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New Corporate Governance Principles too prescriptive, says Governance Institute

Governance Institute of Australia has raised concerns with the draft 4th edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (Principles and Recommendations), including the increased level of prescription in a number of areas and the  inclusion of imprecise terms such as ‘social licence to operate’.

“The Principles and Recommendations have played a vital role in improving corporate governance within Australian listed companies since they were first released in 2003. We continue to support them and the ‘if not, why not’ approach to their application” said Steven Burrell, Chief Executive of Governance Institute.

“However, the increased level of prescription in a number of areas within the draft Principles and Recommendations encourages a ‘tick the box’ approach to disclosure. This could be counterproductive and would not lead to improved disclosures.”

“Our members are concerned about the marked increase in the level of prescription both in the text of some of the Recommendations and in many areas of the new Commentary. This is at odds with the intent of the Principles and Recommendations”

“The intent of the Principles and Recommendations is as a flexible disclosure-based approach to corporate governance reporting. It is also in contrast to the recently published ‘shorter, sharper’ UK Corporate Governance Code which was revised to reduce the level of complexity”, he said.

“Our members are also concerned with the proposed changes to Principle 3 to recognise the fundamental importance of a listed entity’s ‘social licence to operate’ and the need for it to act lawfully, ethically and in a ‘socially responsible manner’”.

“We are concerned that the phrase ‘social licence to operate’, which first originated in the mining and gaming sectors, is now being used in a way that makes it open to a broad range of potentially extremely subjective interpretations. This term can mean very different things to different parties.”

“The term has become loaded and is easily used to describe opposition or disagreement, rather than what we consider the Council intends, which is a concern going to the heart of how an entity is operating. We are concerned that the term is easily appropriated by interest groups that disagree with proposals to argue that their opposition indicates that a company has ‘lost’ its social licence to operate, when the fact is that there is a particular group opposed to a course of action or proposal”, he said.

Governance Institute also considers the Council could provide greater elaboration around the ‘if not, why not’ approach to the application of the Principles and Recommendations. An explanation of the model is important, given the large quantity of other governance guidelines issued by multiple parties.

“As we have observed on a number of occasions, some users of corporate governance information treat commentary as if it were a reporting requirement. Highlighting the ‘if not, why not’ approach in more than one place also assists the market to counteract the tendency to assume that entities must ‘comply’ with the Principles and Recommendations or be ‘marked down’ on governance practice” Mr Burrell added.

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