ISSUE NO.15 September 2003

"CORPORATE CITIZENSHIP"A NEWSLETTER OF

THE AUSTRALIAN COUNCIL OF SUPERANNUATION INVESTORS

ANNUAL GENERAL MEETING POSTPONED

Due to existing commitments of ACSI’s accountant and auditor it will not be possible to have the final accounts available for the AGM as planned for Monday 29 September 2003 at 5.00pm.

As such the new date and time for the AGM is now Wednesday 19 November from 5.00pm – 7.00pm in the IFS Boardroom, Level 29, 2 Lonsdale Street, Melbourne and will include a guest speaker. Followed by an informal dinner for those able to attend. Details of the dinner and speaker will be forwarded shortly.

We hope many of our members will be able to join us at the AGM.

CONTENTSANNUAL GENERAL MEETING POSTPONED......................1

AUSTRALIAN CORPORATIONS RESPONDING TO ACSI CONCERNS........................1

DIARY NOTE......................1

ASIC’S SCORECARD ON THE INDEPENDENCE OF AUSTRALIAN INVESTMENT BANK ANALYSIS................1

ASIC RELEASES DRAFT SRI GUIDELINES......................2

FINANCIAL REPORTING SURVEILLANCE PROGRAMME....................2

PROFIT WARNINGS AT RECORD LEVELS................2

OVERSEAS DEVELOPMENTS........................................3

AUSTRALIAN CORPORATIONS RESPONDING TO ACSI CONCERNS

ACSI has written to the chairpersons of ASX/S&P 200 Companies, introducing ACSI, its members and objectives. We have also introduced the ACSI corporate governance guidelines that outline a basis on which ACSI members will apply scrutiny on listed corporations in the best interests of protecting their equity investments.

Our overriding objective in this regard is to lay the foundation on which there can be constructive dialogue with these companies in the future.

As many of you would be aware, ACSI launched its Voting Alert Service this year to assist trustees to identify contentious corporate governance issues in the ASX/S&P 100 and to vote where possible on resolutions that relate to these issues. It is evident however that not all issues actually get to the shareholder floor. For example, a number of corporations do not have audit committees that are comprised of genuinely independent directors or continue to pay directors non-superannuation related retirement benefits despite growing concerns that such payments may be an obstacle to a director exercising independent judgement in light of protecting

ISSUE NO.15 September 2003

their own position and a retirement pot.

Therefore, ACSI has written to all companies who have had an AGM/EGM to date in 2003, outlined our particular concerns on a specific issue and invited feedback and clarification from the Company. We will in ensure that all members are given an overview of this feedback. Attached at Appendix A is a summary of feedback we have received to date. ACSI will review these responses and make further recommendations to subscribers on these companies where appropriate.

DIARY NOTE

ACSI’s 2004 Annual Conference will be held on 18 June 2004 at the Sofitel in Melbourne.

ASIC’S SCORECARD ON THE INDEPENDENCE OF AUSTRALIAN INVESTMENT BANK ANALYSIS

ASIC has recently released a report that was critical of how investment banks have failed to put adequate measures in place to reduce the scope for potential conflicts of interests of research analysts that they employ.

This follows a survey of eight unnamed investment banks in Australia.

The report identifies that in the context of an investment bank, conflicts of interests can arise between “the independence and objectivity of analysts’ research and the independence of the investment banking function”.

An inherent reason for this is the underlying “sell side” nature of the research analyst’ role who is expected to assist and generate objective investment strategies of the investment bank client’s whilst also assisting in securing revenue for the investment bank by playing a role in investment banking transactions. In other words, there

is a bias towards “buy” recommendations by these analysts particularly in circumstances where the dual roles and potential conflicts are not handled properly.

The ASIC study did not identify US style failings in Australia. In the US, brokers including JP Morgan, Citigroup and UBS Warburg paying out $2.4bill(Aus) to settle claims by investors for conflicted broking research practices of the 1990’s following investigations into practices that revealed that broker stock recommendations were inflated to attract “lucrative investment banking businesses from companies”.

