The age of compliance: is your company ready to adopt the new ASX Corporate Governance Principles and Recommendations?

By Michelle Eastwell and Melissa Grundy

Key issues:

  • The ASX Corporate Governance Council released the Fourth Edition of the Corporate Governance Principles and Recommendations on 27 February, 2019.
  • The Principles are non-prescriptive, recommended principles made by the Council that govern all listed entities’ internal systems and processes to achieve good governance outcomes and promote investor confidence in the market.
  • If a listed entity has a financial year ending 31 December the new Principles will come into effect for the financial year ending 31 December 2020.  Listed entities with a financial year ending 30 June will have the new Principles come into effect for the financial year ending 30 June 2021.

Amongst the cultural wreckage that litters the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the release of the Fourth Edition of the Corporate Governance Principles and Recommendations (Principles) by the ASX Corporate Governance Council (Council) on 27 February 2019 is a welcome beacon for listed entities seeking guidance into the harbour of good corporate governance.

In this article, we highlight the key amendments implemented by the Principles, which will come into effect for listed entities’ first full financial year commencing on or after 1 January 2020 and the implications they may have for entities’ other governance processes. If a listed entity has a financial year ending 31 December, the new Principles will come into effect for the financial year ending 31 December 2020. Listed entities with a financial year ending 30 June will have the new Principles come into effect for the financial year ending 30 June 2021. Although reporting against the Principles will be mandatory by these dates, entities need not wait until that time to adopt the enhanced processes outlined in the Principles.

It is important to recognise that the Principles should not be solely considered the remit of listed entities. All organisations, including not-for-profits and government-owned corporations, will benefit from the guidance they provide as to leading  governance practice.

What are the Corporate Governance Principles and Recommendations?

The Principles are non-prescriptive, recommended principles made by the Council that govern all listed entities’ internal systems and processes to achieve good governance outcomes and promote investor confidence in the market.

Principles of “good corporate governance” are difficult to distil down to a one-size-fits-all mandate. As such, the Principles form part of a listed entity’s periodic disclosure requirements under Chapter 4 of the ASX Listing Rules on an “if not, why not” basis (i.e. listed entities are required to either adopt the Principles into their corporate governance practices, or explain to shareholders any departure from those Principles, based on a variety of factors).

What has changed?

The Council endeavours to adapt the Principles to the corporate governance climate and changing community expectations. The amendments made to the Principles by the Council in releasing the Fourth Edition focus on the crucial topics of culture, values, and integrity.

The 29 specific recommendations made under the Third Edition of the Principles have now been expanded to 35.

A summary of the key amendments to the Principles is set out below.

What has changed What this means
Amendments made to Principle 1: a listed entity should articulate and disclose its core values Recommendation 1.1 has crystallised a listed entity’s obligation to disclose information regarding the roles and responsibilities of its board, to having a board charter that sets out this information.

Further, it has been specified that under its charter, the listed entity should be satisfied that an appropriate framework exists for relevant information to be reported by management to the board, and that whenever required, the board challenge management and hold it to account.
Companies that do not already do so should consider adopting a board charter.

A well-constructed board charter will provide clarity for the board and management regarding their respective roles and responsibilities, form a foundation for the induction of new directors and assist the board with its work planning.

Amendments made to Recommendation 1.2: a listed entity should:

  1. undertake appropriate checks before appointing a director or senior executive or putting someone forward for election as a director; and
  2. 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.
This Recommendation now applies to senior executives as well as directors. For these purposes, “appropriate checks” would usually include checks as to the person’s character, experience, education, criminal record and bankruptcy history.

Further, when providing information to security holders about a candidate standing for election or re-election as a director, in addition to a statement by the board as to whether it supports the election or re-election of the candidate, listed entities should also provide a summary of the reasons as to why the board has taken this view.

Amendments made to Recommendation 1.3: A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. Clarification has been included to this recommendation, the exception being where an entity is a bona fide professional services firm and provides the services of a CFO, company secretary or other senior executive on an outsourced basis. In that case, it is acceptable for the agreement to be between the entity and the professional services firm.

