Skip to content
Journal

CEO Memo, May

The ASX Corporate Governance Principles, originally introduced more than two decades ago, have undoubtedly played a crucial role in shaping Australia’s corporate governance landscape. They provide a comprehensive framework for organisations and are often hailed as a beacon of best practice on matters such as board composition, risk management, disclosure practices and the like.

But as the consultation on the proposed 5th edition closes, it is important to ensure that the principles strike the right balance to encourage better governance (which demonstrably leads to better business outcomes) without stifling innovation and corporate risk-taking (which can also lead to better business outcomes).

While the principles have the very worthy goals of enhancing transparency, accountability, and investor confidence – all values espoused and supported by the Governance Institute – their one-size-fits-all approach fails to consider the unique challenges faced by smaller organisations or the needs of businesses in different sectors or phases of their evolution and/or maturity. As regulatory burdens mount, these companies could soon find themselves restrained by seemingly prescriptive measures rather than supported by them, hindering organisational growth and innovation.

What works for larger corporations at the top end that have ample resources and established infrastructures may not necessarily benefit those without the big budgets and manpower.

It is crucial to acknowledge that smaller listed companies play a vital role in driving economic growth, fostering innovation, and creating employment opportunities across Australia. Governance Institute and its members have expressed concerns that the current ASX governance framework risks marginalising these companies. To truly foster a thriving ecosystem, policymakers must consider tailoring governance standards to accommodate the diverse needs and capacities of all listed companies, especially the smaller ones.

Flexibility is essential in order to provide agility in dynamic markets. Whilst the ASX principles are written on an “if not, why not” basis, they essentially become quasi-regulation due to investor pressure.  This often leaves little room for adaptation and makes it difficult for smaller firms lacking the financial resources to comply with every guideline, leading to a diversion of valuable resources from core business operations to bureaucratic compliance.

Moreover, the compliance costs associated with adhering to ASX governance standards can be exorbitant for smaller companies. From appointing independent directors to implementing sophisticated risk management frameworks, the financial burden can be overwhelming, particularly for companies operating on tight budgets. These expenses divert funds that could otherwise be allocated to research, development, and expansion initiatives, ultimately impeding their competitiveness and growth prospects.

By imposing uniform standards without considering the unique circumstances of a range of firms, the ASX governance framework may inadvertently stifle innovation and hamper entrepreneurial spirit. Executives may find themselves preoccupied with meeting these quasi-regulatory requirements to avoid investor backlash. This bureaucratic red tape not only hampers productivity but may discourage aspirational companies from pursuing listing on the stock exchange altogether.

To support the vitality of Australia’s capital markets and foster an environment conducive to entrepreneurship, policymakers need to focus on flexibility and proportionality. In striking a balance, public capital markets must remain attractive to both retail and institutional shareholders. While robust corporate governance is essential for maintaining investor confidence, it should not come at the cost of deterring investors.

As Australian companies, particularly listed companies and APRA regulated entities face an onslaught of significant regulatory change, including for many larger companies mandatory climate-related financial disclosures, Governance Institute is also concerned that the currently proposed adoption date of the corporate governance principles in the first full financial year commencing on or after 1 July 2025 does not allow sufficient time for listed companies to prepare, particularly as some boards may only meet three times during that period.

Our members are urging the Council to push back the start date to allow a full year between the release and the commencement of the first reporting period. As with previous editions, the Council can encourage early adoption by those companies in a position to do so. Deferral of the adoption date would also allow time for finalisation of the mandatory climate-related financial disclosure legislation.

Our full response to the ASX Corporate Governance Principles 5th Edition consultation will be available on the submissions page of our website from May 6.

Shareholders and directors disputes: Just and equitable winding up

Next article