ASX Demutualisation
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The Demutualisation of the Australian Stock Exchange: Causes and Consequences By Tom Cowan, Ray da Silva Rosa & Terry Walter Keywords: Australian Stock Exchange, Demutualisation, Corporate Governance, Organisational Structure Acknowledgments This study would not have been possible without the generous support of the Australian Stock Exchange (‘ASX’). Specifically, we are very grateful for the time taken by Maurice Newman, two anonymous Directors, Karen Hamilton and David Shortland to discuss the finer details of the demutualisation process. Our thanks also go to ASX staff (or former staff) members: Justine Newby, Jason Anderson, Jason Keady, Mark Blair, Peter Skalkos, Kris Vogelsong, John Hulst and Ann Reckie for providing us with extensive information and resources. There are also several former members of ASX to whom we owe our sincere thanks: Rob Thomas, John McIntosh and an anonymous former member, all of whom provided insightful comments about the demutualisation process. A special ‘thank you’ to James Lloyd and Peter Falk for their very helpful critiques and comments. Their time and effort was much appreciated. We wish to thank Professor Peter Swan and Professor Stephen Taylor for their invaluable contributions. Additionally, we are grateful for the opportunity to use the resources available at the Securities Industry Research Centre of Asia-Pacific (‘SIRCA’). In particular, we thank two SIRCA computer programmers, Darryl Young and Giancarlo Filippo. 2 Executive Summary The Australian Stock Exchange (‘ASX’) demutualised on 13 October 1998. A day later, it listed on its own market. This monograph examines the reasons for and outcomes of the demutualisation process on the basis of interviews with current and former ASX directors, managers and former members. The interviews are supplemented with extensive access to a wide range of ASX produced reports and documents. The analysis reveals that increasing competition and the inherent inefficiencies of a mutual structure were the main reasons for ASX’s demutualisation, consistent with research from the insurance and banking industries. There is evidence that the change in organisational structure has improved ASX as a business and increased stakeholder value. 3 1.0 Introduction# On 14 October 1998, the Australian Stock Exchange (‘ASX’) listed following its members’ vote to convert from a mutual structure to a stock-based company, thus changing the distribution of ownership and control. In a stock-based company, the common shareholders are the residual claimants of the corporation. The shareholders’ residual claim is unrestricted and may be sold without reference to other shareholders. In a mutual organisation, the owners are also customers of the organization and are unable to freely dispose of their stakes. Further, in mutuals the rights to profits or losses reside with its customers and so the customers share risks that the organization has not diversified away. The conversion from a mutual structure to a stock-based company was thus a very significant change in corporate governance for ASX. ASX is the first exchange in the world to list on its own market.1 The move has been a success for ASX and its stakeholders by several measures. By October 1999, the shares were trading at over two times the initial opening price.2 At the end of its first year as a public company, ASX announced a record profit with operating profit after tax 126% above the previous financial year. The change in ASX’s corporate structure and its subsequent positive performance raises several questions, addressed in this monograph. What were the pressures that prompted the change from a mutual structure, which is common for stock exchanges, to a stock-based company?3 Secondly, how was the process managed, given that gains and losses from the change were not borne equally or proportionately among the stakeholders of the mutual # This study would not have been possible without the generous support of the Australian Stock Exchange (‘ASX’). Specifically, we are extremely grateful for the time taken by Maurice Newman, two anonymous Directors, Karen Hamilton and David Shortland to discuss the finer details of the demutualisation process. Our thanks also go to ASX staff (or former staff) members: Justine Newby, Jason Anderson, Jason Keady, Mark Blair, Peter Skalkos, Kris Vogelsong, John Hulst and Ann Reckie for providing us with extensive information and resources. There are also several former members of ASX to whom we owe our sincere thanks: Rob Thomas, John McIntosh and an anonymous former member, all of whom provided insightful comments about the demutualisation process. A special ‘thank you’ to James Lloyd and Peter Falk for their very helpful critiques and comments. Their time and effort was much appreciated. We wish to thank Professor Peter Swan and Professor Stephen Taylor for their invaluable contributions. Additionally, we are grateful for the opportunity to use the resources available at the Securities Industry Research Centre of Asia-Pacific (‘SIRCA’). In particular, we thank two SIRCA computer programmers, Darryl Young and Giancarlo Filippo. 