The past year has brought many new economy companies into the spotlight regarding their corporate governance and financial reporting practices. This often unwelcome scrutiny can be largely attributed to a trail of profit forecast downgrades, a six month ASIC surveillance of the tech companies’ financial reporting practices and the financial demise of many new technology companies after the April tech wreck.

It is not clear as to what degree a lack of confidence in these companies’ regulatory status has contributed to their roller-coaster ride on the stock market. It is clear, however, that a failure to address these issues has the capacity to undermine the reputation of corporate governance practice in all sectors, old or new.

As the peak membership body for best practice corporate governance in Australia, CSA has a vested interest in determining what concerns members have over these emerging issues. The purpose of this survey is to ascertain your views as to the performance of new technology companies in the area of corporate governance and gain some insight as to how these practices could and should be improved.

1. Is it your perception that most technology companies have appropriate corporate governance systems in place? Yes/No

No 95%
Yes 5%

1a. If not, then why?

Comments:

They appear not to be keeping the market properly informed of price sensitive information.
Lack of commitment and resource to corporate governance.
Many have directors and managers inexperienced in businesses other than high technology.
Reports in the paper stating the CEO did not know his obligations — astounding.
It is my perception that a great many technology companies appear to be led and managed by people with limited business experience, poor business plans and a limited appreciation of the their corporate governance requirements.
Inadequate disclosure.
The focus of these companies is on the “result” as quickly as possible usually by gifted techos who have little concern for administration or procedure.
Start up companies focus on new product and business not on compliance.
In experienced managed and few experienced directors prepared to take the risk of excepting an appointment.
It appears the main focus of management is to rapidly expanded business which is understandable but at the expense of good corporate governance practices which are essential for accurate and reliable ASX/Investor reporting.
Most have come to the market too early without knowledge of the obligations to external shareholders without experience of listed public companies and without suitably experienced boards of non-executive directors to guide them.

2. In your opinion, are the standards of corporate governance lower in new technology companies than in old economy companies? Yes/No

No 0%
Yes 95%
Unsure 5%

2a. If yes, in what areas?

Comments:

Remuneration for CEO and senior executives.
Disclosure of information, cash flow, financial analysis, timely reporting.
Independence of directors from management.
Board governance CFO governance.

3. Do you think that the measures that the ASX has introduced are adequate or is more regulation required for new technology companies? Yes/No

ASX Measures adequate

No                 4.8%
Yes              71.4%
Unsure           9.5%
Nil response 14.3%

More regulation required

No                71.4%
Yes                4.8%
Unsure           9.5%
Nil response 14.3%

3a. If yes, please specify

Comments:

Ultimately it is the responsibility of the company/directors to comply or face consequences.
Measures are adequate but ASX should continue to review possible new measures and companies shouldn’t be discriminated against solely because they are classified as new technology.
The answer is not more regulation but more enforcement. However the quarterly cash flow statements (Appendix 4c) should be expanded to include commitments to expenditure for the then current quarter and for 12 months to help reduce surprises.

4. What areas need to be addressed to engender confidence in the sector e.g. disclosure/ financial reporting standards/accounting treatment on appropriate capitalisation or expense of start up costs/structure and activities of the Board/timely communication with stakeholders?

Comments:

Quarterly reporting for first two to three years.
Realistic reporting of facts and issues as soon as they come to hand.
Communication and continuous disclosure.
High reporting and accounting standards.
Quality improvements to boards.
Proper Secretarial structures.
All of the above (i.e. suggestions in question 4).

5. How long do you think it will take to achieve investor confidence in this sector?

Comments:

Two to three years.
Three to five years.
One to two.
Full confidence will never be achieved.
Confidence will return when profitability and positive cash flow projections are achieved.
Five to ten years.
As long as it takes for the unviable companies to disappear and the survivors to establish a strong record, the next twelve months will be critical.
Two years.
Until the share prices of the majority of the tech companies recover.
Several years.
Ten years.
Five years.

Tim Sheehy
CHIEF EXECUTIVE