The ASIC study identified the most significant ongoing concern as “continuing reliance on investment banking staff to identify conflicts of interests themselves and importantly on staff integrity to manage and disclose these conflicts. There is a risk that expectations of staff and management will be different and consequently without documented and tested guidelines and procedures, outcomes will be in inconsistent and pose a threat to the analyst, the bank and its investors.” ASIC regard this risk as unacceptable and undesirable from the perspective of sound practice.

More specifically, it found that investment banks do not have systems in place to prevent the misconduct that was involved in the flawed company research that applied in the United States.

ASIC also found that remuneration practices of investment banks that applied to research analysts, comprised of a mix of base salary and incentive components/bonuses. This caused a potential risk that “may result in a remuneration policy more closely aligned with investment banking revenues than research performance”.

The research also found that “there were some concerns that investment performance will remain one of the criteria for evaluating analyst performance,

which could generate a conflict of interest”.

Other key areas of concern included the lack of policing and guidelines that could apply to staff regarding to their own trading, buying and selling of shares following internal analyst recommendation.

The report concluded that “most of the problems centred on investment banks’ reliance on analysts to identify- and manage - potential conflicts of interests themselves. This was unacceptable and undesirable from the perspective of sound practice”.

The ASIC study will be taken into account in the Federal Government’s considerations for changes to the existing regulatory framework applying to analysts through CLERP 9. ASIC however provides a cautionary note that while international and domestic regulations were needed to promote consistency in application, there was a danger of “regulatory overload” with overly legalistic and rule based responses.

The Federal Opposition have cited the report as evidence of the failure of self-regulatory systems whilst the Government has applauded the industry that was “addressing these (identified) issues”.

ASIC RELEASES DRAFT SRI GUIDELINES

On 3 September ASIC released draft guidelines for the inclusion of information relating to labour standards and environmental, social and ethical factors in the product disclosure statements of investment products, as required under recent reforms to the Corporations Act. The guidelines are a non-prescriptive, principles-based approach.

The guidelines state that where product issuers do intend to have regard to some or all of these considerations, they must tell consumers which matters they take account of and how. Where there is no set approach, this must also be made clear. ASIC will undertake a

ISSUE NO.15 September 2003

review of the final guidelines in 2006. ASIC is inviting submissions on the draft guidelines by Wednesday 15 October 2003. Submissions should be sent to delia.rickard@asic.gov.au. For a copy of the guidelines visit www.asic.gov.au

FINANCIAL REPORTING SURVEILLANCE PROGRAMME

On 4 August 2003 ASIC announced details of its financial reporting surveillance programme for 2003-2004. ASIC will review the financial reports of 440 listed Australian entities for their compliance with accounting standards.

The review will cover compliance with all accounting standards, but will be constantly monitored to respond to market circumstances and any indications of inappropriate reporting trends. The programme reinforces the legal responsibility of Boards to ensure compliance with accounting standards. Performance in this area is being monitored, and abuses of the requirements will be liable for enforcement action. The surveillance program will also result in an increased focus on auditor compliance.

PROFIT WARNINGS AT RECORD LEVELS

A recent survey by Ernst & Young has shown that Australian listed companies issued 117 profit warnings in the second half of the 2003 fiscal year, up 52% on the first half, and up 33% of the previous corresponding half. Fifteen percent of the top 200 ASX listed companies issued profit warnings in the second half, up from 12% in the first half. This is in contrast to the UK where profit warnings for the same period were at a record low.1

OVERSEAS DEVELOPMENTS

USA

1 ‘The Corporate Library’, July 30 - August 12, 2003, Vol. 5, No.25

CalPERS introduces new investment standards

CalPERS have introduced new investment standards for the 90 brokers and investment banks with which the fund does business. The new standards include requirements that banks physically and administratively separate their investment banking and research units in a move to create firewalls that ensure the two do not communicate.2