1 The Stockholm Stock Exchange was not the first as it is a subsidiary of a listed company, OM Gruppen. In fact, the Swedish government passed legislation to prevent the SSE from listing on its own market as it considered such a scenario to be “inappropriate” [Offer Document for the Stockholm Stock Exchange (1992)]. 2 The share price peaked on 16 March 1999 at $16.18 or a 281% rise from the initial opening price. 3 A stock-based company refers to a company limited by shares. 4 structure? Thirdly, how have the corporate governance structures of ASX evolved since demutualisation? Answers to the above questions are of interest to stakeholders in other stock exchanges. Globalisation of financial markets has intensified competition across exchanges.4 Alliances and consolidations are occurring in attempts to attract more investors on the basis of lower transaction costs, more products and increased liquidity. Specific examples include the merger of the American Stock Exchange (‘AMEX’) and the National Association of Securities Dealers Automated Quotation (‘NASDAQ’), the merger of the Chicago Board Options Exchange with the Pacific Exchange and in Europe, the formation of Euronext out of the Amsterdam, Brussels and Paris Exchanges. In Australia, ASX has signed an agreement with NASDAQ, NYSE, AMEX and SGX which will provide joint trading of securities on reciprocal markets. ASX has stated that global alliances should allow for the exchange to move to 20 hour trading days.5 In the years following the ASX listing, a number of the world’s major exchanges such as the London Stock Exchange (‘LSE’), NASDAQ and the Stock Exchange of Hong Kong (‘SEHK’) have followed ASX and demutualised. Many other exchanges such as NYSE are considering a new structure in order to remain competitive in the face of regulatory and technological changes that threaten their viability in the global environment. The question thus arises should these exchanges follow ASX’s model? 1.1 Economic Significance of Stock Exchanges Stock exchanges have a vital role in the economy. Between 1993 and 2000, ASX mediated over $157.2 billion6 of funds from savers to productive enterprises through initial public offerings and other capital raising activities.7 By the end of the 1999 financial year, the value of the market was equivalent to 88.6% of the national gross domestic product. The central role of exchanges in allocating capital underlines the importance of exchanges having appropriate organisational structure and corporate governance mechanisms. Further, in 4 Cross-exchange equity trading increased from US$0.3 trillion in 1988 to US$2.3 trillion at the end of 1995 [Smith and Sofianos (1997)]. Factors that have contributed to the globalisation of securities markets include: the deregulation of stock exchanges, improved technology and capital mobility, the Internet and increases in contributions towards superannuation funds. 5 ASX Press Release – 17 June 1999. This comment was made in regard to the NASDAQ alliance. 6 In this study, all currency is in Australian dollars except where otherwise stated. 7 Australian Stock Exchange Fact Book (1999). 5 Australia, over 57% of the adult population have exposure to the Australian share market either through direct ownership or indirect means such as managed funds.8 The chairman of ASX, Maurice Newman, was thus underlining a non-controversial proposition when he said “economic growth and employment prospects are enhanced by efficient capital markets which reduce capital formation costs and enable benefits to be widely spread”.9 1.2 Analytical Framework In analyzing ASX’s change in corporate structure we draw principally on agency theory. The key premise of agency theory is that organizational structure affects employees’ (ie, agents) incentives to act in the interest of the stakeholders (ie, principals) who hire them.10 Different industry conditions may require different organizational forms for optimal performance. A literal interpretation of this view implies there is a uniquely optimal form of organisation for each industry. Casual observation indicates this is not the case.11 However, the agency perspective can serve to identify the pressures on an organisation to adapt and the likely consequences of that adaptation. We adopt the view that the agency perspective may not explain all aspects of the demutualisation of ASX but it is likely to yield several significant insights. If the change has been successful, the members, ASX listed companies and stock market investors (‘investors’) will all have benefited from the change in organisational structure. 1.3 Original Contributions This study entails the use of a unique data source: ten interviews with current and former ASX directors, managers and former members.12 The interviews are supplemented with a wide range of internally produced reports and documents from ASX. The monograph thus provides a detailed history of the lengthy process undertaken by ASX in becoming the first 8 ASX Fact book 2001 9 Australian Stock Exchange Listing Memorandum (1998).