Earlier this year, the ASX Corporate Governance Council (the Council) released its final version of the 4th edition of the ASX Corporate Governance Principles and Recommendations (CGPR or 4th Edition).
Overall, the revised CGPR include a strong emphasis on the link between culture, values and community expectations, no doubt incited by recent cases of conduct by large corporates falling short of community standards and expectations.
The CGPR sets out recommended corporate governance practices for Australian listed entities that are likely to achieve good governance outcomes. Good corporate governance promotes investor confidence in the market which is crucial for listed entities to compete for capital.
Good corporate governance cannot be applied on a ‘one-size-fits-all’ basis – entities will follow different governance practices depending on factors such as their size, complexity, history and culture. For this reason, the recommendations under the CGPR are not mandatory. If a listed entity deems a recommendation to not be appropriate to its specific circumstances, it does not have to adopt that recommendation. It must, however, explain why the recommendation was not adopted (the ‘if not, why not’ approach).
What has changed from the 3rd Edition?
The 4th Edition is similar in form and structure to the preceding edition: it has eight core principles, supporting recommendations and commentary with guidance on implementing the recommendations. The key changes from the 3rd Edition are discussed below.
Principle 3 and related recommendations
One of the key changes is the redrafting of Principle 3 to state that “a listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly”. The themes of culture and values are front and centre. The revised principle is supported by the introduction of three new recommendations – see recommendations 3.1, 3.3 and 3.4 below.
The 4th Edition contains 35 recommendations compared to 29 in the previous edition, including seven new recommendations. The new recommendations are as follows:
- Recommendation 3.1: A listed entity should articulate and disclose its values.
- Recommendation 3.3: A listed entity should:
(a) have and disclose a whistleblower policy;
(b) 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:
(a) have and disclose an anti-bribery and corruption policy;
(b) 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.
There are also two new recommendations that would only apply to certain listed entities:
- 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 discussion 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.
Enhancements to existing recommendations
A large number of enhancements were made to existing recommendations. Some of the more significant changes are referenced below:
Recommendation 1.1 includes several changes with respect to the role and responsibilities of the board of a listed entity. The 4th Edition lists several new board responsibilities aimed at supporting strong culture and governance.
Recommendation 1.5 has been expanded to reflect that the measurable objectives for achieving gender diversity should extend to the entire entity i.e. the board, senior executives and the workforce generally.
Commentary suggests that the board (or committee) may wish to consider setting KPIs for senior executives on gender participation within their areas of responsibility and linking part of their remuneration to the achievement of those KPIs.
Gender diversity (S&P/ASX 300 Index entities)
A statement has been added to recommendation 1.5 that if a listed entity was in the S&P/ASX 300 Index at the beginning of the reporting period, the measurable objective for achieving gender diversity in the composition of the board should be to have not less than 30% of its directors of each gender in a specified period.
Diversity in board composition
The commentary under recommendation 1.5 has been amended to state that boards should consider other facets of diversity in addition to gender when considering the composition of the board, including having directors of different ages, ethnicities and backgrounds to provide different perspectives and avoid ‘groupthink’.
Environmental and social risks
The definitions of ‘economic sustainability’, ‘environmental sustainability’ and ‘social responsibility’ have been replaced with ‘environmental risks’ and ‘social risks’ to capture a broader range of risks. Recommendation 7.4 now states that “a listed entity should disclose whether it has any material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks”.
Climate change risks
Commentary has been added to recommendation 7.4 to highlight climate change as a specific source of environmental risk. The Council encourages entities with a material exposure to climate change risk to make the disclosures recommended by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).
The commentary to recommendation 8.1 now identifies remuneration as a ‘key driver of culture’ as well as a focus for investors. The 4th Edition emphasises the need to avoid rewarding conduct that is contrary to an entity’s values or risk appetite. In addition, the commentary now states that consideration should be given to the implications of being perceived by the community as paying excessively.
When will the 4th Edition come into effect?
The 4th Edition will apply to annual reporting periods beginning on or after 1 January 2020, meaning listed entities with 31 December balance dates will the first to adopt the latest edition of the CGPR for financial years ending 31 December 2020. Early adoption is, however, encouraged by the Council.
How should listed entities prepare?
Listed entities should undertake a review of their existing board charters, charters of committees and their stated corporate governance policies and procedures against the 4th Edition sooner rather than later to prepare for the 4th Edition’s effective date. Specifically, listed entities may need to review or prepare the following:
- a code of conduct
- a statement of values
- a diversity policy
- a whistleblower policy
- an anti-bribery and corruption policy
- a continuous disclosure policy
Under the 4th Edition, listed entities should disclose the above policies in full to the market.