Australia: ASX Refines Approach To Corporate Governance

Last Updated: 13 August 2007
Article by Marianne Robinson


The ASX Corporate Governance Council (Council) released the first edition of its Principles of Good Corporate Governance Practice and Best Practice Recommendations (Guidelines) on 31 March 2003. In November 2006, the Council released a public Explanatory Paper and Consultation Paper on proposed changes to the Principles and Recommendations. Following submissions and industry discussions, on 2 August 2007 the Council released the revised Corporate Governance Principles and Recommendations (Principles).

The original Guidelines were used as a benchmark by a variety of entities including APRA for the Prudential Standards on Governance and Fit and Proper Persons that apply to insurers (life and general) and regulated superannuation entities. The Guidelines also played a significant role in the development of the Australian Standard on Governance standards published in 2004 which includes Good Governance Principles (AS8000), Fraud and Corruption Control (AS8001), Organisational Codes of Conduct (AS8002), Corporate Social Responsibility (AS8003) and Whistle Blower protection programs (AS8004).

The continued high profile given to governance within both the private and public sectors makes the Principles of relevance to non-listed as well as listed entities. There has also been an increased recognition since 2003 that governance and compliance risk are areas where some companies have implemented more generic type systems that may not have been tailored to the specific needs of the company. In the financial services sector, the AFS licensing and APRA Prudential Standards have focused the attention of Boards on these issues but not to the extent envisaged by the Principles.

Application to all listed entities

The Principles are directed at all listed entities. The term ‘company’ is used to encompass any listed entity, including listed managed investment schemes (trusts), listed stapled entities, and listed foreign entities. Where appropriate, references to ‘shareholders’ and ‘investors’ includes references to unit holders of unit trusts. Where there is a specific application of the Principles for trusts and externally managed entities these have been highlighted within each Principle.

Reasons for the refinements

  • Ongoing legislative and regulatory reform has led to some of the original Guidelines being incorporated into the Corporations Act 2001 and the Accounting Standards.
    • Risk management practice has evolved and new areas of risk identified such as corporate social responsibility (CSR) or corporate responsibility (CR).
    • A desire to provide greater clarity and consistent terminology to avoid any ambiguities.

    Effective date

    The effective date for the Principles will be the first financial year for the listed entity commencing on or after 1 January 2008. Where an entity’s financial year begins on 1 January, disclosure will be required in relation to the financial year 1 January 2008 – 31 December 2008 and will be made in the annual report published in 2009. Where an entity’s financial year begins on 1 July, disclosure will be required in relation to the financial year 1 July 2008 – 30 June 2009 and will be made in the annual report published in 2009. The ASX is encouraging listed entities to make an early transition to the revised Principles.

    What is corporate governance?

    Corporate governance has been defined for the purposes of the Principles as ‘the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations’. The Principles are based on the concept of governance extending to the mechanisms by which companies, and those in control, are held to account. Governance is recognised as playing a significant role in how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Significantly, the Principles recognise that corporate governance practice is not static but is evolving and will vary from entity to entity. The Principles have moved away from the concept of best practice to reduce any suggestion that the Guidelines are prescriptive.

    The ‘if not, why not’ approach is retained The ‘if not, why not’ principle has been retained as, ‘Disclosure of a company’s corporate governance practice, rather than conformity with a particular model is central to the ASX Corporate Governance Council’s approach’.

    Effective ‘if not, why not’ reporting practices involve:

    • Identifying the Recommendations the company has not followed.
    • Explaining why the company has not followed the relevant Recommendation.
    • Explaining how its practices accord with the ‘spirit' of the relevant Principle, that the company understands the relevant issues and has considered the impact of its alternative approach.

    Key changes

  • The Principles have been reduced from ten to eight to reflect the legislative reforms, and the term 'best practice' has been removed.
    • The concept of preserving stakeholder confidence is a thread underlying each Principle and Recommendation.
    • Recognition is given to the importance of clearly defining the roles of the Board and senior executives and to the fundamental importance of appointing a Board with a balance of skills, experience and independence appropriate to the nature and extent of company operations.
    • Each disclosure obligation is clearly identified and noted in the Guide to Reporting found at the end of each Principle.
    • The requirement in the Guidelines for shareholders to approve share-based payments to executives who are not directors has been replaced in the Principles by guidelines on how to deal with this issue. The removal of this Principle is opposed by shareholder groups, including the Australian Council of Superannuation Investors and the Investment and Financial Services Association who are continuing to lobby for its restoration.

