Early adopters suggest pressure points for governance disclosures

The 3rd edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations came into effect on 1 July 2014. Most entities with a 30 June balance date will be disclosing against the new edition in their forthcoming annual reports, but 68 entities were ‘early adopters’. A random cross-section of disclosures from both large and small listed entities finds that 80 per cent of entities made their corporate governance disclosures on their websites and 40 per cent reported full adoption of the new recommendations and 60 per cent partial adoption.

Board skills matrix

The disclosures concerning the board skills matrix all dealt with the mix of skills and diversity that the board had rather than a projection of what it would be looking to achieve. Not all disclosures were in matrix form with the majority being statements describing the skills and experience of the board. Some entities did not adopt this recommendation with a number saying that they considered directors’ attributes prior to appointment or that the entity was small enough for the board to identify any gaps in board skills.

Committees

Most had a nomination committee, although a small number adopted the alternative and fewer still said they did not adopt this recommendation because they are too small or because of the nature of their business (for example, fund management entities). The majority had audit committees, with a handful adopting the alternative and, surprisingly, some having no audit committee. This needs to be viewed in light of how companies structure their risk committees, with the majority having one, and many noting that their risk committee also undertook audit committee functions. A number of entities provided varying degrees of detail about their alternative processes. On the remuneration committee front, more than three-quarters had one, with a handful adopting the alternative, of which only one did not utilise the ‘if not, why not’ regime to explain why (those that did were fund managers).

Risk management reviews

All entities reviewed said that they undertook risk reviews with a couple noting they were in the process of setting up one. While entities disclosed details of a review process (with varying degrees of detail), many did not explicitly say that a review had taken place. In some cases this had to be inferred from a description of the process that refers to an annual review.

Internal audit

More than half of the entities disclosed that they had an internal audit function, with slightly less than half noting they had processes for improving the effectiveness of risk management and internal control. Many of those who said they had alternative processes gave very brief detail. Only one entity did not adopt the recommendation because the ‘company is small enough and the board sufficiently knowledgeable of the operations to evaluate the effectiveness of risk management and internal control processes of the company’.

Sustainability risks

Disclosures in this area were generally weak. Many entities believed they had met their disclosure requirements by cross-referencing to other reports such as the risk section in their annual report or their corporate social responsibility (CSR) or sustainability reports. A number of these CSR and sustainability reports did not appear to have a risk focus. Notably, only a minority made statements as to whether these risks were material or not.

Induction and professional development

Only one of the entities reviewed did not have an induction program, due to ‘the uncomplicated nature’ of its business.

Company secretary

All entities reported adoption of this recommendation, although they were largely silent on separate reporting lines.

Background checks and information to be given for election of directors

All but one of the entities reviewed reported adoption of this recommendation, with the majority disclosing that they ‘’undertake appropriate checks’ and making reference to their notice of meeting with respect to Recommendation 1.2 (b). One entity reported that it did not adopt Recommendation 1.2(a) but did not disclose why.

Market focus

Market focus on forthcoming corporate governance statements will be on the information provided to investors, to allow them to assess the governance frameworks in their investee companies, on:

  • the nine new recommendations (1.2 (background checks and information to be given for election of directors); 1.3 (written contracts of appointment); 1.4 (company secretary); 2.6 (induction and professional development); 4.3 (external auditor at AGM); 6.1 (information on the website); 6.4 (facilitate electronic communications); 7.3 (internal audit); and 7.4 (sustainability risks))
  • the number of entities who took the opportunity to streamline their annual reports by making their corporate governance disclosures on their website
  • the number of entities who have chosen to adopt and report on the alternative to the committee structures in recommendations 2.1 (nomination committee); 4.1 (audit committee); 7.1 (risk committee); and 8.1 (remuneration committee), or the alternative allowed in recommendation 7.3 to disclose the risk management and internal control processes it has in place in lieu of an internal audit function
  •  (2.2 (board skills matrix), 7.1 (risk committee), 7.2 (annual risk review) and 6.2 (investor relations program))
  • recommendations that were a variation of a recommendation or disclosure in the second edition.

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