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Governance Institute guidance on the Corporate Governance Principles and Recommendations, 4th edition

  • Governance Institute has issued an Insights document which provides guidance on the new edition of the Principles and Recommendations.
  • The fourth edition contains 35 recommendations of which seven recommendations are new.
  • The Insights document includes a table of key changes and suggested actions.

Following the launch of the fourth edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (Principles and Recommendations). Governance Institute’s has issued an Insights document which provides an outline of the key changes in the new edition of the Principles and Recommendations.1

Governance Institute is a founding member of the ASX Corporate Governance Council and a member of the Council Drafting Committee for the Principles and Recommendations.

Introduction

The release of the fourth edition comes at a time when governance has been at the forefront of public debate in a way not seen since the Global Financial Crisis in 2008. The draft Principles and Recommendations were released for three months’ public consultation in May 2018. The Council’s intention in revising the Principles and Recommendations was to ensure they are contemporary and relevant in addressing emerging issues in corporate governance, including those arising from the recently concluded Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The consultation attracted 102 submissions (including ten confidential submissions), the largest since the consultation on the second edition in 2007. A wide range of interested parties made submissions, including: council members, investors (domestic and international), proxy advisory firms, professional services firms, business groups, academics and NGOs. Governance Institute consulted widely with our members in formulating our submission particularly our large and smaller listed entities and unlisted and not-for-profit entities. The Council released a consultation response to submissions. As the leading Australian statement on corporate governance the Principles and Recommendations influence governance practices across all sectors.

Many Governance Institute members provided practical input on the draft Principles and Recommendations. Governance Institute is also pleased to note that its contributions were acknowledged and accepted by the Council in a number of cases. We specifically acknowledge the substantial work by the chair and the secretariat of the Council, and the ASX chief compliance officer. The Council’s review was timely and had an appropriate focus on the importance of values, culture, non-financial risk and accountability. The original intention that the Principles and Recommendations follow a flexible market based approach to corporate governance practice and disclosure remains in place.

Starting from the second semester 2019, the Governance Institute’s postgraduate courses will all incorporate the fourth edition changes. The Institute’s short courses and other resources are currently being updated, including a number of Good Governance Guides.

New recommendations

The fourth edition contains 35 recommendations, compared to 29 in the third edition. Seven recommendations are new.

  • Recommendation 3.1: Listed entities are to articulate and disclose their values.
  • Recommendation 3: Listed entities should have and disclose whistleblower policies, and ensure that their boards or board committees are informed of any material concerns raised under their policies.
  • Recommendation 4: Listed entities should have and disclose their anti-bribery and corruption policies, and ensure that their boards or board committees are informed of material breaches of the policies.
  • Recommendation 4.3: Listed entities should disclose their processes to verify the integrity of periodic corporate reports released to the market that are not audited or reviewed by their external auditor.
  • Recommendation 2: Listed entities should ensure that their boards receive copies of all material market announcements promptly after they are made.
  • Recommendation 5.3: Listed entities giving a new and substantive investor or analyst presentation should release copies of the presentation materials via ASX Market Announcements Platform in advance of the
  • Recommendation 6.4: Listed entities should ensure that all substantive resolutions at a meeting of security holders are decided by a poll rather than by a show of

Two new recommendations are only relevant to a small set of listed entities:

  • Recommendation 9.1: Listed entities with a director who does not speak the language in which board or security holder meetings are held, or key corporate documents are written, should disclose the processes they have to ensure these directors understand and can contribute to meetings, and can discharge their obligations in relation to these documents.
  • Recommendation 9.2: listed entities established outside Australia should ensure that security holder meetings are held at a reasonable place and time.

There is also a separate section at the end of the principles clarifying their application to externally managed listed entities.

 
The ‘If not, why not?’ principle
The fourth edition retains the ‘if not, why not’ approach. Governance Institute strongly supports this principle, which has been in place since the first edition in 2003. It is structured into eight principles, supporting recommendations and commentary. All ASX listed entities are required to report against the Principles and Recommendations under the Listing Rules on an annual basis.Entities do not have to follow each recommendation. Their board of directors remains able to choose which governance practices to adopt, given its legal responsibility for managing its business with due care and diligence and for ensuring it has appropriate governance arrangements in place. As the Council explains:

‘Under the Principles and Recommendations, if the board of a listed entity considers that a Council recommendation is not appropriate to its particular circumstances, it is entitled not to adopt it. If it does so, however, it must explain why it has not adopted the recommendation — the “if not, why not” approach.’ (Principles and Recommendations p 2)

The entity’s explanation of why it chooses not to adopt a recommendation is also important information for investors and other stakeholders. The flexible ‘if not, why not’ approach ensures the market receives an appropriate level of information about the entity’s governance arrangements to give investors and others the ability to have a discussion with the entity about its governance. It also allows investors to factor the information provided into their decision on whether or not to invest in the entity and how to vote.

Key highlights

The Insights: ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, fourth edition contains more detail about key changes and suggested actions.

Board responsibilities

A number of additions to the suggested scope of the board’s role as described in a board charter:

  • defining the purpose of an entity
  • approving the statement of values which should underpin the desired culture
  • oversight of management’s instilling of the values
  • satisfying itself in relation to financial and non-financial risks
  • obtaining relevant information
  • challenging management and holding it to account
  • satisfying itself remuneration policies align with the entity’s purpose, values, strategic objectives and risk.

Diversity

Recommendation 1.5 has been revised to extend measurable objectives for achieving gender diversity to senior executives and the workforce generally. For entities in the S&P/ASX 300 Index the measurable gender objective for the board should be not less than 30 per cent of each gender within a specified period.

Governance Institute supports these changes, which should assist in improving board gender diversity in listed entities outside the S&P/ASX 200 index and across listed entities generally.