    Company trading policies

  • The Principles recommend that company trading policies should prohibit the hedging of unvested options and that any hedging of vested options should be disclosed to the company under Principle 3. This approach complements the changes proposed to the Corporations Act which will require companies to disclose their policy on hedging options.
  • Role of the Board, Chair and Company Secretary

  • The statement of matters reserved to the Board, the Board Charter, and the statement of areas of delegated authority to senior executives should be made publicly available and posted on the company’s website in a clearly marked corporate governance section.
    • Non-executive directors should consider the benefits of conferring regularly without management present, including at scheduled sessions. At times it may be appropriate for the independent directors to meet without other directors present. It follows that such meetings should also take place in the absence of management.
    • Because the role of Chair is demanding and requires a significant time commitment, the Principles indicate that the Chair of a listed entity should not take on other positions that are likely to hinder effective performance in the role.
    • Recognition has been given to the role played by the Company Secretary in the governance framework, the importance of monitoring compliance with Board policy and procedures, and the timely completion and despatch of Board agenda and briefing material. The Principles stress the importance of all directors having access to the Company Secretary who should be appointed by the Board as a whole and be held accountable to the Board, through the Chair, on all governance matters.


  • The Guidance Note to Principle 2 sets out a list of relationships likely to affect a individual's independent status and that therefore should be considered by the company.
    • Public disclosure of the reasons for considering a person as being independent will be required. A former CEO will not qualify as an 'independent' director unless there has been a period of at least three years between ceasing such employment and serving on the Board.
    • The importance of directors having access to independent advice and access to auditors is maintained and the role of internal audit upgraded to include risk related issues.

    Role of the nomination committee

  • The nomination committee's charter should clearly set out its roles and responsibilities, composition, structure, membership requirements and the procedures for inviting non-committee members to attend meetings. The terms of reference of the nomination committee should allow it to have access to adequate internal and external resources, including access to advice from external consultants or specialists. The nomination committee should be structured in a manner similar to that of the Audit Committee so that it:
      • Consists of a majority of independent directors.
      • Is chaired by an independent director.
      • Has at least three members.
    • In order to be able to discharge its mandate effectively, directors should only be appointed on the basis of appropriate skills and expertise. The nomination committee should consider implementing a plan for identifying, assessing and enhancing director competencies.

    Disclosure of material business risk

  • Most change made to the Guidelines has occurred in Principle 7: Recognise and manage risk, which now clearly recognises the role played by non-financial as well as financial risks in the determination of material risks facing a listed entity.
    • Recommendation 7.3 modifies the assurance sign-off given for financial reporting risks so that it extends to 'material business risks' and requires the Board to disclose that it has received assurance from the CEO/CFO that the declaration in section 295A of the Corporations Act is founded on a sound system of risk management and internal control. The Principles support disclosure of any non-compliance with Principle 7 in the Governance Statement in the annual report together with disclosure of whether or not the Board has received the assurance from the CEO and CFO.
    • To comply with the Principle, companies will need to identify and address risks that could have a material impact on the business so that the Board can establish policies for the oversight and management of those material business risks and disclose a summary of those policies. The company approach to risk management should consider all material business risks. These risks may include but are not limited to: operational, environmental, sustainability, compliance, strategic, ethical conduct, reputation or brand, technological, product or service quality, human capital, financial reporting and market-related risks.
    • The Board will be responsible for reviewing the company’s policies on risk oversight and management and satisfying itself that management has developed and implemented a sound system of risk management and internal control. Ultimate responsibility for risk oversight and risk management will rest with the full Board, whether or not a separate risk management committee exists.
    • For the purposes of the Principles, the terms 'risk oversight', 'risk management' and 'internal control' refer to the processes, structures and culture companies establish to identify, assess, treat and monitor risks that support the achievement of company objectives and provide for assessment of the effectiveness of risk oversight and internal control and management.
    • Principle 7 disclosures will not be required for commercially sensitive information, the details of the company's risk profile or details of the company’s material business risks.


    While the Principles may be less in number, the impact is likely to be significant. The increased emphasis on the role played by risk and the increased importance of risk profile and risk appetite will require management and the Board to formalise the listed entity’s approach to risk in a way that is much broader than many have experienced in the past.

    The determination of ‘material risks’ is not an easy process and for many companies risk management has not been elevated to the Board level other than in some form of consideration of financial risk. The widely acknowledged AS4360 Risk Management standard is likely to assume an even higher profile within listed entities as will AS3806 Compliance Programs.

    The recognition in the Principles of the role played by the Company Secretary in the governance of companies reflects the increased attention given to this role and the significant changes that have taken place over the last two years. In addition to the formal recognition there is also an increased importance assigned to this role flowing from the emphasis placed on the formal charters of the Board, the sub committees and the expansion of public disclosures as well as the number of registers that companies are required to maintain as part of the governance framework.

    The future

    In the past, many companies have given token support to corporate governance and have adopted fairly generic documentation rather than customising the Charters, Protocols and Codes of Conduct for the needs of the entity. The process is more complex when implemented across a conglomerate and in particular implemented across financial conglomerates where a regulator has input into the required governance framework or where legislation such as the Life Act 1995 or the Superannuation Industry (Supervision) Act 1993 requires that the interests of shareholders are secondary to the interests of policy holders and beneficiaries of superannuation funds.

