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What’s new in the May 2014 ASX Principles?

By James Beck

The third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Principles) was released on 27 March 2014 and takes effect for a listed entity’s first full financial year commencing on or after 1 July 2014. There are now 29 recommendations to give effect to the 8 principles as opposed to 30 in the draft version. Removed from the final edition was Draft Recommendation 8.3, which proposed entities have a ‘clawback’ policy setting out the circumstances in which the entity may claw back performance-based remuneration from its senior executives.

The key revisions are:

  • nine new substantive recommendations (1.2, 1.3, 1.4, 2.2, 2.3, 2.6, 4.3, 7.3, 7.4)
  • enhanced recommendations on risk (7.1, 7.2)
  • changes to the diversity recommendation (previous recommendations 3.2-3.4 combined and modified in 1.5)
  • the reporting requirements are now self-contained within each recommendation to make it clear to listed entities what has to be disclosed
  • the ability for listed entities to report governance disclosures on their websites rather than in the annual report (ASX Listing Rule 4.10.3).

Of these revisions, the following have no equivalent in the previous edition of the ASX Principles, although they were addressed in the commentary:

  • Recommendation 1.2(a): Listed entities should ‘undertake appropriate checks’ (such as criminal record, bankruptcy, education and character reference checks) before appointing a person, or putting forward to security holders a candidate for election, as a director.
  • Recommendation 1.2(b): Listed entities should provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director.
  • Recommendation 1.3: A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment.
  • Recommendation 1.4: The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board.
  • Recommendation 2.2: A listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership.
  • Recommendation 2.3: A listed entity should disclose:
    – the names of the directors considered by the board to be independent directors;
    – if a director has an interest, position, association or relationship of the type described in Box 2.3 but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position, association or relationship in question and an explanation of why the board is of that opinion; and
    – the length of service of each director.

Of note, in the draft of this edition of the ASX Principles, the factors relevant to assessing director independence (Box 2.3) included whether a director ‘has been a director of the entity for more than 9 years’. This has been watered down to say ‘has been a director of the entity for such a period that his or her independence may have been compromised’. However, the commentary to this recommendation does state that the board should ‘regularly assess’ the independence of ‘any director who has served in that position for more than 10 years’.

  • Recommendation 2.6: A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively.
  • Recommendation 4.3: A listed entity that has an AGM should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit.
  • Recommendation 7.3: A listed entity should disclose if it has an internal audit function, how the function is structured and what role it performs; or if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes.
  • Recommendation 7.4: A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.

All listed companies should review the enhanced risk recommendations carefully and consider whether they need to upgrade their corporate governance practices in this area. Recommendation 7.3, that entities should disclose whether they have an internal audit function or how they handle internal audit processes if they do not, will be a wakeup call to many of the listed entities that are yet to embrace the assurance that internal audit provides.

The ASX Principles now include enhanced recommendations for disclosure of material exposures to economic, environmental and social sustainability risks, including how those risks are managed.

Previous editions have contained general recommendations around sustainability risks and suggested that listed entities ‘should consider making’ more detailed disclosures. The new Recommendation 7.4 now requires disclosure where material exposures to risks exist. Material exposure is defined as ‘a real possibility that the risk in question could substantively impact the listed entity’s ability to create or preserve value for security holders over the short, medium or long term’. The glossary to the ASX Principles also explains what is meant by economic, environmental and social sustainability risks.

Recommendations 2.1, 4.1, 7.1, 8.1 and 7.3 on nomination, audit, risk and remuneration committees have been amended to allow for listed entities to employ alternative governance practices in respect of nomination, audit, risk and remuneration functions. This recognises that it may not be practicable for certain entities (for example, entities with smaller boards) to establish separate committees to perform these functions, and the changes will enable those entities to report positively (rather than negatively) that they have complied with the recommendations.

In relation to diversity, listed entities with 100 or more employees may streamline their gender reporting by relying on their report of ‘Gender Equality Indicators’ under the Workplace Gender Equality Act 2012 (Cth) as satisfying the requirement under Recommendation 1.5 to disclose proportions of men and women on the board, in senior executive positions and across the organisation.

While it is compulsory only for listed entities to make disclosures about their compliance with the ASX Principles, they serve as leading practice guidance to many other entities outside of the ASX. Thus, the new recommendations are worthy of reflection more widely given that they form the basis of what is required in a sound system of corporate governance.

A copy of the new ASX Principles is available on the ASX website (click here) as well as a summary of the changes (click here).