Mark Rigotti: Don't get distracted, know your business.
Joe Longo: Yeah.
Mark Rigotti: It's interesting, at the AICD we were privileged enough to bring a couple of directors to talk to the AFR about the Trump effect. And an hour and a half later, when everyone's trying to work out how to navigate this, it came down to some simple kind of things; know your company, know your strategy. Work out what the changes or the potential changes might mean for your company and your strategy. So those foundational principles can be pretty strong. I don't know, how are you thinking about this changing world? How is ASIC thinking about the changing world that we're in?
Joe Longo: All the time.
Mark Rigotti: Is that too big a topic?
Joe Longo: All the time. I think the digital - I actually meant what I said. I think the digital transformation technology part, it's everybody's challenge, including for me and for regulators. Now, I'll go back to AI, because I think it's obviously a very topical, fantastic example. IOSCO is doing a piece of work on AI at the moment. And like so much IOSCO work, you won't see the product until sometime next year. But what I'm worried about there is the rapidity of change and innovation and developments in that area. It's going to be hard for regulation to keep up.
So, it might be something you were talking about a moment ago that lends itself more to principle. But even that might be deficient, because it's in the very nature of that technology that key concepts of accountability and explainability. When you read into this, it's really very difficult stuff. A lot of business don't understand how their own algorithms work. They don't know where their data is. I think it's a really difficult subject to get your head around, is my view.
Mark Rigotti: Well, I think we all agree that it's been a major theme through the last few days. And I think part of it is, again, bringing some of the coffee conversation into the room, was there's a literacy level. And we're probably all struggling with that.
Joe Longo: That's right. And I'm struggling with that all the time.
Mark Rigotti: Yeah, but then there's actually an expertise level. And what level of expertise do you as an individual need to achieve? Or can you actually go and get it?
Joe Longo: Well, the way I explain it is, I think for a lot of us who are reasonably well read, you can ask the first three or four questions. So, you have your engagements. It's a seventh, eighth and ninth question, that I can't - that's the real test. It's getting from the superficial to the next level. And I think that requires a lot of curiosity and work. And you've got to do the work and read in and get help.
Mark Rigotti: Yep. Well, work in progress. Watch this space. Just looking at the time, there's a few people in the audience who would like to explore probably a slightly sensitive topic. So don't worry -
Joe Longo: You know I'm not good at sensitive topics.
Mark Rigotti: No. So, I guess, let me try and paraphrase it. We've seen some of the governance stories hitting the press at the moment go to the issue of, I guess, personal behaviours, and whether that disqualifies someone from being the director or impacting. How are you thinking about that? I know you've got the enforcement functions. What's got the guidance on?
Joe Longo: I've already answered that question, under oath. I'll try to remember what my response was. So, in addition to what I said in the speech, and I'm more serious now, I can't comment on any particular matter. As we know, ASIC is looking at some of them, and we'll see where that ends up.
I think it's very important, as I tried to explain at this parliamentary hearing, that poor personal behaviour isn't necessarily a breach of the law. Or certainly not of the Corporations Act. Maybe a breach of some other laws, but not of the Corporations Act. So, I think as a society and a community, a professional community, a well-functioning board, I think those of us, that we all are thinking about what's poor personal behaviour, and we want to discourage that. A well-functioning board, I would have thought, will find that very distracting from the main gain. Now, whether that is a breach of the directors' duties or a breach of the law…
Mark Rigotti: That's a legal question.
Joe Longo: Yes. And I suppose my intent on that day in Canberra was to say, look, there are limits to what the law is there for. We all have to take responsibility for our conduct, whether it's personal or professional, and some of those consequences don't deserve to be in the court. So, there has to be another response. And I think that's where the rest of the board, the shareholders, the chair, there should be other mechanisms that correct, if you like, the core consequences of that behaviour.
Now, sometimes it will be so serious that ASIC will get involved, and we may or may not take action.