Attorneys allowed to whistle blow

The American Bar Association (ABA) has approved a rule that allows, but does not require, attorneys to blow the whistle on corporate clients who are suspected of committing fraud or other financial malfeasance. Opponents of the rule contended that the new rule contradicts the profession's single most sacred ethic - attorney-client confidentiality. The proponents, who pushed the measure, argued that the public good outweighs such professional values, particularly considering the countless investors who were devastated by Enron and other scandals.3

Views on Sarbanes-Oxley

In the midst of the Australian debate about the value of regulatory and guidance reforms on corporate governance, a survey has been conducted in the US on this very issue. The survey was sent to 1,912 chief executives, chief compliance officers, and general counsel seeking views in relation to Sarbanes-Oxley at the end of September and elicited about a 10% response rate within one week. The initial results have revealed that 75% of respondents feel they are now exposed to greater liability, and 93% said the cost of compliance would certainly continue to rise over the next year. Seventy-two percent said they favour increased scrutiny of corporate governance, while 60% said the reforms already go too far.

2 ‘The Corporate Library’, August 13 - August 19, 2003, Vol. 5, No.26 3 See Footnote 1

The positive news is that fifty-four percent said they believed the Act had boosted investor confidence in the US.4

Kodak Establishes Governance Position

Kodak announced in the beginning of August that it had appointed its first chief governance officer (CGO). The CGO will be responsible for helping Kodak comply with new federal and state mandates, as well as those imposed by the New York Stock Exchange. Kodak is one of only about 60 US companies to have appointed a CGO, but the trend towards creating such a post at listed companies in the US is clearly accelerating.5

UK

Revised Combined Code issued

The Financial Reporting Council has finalised the new Combined Code on Corporate Governance. The new Code is based on the draft revision of the existing Code that Derek Higgs suggested in his report on non-executive directors published in January.

The Code’s overall aim is to enhance board effectiveness and to improve investor confidence by raising standards of corporate governance. The main features are: new definitions of the role of the board, the chairman and the non-executive directors; more open and rigorous procedures for the appointment of directors; formal evaluation of the performance of boards, committees and individual directors; as well as enhanced induction and more professional development of non-executive directors.

As with the existing Code (similar to the ASX guidelines), in order to meet their obligations under the Listing Rules, UK listed companies will have to describe how they apply the Code’s main and supporting principles and either confirm that they comply with the Code’s provisions or provide an

4 See Footnote 15 See Footnote 1

ISSUE NO.15 September 2003

explanation to shareholders. The new Code emphasises that companies and institutional investors should enter into dialogue based on trust and mutual understanding. Companies should give helpful and informative explanations, and institutional investors should take a considered approach when evaluating them.

The code also advises that at least half the board in larger listed companies be independent non-executive directors, with a definition of independence of non-executive directors; the separation of the roles of the chairman and the chief executive to be reinforced; and that a chief executive should not go on to become chairman of the same company.

The new code comes into effect on 1 November.6

Company turns on Investor Apathy

Unilever PLC has written to 10 institutional shareholders to ask them why they did not vote at its last annual meeting. Unilever's move contradicts conventional wisdom suggesting that companies are happiest when shareholders are silent. "In the current corporate governance climate we wondered whether this was for policy reasons or whether there were technical reasons," said a representative of Unilever. Unilever has since discovered that three of the 10 actually did try to vote, but the balloting process had gone awry. The company said it is eager for institutional directors to register their opinions and added that it "would welcome the chance to talk this issue through." Hopefully this is a sign of things to come.7

