ASX Corporate Governance Update
The latest version of the ASX Corporate Governance Council’s Principles and Recommendations comes into force on or after 1 July 2014. The Principles and Recommendations set out the Council’s view of appropriate standards to be followed by ASX entities to demonstrate good corporate governance.
The revision was deemed necessary as a result of global developments in corporate governance, and the most important changes relate to governance reporting, risk management, independence of long-tenure directors, and gender diversity.
Governance Reporting – the “If not, why not” approach
Each listed entity is required by the Listing Rules to provide a corporate governance statement. The board of a listed entity does not have to follow a recommendation that it does not believe is appropriate. If the board chooses not to follow a particular recommendation it is required to explain – in its statement – the reasons behind its decision. This is referred to as the “if not, why not” approach and the Council considers it to be fundamental to the operation of the Principles and Recommendations.
The idea behind this approach is that the market, including stakeholders, can take up this divergence from the guidance with the board directors and make enquiries about the entity’s governance arrangements. In addition, it will help security holders to determine how to vote on particular resolutions, and investors whether to invest in securities.
Smaller entities had long complained about the laborious process of providing detailed explanations on why they did not comply with recommendations that were clearly inappropriate for their businesses. The ASX Council responded by amending some recommendations so that the emphasis is now on what the small entity has done to satisfy good corporate governance, for example, in matters relating to the structure of the board, the audit committee, risk committee and remuneration committee.
Entities should have an internal audit committee and provide details of its composition, qualifications of the members, the number of times it meets and who attends the meetings. If it does not, it must disclose that fact and the processes it employs that independently verify and safeguard the integrity of its corporate reporting. The Council accepts that ultimate responsibility for a listed entity’s financial statements rests with the full board. It recommends, having a separate audit committee, however, for reasons of transparency and independent judgment.
An entity now has to disclose whether it has any “material exposure to economic, environmental and social sustainability risks”. If it does have such material exposure it must state how it intends to manage those risks. In order to satisfy this recommendation you may wish to consider preparing a sustainability report which will be useful for present or future investors.
The Council recognises that a listed entity may have a single board committee to oversee risk, (for example, a dedicated risk committee or a combined audit and risk committee) or a group of committees overseeing different aspects of risk. It accepts that is a matter for the board of an entity to structure its governance arrangements in respect of risk oversight. The board may delegate overseeing the risk management framework to a committee, or implement some other process for board oversight. Whatever your board decides to do it must have developed a framework in respect of risk management for the entity. The members of your risk committee between them should have the “necessary technical knowledge” as well as a sufficient understanding of the industry in which your entity operates.
The corporate governance statement must be included in the annual report. However, if your listed entity wishes to include the corporate governance statement on its website, the annual report must include a link to the URL where the statement can be found. The Council expects that listed entities will choose to publish their governance disclosures, including their corporate governance statement, on their website rather than in their annual report. It recommends that those disclosures should be clearly presented on a “corporate governance” landing page on your website. There should be an easily located link to this landing page in the navigation menu, for example, under “About Us”, “Investor Centre” or “Information for Shareholders”.
Independence of long-tenure directors
The Council’s consultation draft proposed that tenure of more than 9 years would cause a director to no longer be independent. The final recommendation is less stringent, however, and requires independence to be assessed by considering whether the director has served for “such a period that his or her independence may have been compromised.”
If your board comprises independent directors who have been in office for over 10 years, you should specifically address this in your corporate governance statement confirming why the director’s independence has not been affected by their length of time in office.
Guidance has been provided in the area of gender diversity which the ASX Council believes leads to better financial performance. The recommendation is for the promotion of gender diversity in order to broaden the pool for the recruitment of high quality talent, improve employee retention, gain a closer connection with customers, and improve corporate image and reputation. Measurable and meaningful objectives should be set by your board and these should be monitored for effectiveness. Any recognised gender imbalance issues should be addressed.
The Council warns against just setting up a diversity policy without setting appropriate numerical targets. Your measurable objectives could include a target percentage of women to be employed generally, a number in senior roles and on the board by a specific date; and achieving specific targets for the “Gender Equality Indicators” in the Workplace Gender Equality Act.
It is important that your entity reports annually on its gender diversity status and on its progress in achieving its gender diversity objectives. This encourages greater transparency and accountability and is likely to improve the effectiveness of your diversity policy.
What You Need To Do
Contact You Legal for confidential legal advice on your existing governance practices and disclosures in light of the new Principles and Recommendations. Although the Principles and Recommendations are only intended to apply to ASX listed entities, your (non-ASX) organisation may wish to adopt them or use them to design your own corporate governance policies.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.