Last week, the ASX Corporate Governance Council released the final version of the fourth edition Corporate Governance Principles and Recommendations (Click here to view Media Release).
Effective date deferred
The new edition will take effect for an entity's first full financial year commencing on or after 1 January 2020 (instead of the previously proposed 1 July 2019). Accordingly, entities with:
- a 31 December balance date will be expected to measure their governance practices against the new recommendations in the financial year ended 31 December 2020; and
- a 30 June balance date will be expected to measure their governance practices against the new recommendations in the financial year ended 30 June 2021.
The Consultation response provides an overview of the changes in the new Principles and Recommendations. It states that the fourth edition maintains the same flexible, non-mandatory 'if not, why not' approach to disclosure as in the third edition. It also has the same structure – eight core principles, supporting recommendations, and commentary with guidance on implementing the recommendations.
The fourth edition has 35 recommendations of general application, seven of which are new:
Recommendation 3.1: A listed entity should articulate and disclose its values.
Recommendation 3.3: A listed entity should:
- have and disclose a whistleblower policy; and
- ensure that the board or a committee of the board is informed of any material incidents reported under that policy.
Recommendation 3.4: A listed entity should:
- have and disclose an anti-bribery and corruption policy; and
- ensure that the board or a committee of the board is informed of any material breaches of that policy.
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.
Recommendation 5.2: A listed entity should ensure that its board receives copies of all material market announcements promptly after they have been made.
Recommendation 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 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.
The two new recommendations that only apply to a small subset of listed entities are:
Recommendation 9.1: 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 should disclose the processes it has in place to ensure the director understands and can contribute to the discussions at those meetings and understands and can discharge their obligations in relation to those documents.
Recommendation 9.2: A listed entity established outside Australia should ensure that meetings of security holders are held at a reasonable place and time.
Culture and values
The final version of the fourth edition includes all of the key changes around culture and values proposed in the consultation draft, although there are some drafting changes reflecting feedback received in the consultation. Clearly this was an area the Council wanted to focus on and maintain, even though they agreed to remove the somewhat controversial language around a 'social licence to operate'.
Key in this regard are the changes to principle 3 which now provide that a listed entity should 'instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly'.
Principle 3 will be underpinned by new recommendations 3.1 (values), 3.3 (whistleblowing policy) and 3.4 (anti-bribery and corruption policy), as well as an addition to recommendation 3.25 (code of conduct) that a listed entity's board, or a committee of the board, should be informed of any material breaches of the entity's code of conduct.
In addition, the commentary to recommendation 1.1 (role of board and management) has been amended to add a number of items to the list of usual responsibilities of the board of a listed entity including 'approving the entity's statement of values and code of conduct to underpin the desired culture within the entity'. Changes are made to ensure that the board of a listed entity is provided with the information it needs to monitor the culture of the entity.
Other key changes proposed in the consultation version that have been incorporated into the fourth edition (in some cases with drafting changes) include:
- expanding recommendation 1.5 (diversity) to state that the board of a listed entity should set measurable objectives for achieving gender diversity not only in the composition of its board but also in its senior executive ranks and its workforce generally; and
- adding to recommendation 1.5 a statement that if a listed entity was in the S&P/ASX 300 Index at the commencement of the reporting period, the measurable objective for achieving gender diversity in the composition of its board should be to have not less than 30% of its directors of each gender within a specified period.
Key changes in light of consultation feedback
In light of consultation feedback, Council has shortened and re-drafted some parts of the commentary to make it clearer that it is guidance only and not intended to be prescriptive.
It has also replaced the references in the commentary to 'social licence to operate' with references to 'reputation' and 'standing in the community'. It regards these concepts as synonymous. Council has added to the commentary under recommendation 3.1 in the fourth edition a statement that:
'In formulating its values, a listed entity should consider what behaviours are needed from its officers and employees to build long term sustainable value for its security holders. This includes the need for the entity to preserve and protect its reputation and standing in the community and with key stakeholders, such as customers, employees, suppliers, creditors, law makers and regulators.'
It is good to see that the Council took on board a number of comments made by industry during the consultation phase. In our view, while certainly important to have increased the focus on corporate culture and values, it was equally appropriate to maintain the 'if not, why not' approach to the Principles and Recommendations.
While the effective date for the fourth edition has been moved, we recommend companies start to consider changes to appropriate policies and procedures now – to ensure that they are not only adopted, but understood and implemented, in good time.
We are happy to discuss the Principles and Recommendations further with interested parties and companies looking towards implementation for 2020.
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.