Higher Standards, More Flexibility, Increased Disclosure
In August last year, the Australian Securities Exchange (ASX) Corporate Governance Council (Council) undertook a review of the Corporate Governance Principles and Recommendations (Recommendations) in response to the corporate governance failures that emerged in the aftermath of the Global Financial Crisis (GFC).
The result of that review is the draft third edition of the Recommendations, which was recently released, along with a consultation paper explaining the amendments. The ASX has also released its own consultation paper regarding proposed amendments to the ASX Listing Rules (Listing Rules) and to Guidance Note 9.
Several broad themes can be identified from the ASX's proposed Listing Rules amendments:
- a greater emphasis has been placed on the importance of maintaining structural mechanisms to identify risks – including social and environmental risks
- the standards promulgated in the Recommendations are, in some respects, higher, while at the same time, there is more flexibility in both meeting and reporting against the Recommendations
- on reflection of the global nature of the crisis which sparked this review, the Council is striving to align Australia's corporate governance principles with international norms.
What Does This Mean for Listed Entities?
The key changes the Council has put forward for consultation include:
- a new Recommendation that listed entities establish a separate risk committee tasked with identifying and monitoring risks, including social and environmental risks
- tightening the factors to consider when evaluating whether a director is independent or not
- allowing smaller listed entities to adopt alternative options in respect of certain Recommendations where the aims of the Recommendation can legitimately be met at a lower cost of compliance
- numerous practices elevated to full Recommendations after previously only being suggested in the commentary.
Key changes incorporated in the proposed amendments to the Listing Rules include a new Appendix 4G, detailing the location of reporting related to the Recommendations and a requirement to disclose the on-market purchase of securities by or on behalf of employees or directors.
The Recommendations and Listing Rules have not yet been finalised; interested stakeholders now have the opportunity to make submissions to the Council regarding the proposed amendments. K&L Gates can assist in assessing the impact the proposals could have on your company and in preparing submissions to the Council.
The Recommendations and Listing Rules proposed amendments are discussed further below.
The Council is proposing to increase the corporate governance obligations of entities in the following areas.
In the wake of what it perceives were the corporate governance failures of the GFC, the Council has proposed new Recommendations concerning the risk management procedures of listed entities.
The new Recommendations are that listed entities:
These Recommendations are, according to the Council, designed to encourage an enterprise-wide approach to risk management, and accord with international developments in this space.
The Council has indicated that the inclusion of a Recommendation relating to environmental and social sustainability risks is not intended to encourage particular environmental or social policies, but rather is aimed at mitigating against the investment risks that may follow from the failure to adequately identify and manage relevant social or environmental issues.
The Council is proposing to include additional factors to consider when evaluating whether or not a director is "independent". The Council is proposing to:
The Council has indicated that this last point, in particular, is in keeping with international practice which has developed in recent years. This proposal could mean listed entities will be required to weigh the benefits of experience and loyalty against independence.
|Entities incorporated outside Australia||
Recognising that not all listed entities are incorporated in Australia (and are therefore not subject to the Corporations Act), the Council is proposing to issue new Recommendations which effectively require foreign incorporated entities to conform to certain practices required under the Corporations Act. For example, the Council is proposing Recommendations that:
In a bid to tackle concerns that senior executives should not retain bonuses paid in circumstances where there has been a material misstatement of financial results, the Council has proposed a Recommendation that listed entities:
|New Recommendations sourced from commentary||
The Council believes that a number of suggestions previously in the commentary to the Recommendations should be elevated to become Recommendations themselves, as these practices should now be considered governance standards. Proposed Recommendations sourced from the commentary include Recommendations that listed entities:
As a result of the proposed amendments to the Listing Rules and Recommendations, listed entities will be afforded some increased flexibility in reporting against the Recommendations.
|Online disclosure||The ASX is proposing to amend Listing Rule 4.10.3 to enable listed entities to make their corporate governance disclosures on their website, instead of having that disclosure confined to the annual report.|
Recognising that some listed entities will legitimately adopt alternative measures to meet the objectives of certain Recommendations than those specified, the Council is proposing to enable those entities to report their alternative arrangements rather having to report non-compliance. These "alternative" Recommendations apply in relation to:
|Gender diversity reporting||The Council is proposing a Recommendation allowing listed entities which report their "Gender Equality Indicators" under the Workplace Gender Equality Act to use that report for their corporate governance disclosures, rather than having to report the respective proportions of men and women on the board, in senior executive positions and across the whole organisation.|
The proposed amendments to the Listing Rules and the Recommendations, if adopted, will mean that listed entities are obliged to provide additional disclosure.
In the ASX's view, it can be difficult and time consuming to locate information disclosed by listed entities throughout their annual reports and on their website. Additionally, the ASX is concerned that some corporate governance statements are pro forma documents. Accordingly, the ASX is proposing to require listed entities to complete and file an Appendix 4G at the same time as its annual report.
The Appendix 4G is a 13 page form requiring listed entities to state whether or not they comply with each Recommendation, and where the disclosure relating to each Recommendation has been made.
|Diversity||The Council is proposing a Recommendation that listed entities disclose how "senior executive" is defined when reporting gender diversity statistics.|
|Director elections||The Council is proposing a new Recommendation that listed entities provide their security holders with all material information relevant to a decision on whether or not to elect or re-elect a director. The aim of this Recommendation is to ensure security holders have enough information to make an informed decision. The Council notes this measure has been adopted internationally.|
|On-market employee share purchases||While perhaps not closely related to the corporate governance regime, the ASX is taking this opportunity to also propose a new Listing Rule 3.19B, which will require any on-market purchases under the terms of a scheme for the purchase of securities by or on behalf of employees, directors, or their related parties, to be disclosed within five business days.|
This is the consultation stage of the amendment process – these changes will not all necessarily be included in the final version of the Recommendations and Listing Rules. Which proposals are finally implemented will depend upon the submissions received during this consultation phase. If you will be affected by these changes, now is the chance to have your say.
The Council has invited interested parties to provide comments on the draft Recommendations by Friday, 15 November 2013. Parties are welcome to send the Council combined submissions dealing with both the draft Recommendations and the proposed ASX Listing Rules and Guidance Note changes.
It is envisaged that the final version of the Recommendations will take effect for each entity's first full financial year commencing on or after 1 July 2014.
K&L Gates would be happy to assist you if you would like to lodge a submission.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.