The ASX is this week conducting a national roadshow in relation to the 4th edition of the ASX Corporate Governance Principles and Recommendations (4th Edition), which was released on 27 February 2019 following a lengthy period of stakeholder consultation.
The Corporate Governance Principles and Recommendations are important because the ASX Listing Rules require each ASX listed entity to include either in its annual report or on its website a statement disclosing the extent to which the entity has followed the recommendations each year. Departures from the recommendations must be reported on an "if not, why not" basis. Entities applying to be listed on ASX (for instance, who are undertaking an IPO) also need to disclose in their prospectus the extent to which the recommendations will be met.
The 4th Edition only takes effect for an entity's first full financial year commencing on or after 1 January 2020, although ASX encourages early adoption. While there is some time to implement the changes necessary to meet the recommendations, ASX listed entities should familiarise themselves with the 4th Edition and start preparing to adopt and / or report against the 4th Edition before 1 January 2020.
If you are not able to attend the roadshow in your city this week, don't despair, we have summarised the key takeaways below.
- ASX explained what has not changed from the 3rd to the 4th Edition. The recommendations remain non-prescriptive, retaining the flexible "if not, why not" approach; the principles, recommendations and commentary hierarchy continues to apply; there are now 35 recommendations of general application (up from 29 in the 3rd edition) and 3 additional recommendations that apply in certain limited cases.
- ASX summarised the key changes in the 4th Edition, drawing particular attention to the recommendations that effect culture and values, role of the board and director independence and corporate reporting, disclosure and risk. The following additional or amended recommendations are worth noting:
- the recommendations that encourage listed entities to focus on culture – "acting lawfully, ethically and responsibly" – reflecting broader developments in the Australian market post-Hayne Royal Commission including the public's desire for greater director accountability and corporate compliance;
- the recommendation for listed entities to adopt and disclose a whistleblower policy1 and an anti-bribery and corruption policy;
- the disclosure of new and substantive investor or analyst presentation materials ahead of the relevant presentation to ensure equality of information among investors;
- voting by poll (rather than a show of hands) to be undertaken for all substantive member resolutions as a vote on a show of hands does not align with the principle of 'one security one vote';
- a requirement that boards have and disclose a diversity policy (in full) and set measurable objectives for achieving gender diversity. The minimum measurable objective for achieving gender diversity in board composition is 30% for entities in the S&P/ASX 300 Index. ASX noted that the great majority of entities in the S&P/ASX 200 Index are already achieving this objective;
- a refinement of the factors relevant to director independence, including length of tenure, allocation of performance based incentives and "personal ties". ASX's position is if a director falls into any of the examples listed in recommendation 2.3, they are presumed not to be independent unless there are factors clearly supporting an alternate view; and
- risk management expanded to include non-financial, environmental, social and emerging risks – this includes risks such as climate change risk, cyber-security and the risk of privacy and data breaches.
- ASX referred to the new section 9, which is intended to include recommendations affecting only a small number of listed entities. For example, ASX recommends that a listed entity with a director who does not speak the language in which board or security holders 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. This will be particularly relevant to entities with foreign directors on the board.
- ASX referred to the new list of board responsibilities in the 4th Edition, designed to support strong culture and governance and to "set the tone from the top". This includes: ensuring alignment between remuneration policies and the entity's purpose, values, strategic objectives and risk appetite, responsibility for designing organisational purpose and a stronger focus on the role of the board in overseeing management and where necessary, challenging management. In this regard, ASX encouraged listed entities to adopt board reporting protocols to ensure matters regarding the business that should be reaching the board table do in fact get there.
- ASX also discussed and provided an update on the consultation process following the release of its consultation paper 'Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules', which sought feedback on proposed changes to the ASX Listing Rules and guidance notes. The ASX noted that on account of the significant number of submissions received, the proposed effective date for the changes has been extended from 1 July 2019 to 1 December 2019. More information on the proposed changes to the ASX Listing Rules is set out in an earlier Norton Rose Fulbright update which can be accessed here.
While the 4th Edition has been available for some time, the roadshow is a timely reminder for entities to start thinking about how they will meet the recommendations.
We encourage all directors and members of legal and company secretariat teams of ASX listed entities to familiarise themselves with the 4th Edition. There are some substantive changes from the 3rd edition that will need to be implemented if entities seek to achieve full compliance with the recommendations.
At a minimum, companies should review their current corporate governance practices against the 4th Edition to determine what changes may be required, or how departures from the recommendations will be explained.
The 4th Edition can be accessed here. We expect the ASX will publish its roadshow presentation on its website shortly.
We are happy to discuss the 4th Edition and how it will be effect your company specifically.
1 Public companies will be required to adopt a whistleblower policy in any event under the new legislation expanding private sector whistleblower laws which makes it an offence for public companies to not have a compliant whistleblower policy from 1 January 2020.
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