    It is timely for Boards to review their governance structures and supporting documentation to ensure that they reflect the evolution of the company and its obligations. The 2008 commencement date for the revised Principles provides a basis for such reviews as well as the briefing of Boards on the changing emphasis on governance and compliance.

    On 2 August 2007, APRA released a consultation package on its proposals to maintain the prudential framework for life companies, including friendly societies, in the light of amendments being made to the Life Insurance Act 1995 (Life Act) by The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007, which is currently before Parliament. APRA proposes to replicate most of the provisions removed from the Life Act in new and amended prudential standards in a process which will include amendments relating to governance and ‘fit and proper’ requirements. APRA is proposing that the new prudential standards will take effect on 1 January 2008.

    How can we help?

    We are able to guide you in the review process required for the implementation of the Principles, including providing assistance with:

    • The review of the formal governance documentation.
    • Board briefings.
    • Directors' workshops.
    • The drafting of governance statements for annual reports.
    • The establishment of tests for independence and conflicts of interest.

    We can also assist in the implementation of APRA's governance and fit and proper prudential standards.

    The Corporate Governance Principles and Recommendations

    Source: ASX Corporate Governance Principles and Recommendations 2nd Edition ASX Corporate Governance Council August 2007.

    Published with the consent of the ASX Corporate Governance Council

    Principle 1 – Lay solid foundations for management and oversight

    Companies should establish and disclose the respective roles and responsibilities of Board and management.

    • Recommendation 1.1: Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions.
    • Box 1.1: Content of a director’s letter upon appointment.
    • Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives.
    • Recommendation 1.3: Companies should provide the information indicated in the Guide to Reporting on Principle 1.

    Principle 2 – Structure the Board to add value

    Companies should have a Board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

    • Recommendation 2.1: A majority of the Board should be independent directors.
    • Box 2.1: Relationships affecting independent status.
    • Recommendation 2.2: The Chair should be an independent director.
    • Recommendation 2.3: The roles of Chair and Chief Executive Officer should not be exercised by the same individual.
    • Recommendation 2.4: The Board should establish a nomination committee.
    • Recommendation 2.5: Companies should disclose the process for evaluating the performance of the Board, its committees and individual directors.
    • Recommendation 2.6: Companies should provide the information indicated in the Guide to Reporting on Principle 2.

    Principle 3 – Promote ethical and responsible decision-making

    Companies should actively promote ethical and responsible decision-making.

    • Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code as to:
      • The practices necessary to maintain confidence in the company’s integrity.
      • The practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders.
      • The responsibility and accountability of individuals for reporting and investigating reports of unethical practices.

    • Box 3.1: Suggestions for the content of a code of conduct.
    • Recommendation 3.2: Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy.
    • Box 3.2: Suggestions for the content of a trading policy. Recommendation 3.3: Companies should provide the information indicated in the Guide to Reporting on Principle 3.

    Principle 4 – Safeguard integrity in financial reporting

    Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.

    • Recommendation 4.1: The Board should establish an audit committee.
    • Recommendation 4.2: The audit committee should be structured so that it
      • Consists only of non-executive directors.
      • Consists of a majority of independent directors.
      • Is chaired by an independent Chair, who is not Chair of the Board.
      • Has at least three members.

  • Recommendation 4.3: The audit committee should have a formal charter.
  • Recommendation 4.4: Companies should provide the information indicated in the Guide to Reporting on Principle 4.
  • Principle 5 – Make timely and balanced disclosure

    Companies should promote timely and balanced disclosure of all material matters concerning the company.

    • Recommendation 5.1: Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.
    • Box 5.1: Continuous disclosure policies.
    • Recommendation 5.2: Companies should provide the information indicated in the Guide to Reporting on Principle 5.

    Principle 6 – Respect the rights of shareholders

    Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.

    • Recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.
    • Box 6.1: Using electronic communications effectively.
    • Recommendation 6.2: Companies should provide the information indicated in the Guide to Reporting on Principle 6.

    Principle 7 – Recognise and manage risk

    Companies should establish a sound system of risk oversight and management and internal control.

    • Recommendation 7.1: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.
    • Recommendation 7.2: The Board should require management to design and implement a risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks.
    • Recommendation 7.3: The Board should disclose whether it has received assurance from the Chief Executive Officer (or equivalent) and the Chief Financial Officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

    • Recommendation 7.4: Companies should provide the information indicated in the Guide to Reporting on Principle 7.

    Principle 8 – Remunerate fairly and responsibly

    Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear.

    • Recommendation 8.1: The Board should establish a remuneration committee.
    • Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives.
    • Box 8.1: Guidelines for executive remuneration packages.
    • Box 8.2: Guidelines for non-executive director remuneration.
    • Recommendation 8.3: Companies should provide the information indicated in the Guide to Reporting on Principle 8.

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    This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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