ASX Interview with James Gerraty
With a renewed focus on good governance and the behaviours of our public companies and their leaders, we have heard a lot in recent months about the Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC), Royal Commissions and the views of shareholder advocacy groups. But what about the ASX? What role does it play?
The Australian Stock Exchange (ASX) is our country’s primary securities exchange and one of the world’s leading market exchanges. Through the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, the benchmark in good governance practice for our listed companies is set.
We took the opportunity to catch up with James Gerraty, ASX Listings Manager to discuss the role of the ASX, how it operates and some of the trends and issues it is dealing with.
Q) To kick off James, please tell us what you do at ASX?
A) I joined ASX all the way back in 1995 having studied a Bachelor of Economics. The role has changed over the years but throughout most of that time I have been working with the listed companies in Melbourne and managing the team who provide all the services that listed entities would need from us.
These services include helping them with any of their disclosure issues, interpretation of the listing rules, capital raisings and IPOs.
Q) How different is the role today compared to what it was back in 1995?
A) I guess there are a number of signposts that reflect change through that time – the internet most obviously, and how that has seen information spread so much more quickly and leading to changes in how investors actually trade. What has been interesting is the continued strong role of technology in the things we have been doing at the exchange and the listings we’ve seen. This includes the so called ‘tech boom’ then ‘bust’ in the early 2000s when at times the fundamentals of the business models were not always clearly defined or understood. We’ve come a long way since those times, but it remains an issue today in some emerging technologies. A key part of our role today is scrutinising business models if they’re at that early stage – not to determine if the business will succeed, as that’s not our role – but to see that investors and we can make sufficient sense of it, that the risks are reasonably clear, and the capital raised is going to be sufficient.
In 2000 it was more the case that if you met the rules you were able to list. Today importantly, we have a discretion which we have been using, to decide who we won’t list and we are not shy in exercising that discretion if we think the business model does not make sense, it won’t be adequately capitalised to meet its objectives or there are other concerns, such as with the quality and track record of its directors and management.
Q) So that’s IPOs, but what other changes have occurred since then in relation to trading and ASX’s oversight role of all the listed stocks?
A) Well, again on the technology point, when I first started, everything a company might announce was delivered by way of fax or by hand (via bicycle courier – what do they all do now?!). Nowadays, of course, there is a significant increase in the speed with which information gets to the market and also the speed and volume of trading that happens. It’s increased the importance of the technology we use in our monitoring role.
We have very good systems to detect price movement in stocks allowing us to respond quickly. And any market information we do receive no longer has to wait until tomorrow morning’s newspaper to reach mum and dad investors.
Q) If something doesn’t look right with trading in a stock what are your responses?
A) One of our most important responsibilities is to take action if we think the market is not informed. We have an obligation under our licence to make sure the market is fair and transparent. From that, we have to take action if the market shows key changes which cannot be immediately explained.
Ultimately it is overlayed with human judgement. We need to determine whether it needs to be monitored for further movement, if there is further movement, we can let the relevant people know about it. That goes through the process of talking to the company and more than likely a price query.
In simple terms, this means going to the company to ask what information they have that could explain the price change.
Q) Is that as simple as picking up the phone?
A) Initially yes, but if we cannot get in contact with the company and the share price has moved quite significantly, we have to assess whether we feel people are trading on an uninformed basis and if so we have to make a decision whether to suspend training. That is not a regular occurrence but it has happened.
Q) You have used the “please explain” but how do you define ‘significant’?
A) Deciding what is ‘significant’ is really case-by-case and factors in a number of things such as past trading history, volatility in the sector and whether trading volume is also increased, but if we think it is significant we may consider that a formal query is required. The market then gets to see ASX’s written questions and the company’s written responses.
Q) How do you find your phone calls are received? Does it ever get antagonistic? Or, is the company usually expecting you to call?
A) It varies, if someone thinks their price move is not remarkable, they might find it a distraction to deal with the query. Generally, however, they will understand there is a market that has to know about what has happened to the share price.
It gets difficult when a piece of information the company has is material, but is incomplete or confidential and therefore not ready for disclosure.
Q) Have you ever had any outlandish responses to a price query, “dog ate my homework type answers?”
A) No, no “dog ate my homework” scenarios but we often see answers “no information in our possession that could prompt that price move”, but then one week later they announce something significant that will prompt more questions.
Q) How much of your working day is spent monitoring or watching for changes as opposed to dealing with something you know has happened?
A) We have a team in Sydney that watches those prices for us and give us information periodically through the day. With this task centralised it allows us to do our day to day work, receiving queries from our listed clients and their advisers, having conversations about interpretations or waivers of listing rules or reviewing draft documents and proposals.
Q) Do you think that is a well understood service offering that ASX is there to help with queries and provide clarification?
A) I think so. It should be anyway. We had this in mind when we rewrote ASX Guidance Note 8 on continuous disclosure. We put a lot more detail into it which shows people what information they need to consider when deciding if they should make disclosure. They can always ask their lawyer which often is necessary and appropriate, but you don’t necessarily need to. For things that are less about interpreting the law, they can ask us.
Q) Free of charge?
A) Yes, free of charge!
Q) What other trends are you noticing, perhaps around the new accounting standards on revenue or leases?
A) Not much to do with accounting standards per se, but when it comes to IPO planning, we are talking more to accountants and advisers these days than we ever have. One of the key reasons for that is that at the end of 2016 we changed the rules so there is a requirement that if you come in under the asset tests admission, you still need two years of audited accounts. This raises questions around audit work of prior periods, which can be expensive, and what they must do to meet these rules.
Q) And forecasts in a prospectus?
A) Forecasts in prospectuses are not something we are particularly concerned about. We are more concerned about continuous disclosure obligations after the date of listing in terms of tracking with those forecasts.
Q) What are your views on the current state of the accounting profession?
A) Like everything, it varies. The best auditors and the best accountants are those who can explain complicated accounting matters in plain English, that a non-accountant can make sense of.
Q) Moving to the current debate around the 4th Edition of the ASX’s Corporate Governance Council’s Principles and Recommendations?
A) In simple terms, our role is to ensure there is annual disclosure in corporate governance statements. And it is clear. There is a little confusion, or an attitude may be a better way of putting it, amongst some investor groups that the larger companies ought not have any “if not, why not” disclosures and should comply in full with everything. That is not how it is meant to work.
Q) What does your team consider when looking at governance statements and Appendix 4Gs?
A) The general quality and completeness for all reporters, with our particular focus that the larger companies are complying with the listing rules as set out in the Principles dealing with Audit and Remuneration Committees including appropriate composition.
Q) To what extent would you agree or sympathise that the disclosures have become more boilerplate?
A) It may be the case for some smaller entities where a formulaic approach to disclosure is taken, but overall, I would say there is less boilerplate nowadays.
Q) What is ASX’s message to the audit community as a governance intermediary?
A) I think the financial system relies on all the players doing their roles to a very high standard. Auditors have a hugely important role. It is interesting as new business and new technologies grapple with questions around the interpretation of accounting standards.
One wish is plainer English from accountants and less of those double negatives auditors seem to like.
Q) What is your favourite governance principle?
A) *Laughs* It’s got to be the risk one. Principle 7.
Q) Any final comments?
A) Do approach us with any questions you might have. We are here to help.