NZ

New Zealand Exchange corporate governance rules

In the first week of August the NSX published its final version of

6 ‘UK Financial Review Council issues governance code’, www.cch.com.au, 03 September 2003 and <http://www.frc.org.uk/publications/publication419.html>7 See Footnote 1

proposed revisions to its corporate governance rules for listed companies. The revisions were made after a consultation period on earlier proposals by industry participants. A requirement for director certification was dropped in favour of a code of practice, which recommends a list of appropriate training courses for directors. Requirements for the independence of directors and audit committees are also included in the new rules.8

8 See Footnote 2

Michael O'SullivanPresident

Level 29, 2 Lonsdale StreetMELBOURNE VIC 3000

Tel: (03) 9342 1450Fax: (03) 9342 1499

Mobile: 0418 996 359Email: mosullivan@caresuper.com.au

Phillip SpathisExecutive Officer

Level 29, 2 Lonsdale StreetMELBOURNE VIC 3000

Tel: (03) 9657 4375Fax: (03) 9657 4378

Mobile: 0417 501 065Email: pspathis@ifsfairley.com.au

This newsletter is correct to the best of our knowledge and belief at the time of going to press. It is, however, written as a general guide so it is recommended that specific professional advice is sought before any action is taken

APPENDIX A

ACSI – ENGAGEMENT

Company: AMP

ACSI Concern:

Company provides retirement packages to non-executive directors at the end of their tenure (in excess of SG).

Response: Board has reviewed non-executive director remuneration arrangements. One-third of non-executive director fees will be paid as AMP shares. Directors with existing cash based retirement benefit will have arrangements frozen from 25 March 2003. The Board is made up of a majority of independent directors. AMP considers that all member of each committee of the Board are independent. ACSI has asserted that Ian Reynard (who retires on 31 August 2003) is not independent on the basis of related party disclosure. AMP asserts that $104,811 of legal fees paid to the legal firm Allen Arthur Robinson in 2002 is not ‘material to AMP or to Allens Arthur Robinson’, and therefore not an impediment to independence.

ACSI Concern:

In accordance with ACSI guidelines Mr I Renard would not be defined as independent on the basis that he is a former partner of a legal adviser to AMP. As such the audit committee is not wholly comprised of independent non-executive directors.

Response: The Board believes that each of the non-executive directors is independent. As such, the Board’s standing Committees: Audit and Compliance, Nomination and Remuneration are all composed entirely of independent non-executive directors.

The Board do not consider that the $104,811 paid in legal fees to Allens Arthur Robinson during 2002 to be material to AMP. Mr I Renard retired from the Board on 31 August.

AMP Directors’ Report for half year 30 June 2003 asserts “AMP endorses the 10 essential Corporate Governance Principles and already follows most of the Best Practice Recommendations.

Company: CSR

ACSI Concern:

Chairperson of the Board is also the Chair of the Remuneration and Nominations committee.

Response: The CSR Board has reduced to 5 non-executive directors and one executive director following the de-merger with Rinker. The audit committee comprises of two non-executive directors and the chairman. The combined remuneration and audit committees comprises of the other two non-executive directors and the chairman. The chairman does not chair either of these committees.

CSR contends that the committee structure “is a sensible one given the size of the board and that it is consistent with ASX guidelines”.

Company: Coca-Cola Amatil

ACSI Concern:

The majority of the Board is not comprised of independent directors.

Response: CCA’s Board has 4 independent directors, 2 executive directors, and 2 directors nominated by The Coca-Cola company. The Chairman is an independent director and has the casting vote in the event of a tied vote of directors and as a consequence the independent directors have a majority vote at board level. Therefore they believe the CCA satisfies the ASX guidelines in relation to the majority of board being independent.

It has formed a related party committee comprising of the four independent non-executive directors to review transactions between the company and its related parties including the Coca Cola company.

ACSI Concern:

Company provides retirement packages to non-executive directors at the end of their tenure (in excess of SG).

Response: As at 31 December 2002, entitlements to retirement allowances for non-executive directors has been terminated.

Company: Macquarie Bank

ACSI Concerns:

Non-executive directors receive share options.

