Australia: New ASX Corporate Governance Principles and Recommendations

Last Updated: 16 June 2014
Article by Darren Pereira and Michael MacMahon

Most Read Contributor in Australia, September 2016

As we reported in October 2013, the new (third) edition of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations (Principles and Recommendations) will come into effect from 1 July 2014 and will apply for a listed entity's first full financial year commencing on or after 1 July 2014.

The third edition of the Principles and Recommendations is not a seismic shift in the ASX corporate governance requirements. Rather, it is a refinement of the requirements in the aftermath of the GFC. Risk management and reporting on corporate governance remain the key areas for revamped requirements, which is not surprising given high profile governance failures since the second version of the Principles and Recommendations was released back in 2007.

The 'if not, why not' approach remains

The third edition maintains the non-prescriptive 'if not, why not' approach to disclosure – that is, it is not compulsory to comply with the recommendations but if an entity does not comply with the recommendations it must explain 'why not'. This leaves a listed entity with flexibility to adopt alternative governance practices if its board considers those to be more appropriate in certain circumstances, provided that it explains why those alternatives have been chosen instead of the ASX Corporate Governance Council's recommendation.

The third edition also maintains the same hierarchy – that is, core principles with supporting recommendations (which an entity needs to report against) and supporting commentary on the principles and recommendations (which it is not compulsory to report against).

The key changes

In a nutshell:

  • the 8 key categories of recommendations remain the same;
  • some of the recommendations have been restructured or reorganised, as well as being amended; and
  • overall, the ASX has noted that there are 9 new recommendations.

In the table below, we provide a snapshot of the 9 new recommendations which listed entities should be aware of and consider in respect of their corporate governance arrangements (as these will be obligations which the entity will need to either comply with or explain the reason for non-compliance). While some of these are new recommendations (i.e. not included in the current (second) version of the Principles and Recommendations), others were partly or wholly included in the current commentary but have now been elevated to reporting recommendations.

Matter The recommendation and commentary
Director checks before appointment

Recommendation: Listed entities should undertake appropriate checks before appointing, or putting a person forward as a candidate to become, a director.

Entities should also provide security holders with all information in its possession relevant to the decision whether or not to elect or re-elect the director.

The recommended checks will include character, experience, education, criminal record and bankruptcy. The ASX commentary to the recommendation also includes details as to what information should be disclosed to shareholders. It will include a biography, other material directorships, any adverse information revealed by the background checks,
other interests which could or could be perceived to influence the person's potential independence, a statement as to whether the board supports the election or re-election, and a statement as to whether the person will be considered to be an independent director.

Written agreements with directors

Recommendation: Listed entities should have a written agreement with each director and senior executive setting out the terms of their appointment.

The commentary provides a list of matters that should be included in the agreement. This recommendation will operate in addition to Listing Rule 3.16.4 under which listed entities are required to disclose the material terms of any employment, service or consultancy agreement with its CEO, any director or any of their related parties.

Company secretary accountable to the board

Recommendation: The company secretary should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board.

This is an example of commentary in the previous version that has been elevated to a recommendation. The commentary in the new version now provides that the role of the company secretary should include advising the board and its committees on governance matters, monitoring that policies and procedures are followed and ensuring that the business of the board and committees is accurately captured in the minutes (which, following recent cases, will be a point that company secretaries will no doubt be very familiar with).

Inducting new directors

Recommendation: 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 roles as directors effectively.

This is also an example of commentary in the previous version that has been elevated to a recommendation. The commentary provides that the board or nomination committee of listed entities should regularly review whether the directors as a group have the skills, knowldge and familiarity with the entity and its environment to fulfil their role effectively. Where gaps are identified, they should consider what training or development is required to fill those gaps. It also notes that directors should receive ongoing briefing on developments in accounting standards.

Auditor to attend AGMs

Recommendation: A listed entity that has an AGM should ensure that its auditor attends its AGM and is available to answer questions from shareholders related to the audit.

For most listed entities this is merely a reflection of the current requirement under the Corporations Act. However, the purpose of this recommendation is to apply to listed entities which are not required to comply with the corresponding requirement under the Corporations Act (for example, foreign listed entities). As we noted in our October 2013 article, this is one of several amendments made by the ASX to effectively impose on foreign listed entities similar obligations that apply to Australian but not foreign companies under the Corporations Act.

Governance information to be available on website

Recommendation: A listed entity should provide information about itself and its governance to investors via its website.

Relative to the previous version, the commentary to the Principles and Recommendations now provides a more detailed list of matters that entities should include under the 'Corporate Governance' part of their website. This will include the directors' biographies, its constitution, charters and corporate governance policies. This is a clear acknowledgment that, 'in the digital age', investors expect information about the entity to be freely and readily available.

Electronic provision of information

Recommendation: A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically.

The commentary notes that the communication should be formatted to be easily readable on computer screens and other electronic devices, as well as being able to be printed.

Internal audit function

Recommendation: A listed entity should disclose, if it has an internal audit function, how the function is structured and what role it performs and, if it does not have an internal audit function, the process it employs for evaluating and continually improving the effectiveness of its risk management and internal control process.

The purpose of the internal audit function is to assist a listed entity to achieve its objectives by bringing a systematic, disciplined approach to evaluating and continually improving the effectiveness of its risk management and internal control processes. If a listed entity has an internal audit function, the head of that function should ideally have a direct reporting line to the board or audit committee.

Risk management

Recommendation: 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 those risks.

As we noted in our October 2013 article, the treatment of risk management in the new version of the Principles and Recommendations is one of the key changes (which we also discuss below). Its intention is to address, in a non-prescriptive manner, the increasing attention being given by the investment community to environmental and social issues and the investment risks they raise.

In addition to the 9 new recommendations detailed above, as detailed in our October 2013 article (accessible here), various other enhancements were also proposed to the Principles and Recommendations and associated Listing Rules - these include the requirement for an entity to annually lodge an Appendix 4G, for entities to establish a risk management committee / committees or, if it does not, explain its process for overseeing the entity's risk management process and for entities to be able to disclose on their websites rather than in their annual reports the extent of their non-compliance with the Principles and Recommendations. These enhancements remain substantially as detailed in our previous article other than to note that:

  • the Council has not included the recommendation that a listed entity should have a clawback policy which sets out when an entity may clawback performance based remuneration from its senior executives. A reduced form of this is now included in the commentary but is, therefore, not an actual reporting recommendation;
  • the consultation draft of the Principles and Recommendations provided that service on the board of a company for more than 9 years would be an indication of non-independence. This has been replaced so that the relevant consideration is now whether the director has been a director for such period that his or her independence may have been comprised (and the non-reporting commentary notes that the board should regularly assess this for a director who has been in that position for more than 10 years); and
  • the disclosure regarding economic, environmental and social sustainability risks will be limited to 'material exposure' (which is defined as a risk which has a real possibility that it could substantively impact on the listed entity's ability to create or preserve value for security holders).

Next steps

Given the imminent introduction of the new requirements, listed entities should:

  • consider their existing corporate governance arrangements and whether or not they remain appropriate for the entity; and
  • consider the extent to which the existing arrangements comply or do not comply with the new recommendations. For any non-compliance, the entities should consider whether the existing practice or Council's recommendation is preferable. For any practice that does not comply with the Council's recommendation, the entity will need to explain why it does not comply.

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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