Mark Rigotti: No, but that's understood. I guess it's that judgement, that discernment, which is the difficult issue.
Joe Longo: I think the first line of defence is the board itself. I think this is where chairs, all the board members, contribute to the culture and well-functioning of the board. And it's people again, right? You can have these principles, but what matters in the end is how people get on with one another. I think John Mullen made that point yesterday as well. So, I think these are foundational concepts. That's where I would go.
Mark Rigotti: Thank you for that. There's one topic that you didn't cover, but it might be good just to step into for a couple of moments, and that's the private markets. Because you've got the paper that's out there. It's getting a bit of press. I think it's been picked up in various ways, including, are our public markets shrinking? Is that a good or bad thing? And this is a bit of an exam question. Our private capital markets aren't growing. What does that mean for directors? Where should we be thinking about participating in, particularly if there's a perception that being a director in a public market company is harder because of regulatory burden, whether that's true or not, put it to one side. I just wonder whether - I know you've got a discussion paper out there, and you're looking for people to respond to it.
Joe Longo: A couple of things. It's a big subject, and I do commend the discussion paper to you, particularly the forward that I wrote. But I think the key point here is what I'm particularly interested in among a number of things, is to what extent is regulation standing in the way? Just putting this broadly as my regulation and someone else's, standing in the way of well-functioning private and public markets. In other words, getting the outcomes that we all think we want. And even then, there isn't a consensus as to what those outcomes are. But just say broadly speaking. So, I'm very interested in that.
And it's true that there is a narrative around high expectations of directors and boards of publicly listed companies. But I'm not convinced that's the main reason why people don't think it's definitely a factor. I think we need to acknowledge that being a director of a public company carries with it a lot of responsibility.
But as the Professor Harold Ford's piece that you've attached to the paper shows, the modern capital - the capital requirements in modern times for a lot of entities, they're quite happy to tap the private market. And they're not really ready to go to the public market. And so, I think we need to be a bit sophisticated and thoughtful about what's really going on here.
And I'm hoping what will happen over the next period of time in our second piece of work is that we'll be able to answer those questions more confidently. But as things stand, I don't think that regulation is the main driver of de-equitisation in our public markets.
The other side of that question, though, is interesting, Mark, and I'll just quickly mention it. And the other question you ask is, well, do we need to regulate the private markets any more than they're already regulated? And by the way, they're not unregulated, but are we happy with what's going on there in terms of valuations and confidence?
Mark Rigotti: There's probably the three views that you mentioned before. Some would say, it's just fine the way it is. Others would say a little bit more. And others would say there's a lot more required.
Joe Longo: Yes, it's the same question under another guise, isn't it? And so, I don't go into this exercise with any preconceptions about the need for re-regulation or additional regulation in the private markets. At the end of the day, as the discussion paper tries to say, we want well-funded - we need both.
Mark Rigotti: It does go to purpose, doesn't it? Because, I mean, public markets were originally developed to allow access to capital from widely distributed sources. You can get that from private markets.
Joe Longo: And also, private equity, the conventional exit strategy, was going popular, but now we have continuation funds. We have - I'm trying to think of the right phrase. A secondary market now, where those kinds of investments can be traded privately without going to - and you can realise your investment without having to go public. So, I think there's a lot going on there.
And I suppose the only other point I would make, and we haven't talked about superannuation a lot, is the discussion paper really wants to highlight that as well, that we need to understand the role of super in our markets. Which I think, by the way, is positive. But we still need to understand it.
Mark Rigotti: Look, we're at a time. There's a whole lot of stuff in there, but one thing I'd encourage you to think about on the public and private markets; what's the role of directors across those two markets? So, if they do think there's a contribution directors can make to evolving both, because the better outcome for the country is you have strong public markets and investment in the private markets, and you regulate it to an appropriate level. Easy to say, hard to achieve.
Look, can you please thank the Chair? We're out of time.