Response: On non-executive remuneration, part of non-executive director remuneration can be taken in the form of fully paid ordinary shares, as they are also required to maintain a minimum shareholding of at least 4000 shares, which is equivalent to annual directors fees. The Bank has suspended the non-executive directors option plans and replaced this with contingent “additional remuneration” valued at 20% of fees and payable on meeting pre-agreed return over last 3 years at or above 65 th percentile of companies in S&P/ASX Industrial Index.

Company: Macquarie Bank Cont…

ACSI Concern:

Mr Clarke is an Executive Chairperson.

Response: With regard to the ‘independence’ of the executive chairperson, David Clarke, Macquarie considers that he is best placed to deal with Macquarie’s ‘complex and highly specialised’ activities, and this provides ‘significant advantages’ of ‘having executives in both setting and implementing strategy’. Therefore the existence of an executive chairperson according to the Bank, works well on a long-term basis. In addition, the Bank has nominated a range of checks and balances to heighten investor’s levels of comfort, including providing the check of management power, including:

Separation of the role of a Lead Independent Director;

The appointment of Lead independent Director;

Having the majority of Independent Directors on the Board – when Catherine Livingstone joins the Board in November it will comprise seven independent directors and four non-independents;

The Independent Directors meeting at least annually in the absence of the other Voting Directors and management;

The delegation of certain responsibilities to Bard Committees, a number of which the Chairman is not a member;

All Directors having access to other members of management in relation to the Board Committees of which they are members;

The ability of Directors to seek independent professional advice for company related matters at the Bank’s expense;

Appropriate induction procedures for new directors which ensure that they can fully contribute to Board discussions at the earliest possible time; and

An annual assessment of the Executive Chairman and CEO by the Independent Directors.

The Macquarie Board recognises that the ASX Corporate Governance Guidelines set out ‘best practice’, they implicitly recognise that ‘one size does not fit all’. Macquarie Board is made up of majority independent directors, which is further enhanced with the recent appointment of Catherine Livingstone. Kevin McCann has been appointed chairman of the Macquarie Board Governance Council.

Company: Macquarie Bank Cont…

ACSI Concern:

Independence of non-executive directors. In particular Non-executive director(s) serving on a board for more than nine years and where a material contractual relationship exists.

Response: The Bank has submitted an extensive criteria of the definition of independent directors that includes:

Is not a substantial shareholder of the bank or of a company holding more than ten per cent of the bank’s voting stock or an officer of or otherwise associates directly or indirectly with a shareholder holding more than ten per cent of the Bank’s voting stock;

Has not within the last three years been employed in an executive capacity by the company or another group member or been a director after ceasing to hold any such employment;

Is not a principal or employee of a professional adviser to the Bank and its entities whose billings exceed five per cent of the adviser’s total revenues. A Voting Director who is a principal or employee of a professional adviser will not participate in any consideration of the possible appointment of the professional adviser and will not participate in the provision of any service to the Bank by the professional adviser;

Is not a significant supplier or customer of the Bank or its entities or an officer of or otherwise associated directly or indirectly with a significant supplier or customer. A significant supplier is defined as one whose revenues from the Bank exceed five per cent of the supplier’s total revenue. A significant customer is one whose amounts payable to the Bank exceed five per cent of the customer’s total operating costs;

Has no material contractual relationship with the Bank or any of its associates other than as a director of the Bank;

Is not a director of any of Macquarie Bank’s subsidiaries with the Voting Director’s ability to act in the best interests of the Bank and independently of management.

Macquarie promotes renewal Board membership to ensure it objectively promotes the retirement of non-executive directors after 12 years compared to the 9 years promoted by ACSI.

ACSI had asserted that Mr McCann, a partner at Allens Arthur Robinson should not be regarded as independent, in light of various contractual relationships between the two entities. Macquarie regards that Allens Arthur Robinson’s billings from Macquarie represent less than 5% of total billings that this is not an impediment to independents.