The Council is aware that some directors of listed entities supply their services through a “personal services company” and have their fees paid to that company rather than to the director personally. New notes added to the Recommendation state that, provided the director has a personal letter of appointment with the listed entity setting out the director’s duties and responsibilities, such an arrangement is not inconsistent with this Recommendation. However, the new notes go on to say that such arrangements do raise other issues that listed entities and directors should consider and take advice on.

While written agreements with executives are quite commonplace, organisations that don’t provide appointment letters for directors are missing a valuable governance opportunity. These documents can greatly assist with: director induction; the setting of expectations regarding their role and responsibilities; define obligations in relation to issues such as confidentiality and entitlement to information; and are a key component of any entity’s governance processes.

Amendments made to Recommendation 1.5: which concerns the listed entity’s diversity policy and objectives. The listed entity is expected to now disclose its diversity policy (rather than just a summary of it). If the entity is in the S&P/ASX 300 Index, it is expected that the measurable objective for achieving board gender diversity should be to have no less than 30% of its directors of each gender.

The Council has extended its commentary to remind boards to think beyond just gender diversity when considering board composition. Boards composed of directors with varied ethnicities, ages and backgrounds can further assist with the broadening of the perspective of the group and reduce the risks of cognitive bias influencing decision making.

Amendments made to Recommendation 2.2 : a listed entity should have and disclose a board skills matrix setting out the mix of skills that the board currently has or is looking to achieve in its membership A board should now regularly review its skills matrix to make sure it covers the skills needed to address existing and emerging business and governance issues relevant to the company.

Emphasis has been put on the company to explain the information in its skill matrix to investors, with the Principles now suggesting that the company explain:

  1. what it means when it refers to a particular skill in its board skills matrix; and
  2. the criteria a director must meet to be considered to have that skill.

To provide meaningful and genuine assistance to a board, a skills matrix needs to be constructed with rigour and should consider not only breadth, but also depth, of experience.  A properly constructed skills matrix will assist a board to target its succession planning and further develop the skills of its members.

Amendments made to Recommendation 2.6: a listed entity should have a program for inducting new directors and for periodically review whether there is a need for existing directors to undertake professional development to maintain the skills and knowledge needed to perform their role as directors effectively This Recommendation has been amended to include particular reference to periodically reviewing whether there is a need for existing directors to undertake professional development.

A well-developed induction program is a key component of a governance framework and a critical foundation for the successful integration of new directors to a board.

It should incorporate a variety of means by which new directors are inducted to the organisation, its operations, strategy and key employees, as well as to the board’s culture, processes and systems.

Amendments made to Principle 3: Instil a culture of acting lawfully, ethically and responsibly, including a new Principle 1.1: a listed entity should articulate and disclose its values. Principle 3 now promotes the preservation of a listed entity’s “reputation” and “standing in the community”, which underpins the Council’s advocacy of good corporate culture and diversity.

The Council’s commentary reinforces the messages outlined in the Hayne Royal Commission report that boards need to sharpen their focus on setting, overseeing and monitoring the culture of their organisation.

A new Recommendation 3.3
A listed entity should:

  1. have and disclose a whistleblower policy; and
  2. ensure that the board or a committee of the board is informed of any material incidents reported under that policy.
We note that in addition to the recommendation under the Principles, a listed entity will also be lawfully required to implement a whistleblower policy upon royal assent of the Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2018, as discussed here.

This recommendation is reflective of a shift towards encouraging a culture of corporate accountability in light of the recent Royal Commission.

A vital element of ensuring any whistleblower policy and procedures work as a board intends is to ensure they are fully integrated into the entity’s wider organisational governance framework and that oversight and monitoring of the implementation and operation of this framework occurs regularly.

A new Recommendation 3.4
A listed entity should:

  1. have and disclose an anti-bribery and corruption policy; and
  2. ensure that the board or a committee of the board is informed of any material breaches of that policy.
Directors of a listed entity will have a positive obligation to be aware of material breaches of the anti-bribery and corruption policy (as well as the whistleblower policy), which will consequently require active vertical monitoring of the entity’s culture and conduct.

The Council also implemented these recommendations to capture the approximate 10% of ASX-listed entities that are established outside Australia, and may not be subject to whistleblowing and anti-bribery legislation in their country of registration.