Independent directors

Where one of the interests, positions or relationships in Box 2.3 ‘Factors relevant to assessing the independence of a director’ exists, the commentary now indicates the board should rule the director not independent unless it is clear that it is not material and will not interfere with the directors’ independent judgment and capacity to act in the best interests of the company as a whole. The term ‘material business relationships’ now extends to relationships as professional advisers and consultants’. The term ‘close personal ties’ has replaced ‘close family ties’ and is intended to capture ties such as ‘family, friendship or other social or business connections’. The reference to ‘independence’ being compromised by length of tenure has been clarified as referring to independence from management and substantial holders.

Board skills matrix

The commentary under Recommendation 2.2 has been expanded to note that investors find it helpful if entities better explain specific skills in its skills matrix, and the criteria a director must meet to be considered to have that skill.

Culture and values

One of the most notable changes in the fourth edition is Principle 3’s emphasis on the importance of culture and values. There are also references throughout the document including:

  • Recommendation 1.1’s commentary around the respective roles of the board and management in relation to culture and values in the linkages to an entity’s values statement in many of the policies and the code of conduct
  • Principle 8 on remuneration
  • Recommendation 3.1 requires articulation and disclosure of an entity’s

Code of conduct

Recommendation 3.2 requires not only disclosure of the code but also informing the board or a board committee of material breaches of the code.

Whistleblower policy

Recommends entities to have and disclose a whistleblower policy (now a requirement under the amended Corporations Act 2001) and the board or a board committee is to be informed of material incidents reported under the policy.

Anti-bribery and corruption policy

Recommends entities to have and disclose an anti-bribery and corruption policy. The board or a board committee is to be informed of any material breaches of the policy.

Governance Institute supported these changes.

Market announcements, release of analysts’ presentations and voting by poll

The changes in these areas will be of particular interest to Governance Institute’s members:

  • Recommendation 5.2 requires that boards ‘promptly’ receive copies of all ‘material’ market announcements.
  • Recommendation 5.3 requires copies of new or substantive investor or analyst presentations to be released in advance of the
  • Recommendation 6.4 all substantive resolutions must be decided on a

Principle 7: Recognise and manage risk

The definitions of ‘economic sustainability’, ‘environmental sustainability’ and ‘social sustainability’ have been removed and replaced with ‘environmental risks’ and ‘social risks’. These terms capture a broader range of issues.

  • ‘Environmental risks’ are specifically defined as ‘risks for the entity associated with climate change, reduced air quality and water scarcity’.
  • ‘Social risks’ also captures a broad range of issues including the ‘risk of regulatory responses’ associated with the entity engaging in ‘modern slavery, aiding human conflict, facilitating crime or corruption, mistreating employees, customers and suppliers, or harming the local community’.

Recommendation 7.4 considers a range of frameworks for reporting material exposures to environmental risks or social risks including:

Where entities consider they do not have material exposures to these risks they are encouraged to benchmark their disclosures against peers. The commentary also encourages entities to consider whether they have material exposures to climate change risk by reference to the Task Force on Climate Change Disclosures framework. These changes represent the evolution of thinking around these risk categories and the emergence of a range of frameworks for reporting since the second edition in 2007.

New definitions

There are new or amended definitions in the Glossary for ‘corporate governance statement’, ‘corporate report’, ‘employee incentive schemes’, ‘environmental risks’, ‘externally managed listed entities’, ‘independent director’, ‘internally managed listed entity, ‘listing rule’, recommendation’, ‘senior executive’, ‘social risks’, ‘substantial holder’.

The definitions of ‘economic sustainability’, ‘environmental sustainability’ and ‘social sustainability’ have been removed.

Level of prescription

Many submissions expressed strong concerns about the level of detail and prescription in the consultation draft. The Council has responded by: removing commentary under Principles 2, 3, 7, 8, and removing a number of self-evident statements, and reducing duplication in the document.

Disclosure of policies

Each of the recommendations relating to the disclosure of governance policies, such as charters, policies and codes has been modified to require disclosure of the full version of these documents.

Conclusion 

This review of the Principles and Recommendations was timely, and had an appropriate focus on the importance of values, culture, non-financial risk and accountability. The original intention is that the Principles and Recommendations follow a flexible market based approach to corporate governance practice and disclosure.

The Council has succeeded in ensuring they remain contemporary and relevant in addressing emerging issues in corporate governance.

As mentioned above, a number of the Principles and Recommendations are an important reference as to ‘best practice’ for unlisted entities, the public sector and not for profits.

The first reporting date is an entity’s first full financial year commencing on or after 1 January 2020. Entities closing at 31 December will need to report against the fourth edition for their financial year ending 31 December 2020. Entities balancing at 30 June 2019 will need to report for the financial year beginning 1 July 2020 and ending 30 June 2021. The Council encourages early adoption of the fourth edition. Governance Institute advocated strongly for the deferral of the adoption date by six months, to allow sufficient time for ASX entities to adopt the changes.

Starting from the second semester 2019, the Governance Institute’s postgraduate courses will incorporate all the fourth edition changes. The Institute’s short courses and other resources are currently being updated, including a number of our Good Governance Guides.

We are here to help, so if you wish any guidance, please don’t hesitate to contact your local Governance Institute of Australia representative, who can point you at the right courses and resources to assist you.

Governance Institute of Australia welcomes your feedback and further input at:

info@governanceinstitute.com.au and phone 1800 251 849 @govinstaus

Governance Institute and NASDAQ are running an event series across several Australian cities, called ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations: Understanding the scope, nature and implications of changes from 5 to 15 March. Please join us and our panel of experts to discuss how these changes will affect your organisation.

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.

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