Australia: ASX to revamp its Corporate Governance Principles and Recommendations

The Australian Securities Exchange (ASX) has commenced the consultation process to revamp and update its key Corporate Governance Principles and Recommendations (Principles and Recommendations).

The Principles and Recommendations were last comprehensively reviewed back in 2007. Since then the GFC has raised a number of key corporate governance issues, and several foreign regulators have revised their requirements. Unsurprisingly, risk management receives detailed attention from the ASX in the proposed new Principles and Recommendations. All up, the proposed changes are intended to raise the benchmark on corporate governance in the wake of the GFC, but to also provide additional flexibility on the method of corporate governance reporting.

The "if not, why not" framework will be retained. Under this framework listed entities are not compelled to comply with the Principles and Recommendations but, if they decide not to, they must explain why not. It is now proposed that the disclosure can be made on the entity's website rather than full disclosure being made in its annual report. Under the proposed changes, entities will also need to lodge annually with ASX an 'Appendix 4G' which is a summary of where a listed entity's corporate governance disclosures can be found. This is intended to make it easier for stakeholders to locate relevant information about an entity's corporate governance reporting and it will assist listed entities in having a checklist so that they can verify compliance with the Principles and Recommendations.

The key features of the proposed new Principles and Recommendations are detailed below.

Key issue What you should know
Focus on risk management Risk management receives much greater attention and the recommendations have been strengthened in many respects. In particular, it is now recommended that listed entities establish a risk committee, either on a standalone basis or as part of the responsibility of the audit committee, or otherwise disclose its process for overseeing risk. It also recommends a risk management review annually (at either board or committee level). Under that review the board needs to satisfy itself that the risk management framework is sound and that the entity is operating within the 'risk appetite' set by the board. As part of an entity's risk management, it is also proposed that a listed entity should disclose if it has an internal audit function or, if it does not, the process it employs for evaluating and continually improving the effectiveness of its risk management and internal control process.
Revised concept of who is an 'independent director' The ASX also proposes to amend the concept of what constitutes an 'independent director'. Under the proposed changes, service on the board of directors for a period of nine years or more will be an indicator of non-independence. The existing recommendations also provide that material supply or customer contracts are an indication of non-independence, however, it is now proposed that this apply for a three year period. The fact that a director has such a relationship will not, like the existing recommendations, mean that they will not be considered independent. However, it will require that the board consider whether that interest or position is such as to compromise the independence of the director.
Clawback of remuneration in certain circumstances It is proposed that listed entities should have a clawback policy which sets out the circumstances in which an entity may clawback performance based remuneration from its senior executives and that entities disclose the policy or a summary of it and the clawbacks that are or should have been made. This could apply where, for example, an executive receives performance based remuneration and it is subsequently discovered that there was a material misstatement in the financial reports. Listed entities should also include matching provisions in their executive services agreements.
Director checks before appointment and inducting new directors ASX propose an additional recommendation that companies undertake 'appropriate checks' before appointing a person as, or putting forward a person as a candidate to become, a director. These include criminal record, bankruptcy, education and character reference checks. Further, it is now proposed to be recommended that a listed entity has (and discloses a summary of) a program for inducting new directors and providing appropriate professional development opportunities for continuing directors to develop and maintain the skills and knowledge needed to effectively perform their role as a director.
Economic, environmental and sustainability risks It is proposed that each listed entity disclose whether and how it has had regard to economic, environmental and sustainability risks. This is an attempt to address, in a 'measured and non-prescriptive manner', the increasing attention being given by the investment community to environmental and social issues. However, ASX does not propose to adopt integrated reporting on these matters until the international reporting framework is much better developed than it currently is.
Additional obligations for foreign entities Some of the recommendations are proposed to be modified to recognise that some listed entities are not incorporated in Australia and are not, therefore, subject to all requirements under the Corporations Act 2001 (Cth). For these companies, it is proposed to be recommended that they comply with some of the governance practises that entities incorporated in Australia must conform to. For example, this will include a recommendation that the auditor is available at the AGM and that, before the annual report is approved by the board, the CFO and CEO declare that the financial records have been properly maintained and that the financial report gives a true and fair view of the entity's financial performance and position.
Flexibility for smaller listed entities It is proposed that a number of recommendations have alternatives added to recognise that some smaller listed entities may legitimately have different governance practices compared to larger entities. For example, smaller entities may decide not to set up specific committees and instead adopt alternative practices to address the issues that for larger companies would typically be addressed by a committee. This will enable them to report that they comply with the Council's recommendations rather than reporting that they do not comply and giving an explanation why not. This will apply in respect of aspects of the nomination, audit, internal audit, risk and remuneration committees.
Diversity related recommendations Under the proposed changes entities can report their "Gender Equality Indicators" under the Workplace Gender Equality Act 2012 instead of reporting the respective proportion of men and women on the board, in senior executive positions and across the whole organisation.
Some existing matters elevated to recommendations Some matters which were previously in the commentary in the current edition are proposed to be elevated to actual recommendations which will trigger an obligation on a listed entity to report against these matters. The reason for this is that the Council believes that these matters should not just be considered guidance but should be considered contemporary governance standards. For example, the above requirement to have an internal audit function (or otherwise disclose a process if the entity does not have an internal audit function) effectively elevates existing commentary to a reporting recommendation. Other examples include the proposed recommendation that the company secretary have a direct reporting line to the chair of the board and that listed entities should have written agreements with each director and senior executive.
Reporting recommendations concept removed The former distinction between substantive recommendations and reporting recommendations is proposed to be deleted (reporting recommendations were not substantive recommendations but were matters to be reported against in the corporate governance statement in the annual report). This led to confusion and inconsistent practices between listed entities. Now it is proposed that each of these matters is self-contained within the substantive recommendation.

The proposals are in consultation at the moment, and some amendments will be required to the Listing Rules to facilitate the changes. It is expected that the final version of the Principles and Recommendations will be released in early 2014 and will apply for an entity's first full financial year commencing after 1 July 2014.

If the proposals are adopted listed entities will need to review their current corporate governance arrangements and update them to accord with the revised standards. We will keep you updated regarding the important developments in this area.

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.

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