Amendments made to Recommendation 4.3: a listed entity should disclose its process to verify the integrity of any periodic corporate report it releases to the market that is not audited or reviewed by an external auditor. Listed entities are now expected to disclose the process used to verify corporate reports that are not subject to audit or review by an external auditor.

The Principles clarify that this new disclosure can be made either in the report itself, or more generally in the listed entity’s governance disclosures in its annual report or on its website.

New Recommendation 5.2: a listed entity should ensure that its board receives copies of all material market announcements promptly after they have been made and 5.3: a listed entity that gives a new and substantive investor or analyst presentation should release a copy of the presentation materials on the ASX Market Announcements Platform ahead of the presentation. Recommendation 5.2 has been added to ensure that the board has timely visibility of the nature and quality of the information being disclosed to the market and the frequency of such disclosures.

Recommendation 5.2 has been added to ensure there is equality of information across all investors. The Council has stated that this recommendation is not intended to apply to private meetings between a listed entity and an investor or analyst. However, any entity that has such a meeting must be careful not to disclose any information in the meeting that a reasonable person would expect to have a material effect on the price or value of its securities that has not already been disclosed to the market.

If they do not do so already, listed entities should ensure they review these new Recommendations.

A new Recommendation 6.4: a listed entity should ensure that all substantive resolutions at a meeting of security holders are decided by a poll rather than by a show of hands. This recommendation has been made noting the increased efficiency and cost-effectiveness of technology in respect of voting at meetings, allowing polls to be conducted quickly and cheaply, and to ensure the integrity of the voting process by enforcing the principle of “one security – one vote”.

If they do not already do so, listed entities should be prepared to decide substantive (i.e. non-procedural) resolutions by a poll.

Amendments to Principle 7: a listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework Specific reference has been made in Principle 7.2 to an entity’s risk management framework dealing with contemporary and emerging risks such as: conduct risk (i.e. inappropriate, unethical or unlawful behaviour); digital disruption; privacy and data breaches; sustainability and climate change.

Listed entities should ensure that when reviewing risk, they include contemplation of these key areas.

For the first time, the Principles recognise the critical importance of a listed entity having a risk management framework that deals adequately with cyber-security. This is of particular relevance given the new obligations on companies under the Australia Notifiable Data Breaches Scheme (as discussed here).

Recommendation 7.4 (disclosure of material exposure to environmental or social risk) has been expanded to make specific reference to environmental risks related to climate change. This includes risks related to the transition to a lower-carbon economy and physical risks (changes in water availability, extreme temperature changes etc.). This applies to all listed entities, not just those directly involved in mining or consuming fossil fuels.

New recommendations 9.1, 9.2 and 9.3. These new recommendations only apply in certain limited circumstances and relate to:

  1. a listed entity with a director who does not speak the language in which board or security holder meetings are held or key corporate documents are written disclosing the processes in place to ensure that director understands and contributes to discussions at those meetings;
  2. a listed entity established outside Australia ensuring that meetings of security holders are held at a reasonable place and time; and
  3. a listed entity established outside Australia and an externally managed 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.

 

There have been other minor amendments and clarifications made to the Principles for this latest edition, so we encourage all listed companies to review the changes in their entirety. ASX have published a marked up version of the Principles showing all changes made here.

The Principles provide directors of listed entities with broad guidelines to ensure that the entity for which they are responsible preserves a lawful, responsible and accountable culture. In a market which perceives an entity’s ethical status to be as important as its financial status, the Principles set a high standard for corporate governance. Listed entities should ensure that they have considered this latest edition of the Principles, and where necessary update their own policies and procedures to match.

Next steps

HopgoodGanim and Effective Governance have a long history in assisting clients to enhance their businesses through providing practical advice and solutions on governance and compliance improvements. This assistance takes the form of advising listed entities and boards in their consideration of, and compliance with, the Principles and the ASX Listing Rules, professional development training, policy and charter creation, and more recently on assisting clients with issues stemming from risks associated with culture and conduct risk.

If you require advice or consultation in relation to your obligations under the ASX Listing Rules or the Principles, or more generally in relation to your corporate governance practices and procedures, please contact HopgoodGanim Lawyers’ Corporate Advisory and Governance or Effective Governance teams.

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