ACSI submission to ASIC in response to Australia’s evolving capital markets: A discussion paper on the dynamics between public and private markets.

‍

Summary position

Public and private markets each play an important role in superannuation investment. Approaches in each market can inform the other, while recognising that regulatory provisions should account for differences in each market. ACSI's primary focus is the Australian listed equity market and our comments in this submission should be understood within this context.

While there are a range of factors influencing the recent decline in listings on the Australian Securities Exchange (ASX), as set out in the Discussion Paper, recent trends should not be attributed to changes in regulation or shareholder expectations. Frameworks that protect shareholder rights and promote strong company governance have significant value and ultimately provide investors with confidence, supporting participation in public markets.

Drivers of companies' decisions to list on public markets

As noted in the Discussion Paper, there has been a recent decline in the number of listings through initial public offerings (IPOs) on the ASX. A range of factors influence companies' decisions on whether to pursue a public listing and upon which market to list, and there are examples of trends in declining public listings playing out in other jurisdictions.

Relevant considerations include macroeconomic conditions, the depth and diversity of the investor base, market liquidity, research coverage, governance standards and the relative availability of private capital. ASIC Report 807 highlights that the additional cost of being a public company is likely only a small contributor to the decline in listings in the United States and similarly notes that changes in regulatory settings do not appear to be driving the recent decline in ASX listings. Accordingly, while there are no specific regulatory changes currently proposed (and we would consider each and any proposal on its particular merits), it appears that regulatory settings are not the key issue. Therefore, even significant change is unlikely to address the decline, and may even be counterproductive if it affects investor confidence.

The importance of company governance

Good governance is a central focus of the regulatory system. Appropriate shareholder protections, and well-governed companies protect and promote shareholder involvement in the public markets.

ACSI prioritises strong governance practices by ASX-listed companies, on the basis that good governance supports long-term financial outcomes for our members' beneficiaries. Good governance, including appropriately qualified directors with the capacity and ability to challenge and support management, is central to a company's strategy, oversight structure and approach.

As noted in ASIC Report 807, "consideration should be given not just to the costs of a rigorous governance framework but also the benefits of additional monitoring for strategic decision making." There is a range of academic evidence showing the benefits of good governance to performance, for example a 2019 study found that a firm's governance rating "reliably forecasts measures of firm operating performance." In addition, a 2010 study found a significant positive relationship between corporate governance ratings and performance. In 2020, a research paper, using adherence to the UK Corporate Governance Code as its measure, found companies with stronger governance displayed greater value across financial indicators, and that companies with strong governance both created and retained more value.

The importance of upholding shareholder rights

Governance expectations for listed companies are upheld by both regulatory obligations (such as directors' duties) and by shareholders exercising their ownership rights (including via engagement meetings and by voting on company resolutions). ACSI notes that many regulatory obligations and shareholder expectations similarly apply to unlisted companies, although processes may be less publicly visible, and they may rightly operate differently given differing market attributes. This is consistent with the principle that good governance needs to be fit for purpose and one singular approach does not fit all organisations.

ACSI notes that one important element of an active public equity market is access to a deep and diverse investor base. In this regard, appropriate shareholder protections underpin investor confidence. Key regulatory frameworks supporting these rights include continuous disclosure obligations and rules which uphold the principle of 'one share, one vote'. These protections are especially important in the public markets, due to the potential volume and spread of shareholders which can limit their ability to engage with the company. In the private markets, for example, ownership structures, including potential nominee directors, can work to address the agency problem and information asymmetry.

While ACSI would assess any specific reform proposal on its merits, our view is that it would be counterproductive to weaken key governance standards or shareholder protections in an attempt to attract listings. Key shareholder protections support integrity and confidence in the market and therefore are essential to fair and efficient public markets.

Please see attached detailed responses to consultation questions.