Friday, 23 August 2013

Update to ASX Corporate Governance Principles and Recommendations – overhaul of approach or maintaining the status quo?

On 16 August 2013, as has been anticipated, the ASX Corporate Governance Council (CGC) released a consultation paper for a draft third edition of its Corporate Governance Principles and Recommendations (Principles and Recommendations).  This was released together with a separate consultation paper on Proposed Changes to ASX Listing Rules and Guidance Note 9, to supplement the proposed new Principles and Recommendations.

Although there have been some amendments to the second edition of the Principles and Recommendations (e.g. in relation to diversity initiatives), the draft third edition represents the first comprehensive review of the Principles and Recommendations since 2007 and, importantly, represents the first major redraft of key Australian corporate governance principles since the GFC.

The impact of the GFC is clearly seen in the new draft Principles and Recommendations, with an overarching focus by CGC on risk management and the importance of the board of directors having a greater degree of involvement and oversight in the adoption and implementation of corporate governance policies and procedures.  There is also a focus on encouraging the availability of corporate governance materials on a company’s website, rather than as a prescriptive requirement for the annual report.

The eight key principles enshrined in the Principles and Recommendations, together with the ‘if not, why not’ approach to reporting on corporate governance practices, have been retained in the draft third edition.  The overarching approach to corporate governance issues is therefore unlikely to alter.  However, the amendments to certain key principles and the approach to disclosure of corporate governance practices have received detailed attention, and it is worth reviewing the respective consultation papers to get a feel for these changes.

Some of the key proposed and/or interesting changes are:

To the Corporate Governance Principles and Recommendations:

  • A new recommendation 1.2(a) requiring a listed entity to undertake appropriate checks for an incoming director and to provide shareholders with all material information relevant to that person’s appointment.  This will act to supplement the relatively new admission requirement that a listed entity must show each director or proposed director is of ‘good fame and character’.
  • The diversity-related recommendations have been moved from principle 3 to principle 1 (relating to laying foundations for management and oversight), as CGC considers that the previous location of these recommendations resulted in confusion.  This is to be supplemented with a requirement that an entity report on the proportion of female employees in the whole organisation, in senior executive positions and on the board of directors.
  • More extensive guidance in relation to the ‘independence’ of directors has been included, to specifically include close family ties and service on the board for more than 9 years as indicators that a director may not be independent. 
  • Wording has been included in principle 3 on the importance of an entity promoting decision-making that creates ‘long-term value’ for security holders.  Combined with a new recommendation 7.3, relating to a listed entity disclosing how it has regard to environmental and social sustainability risks, there is a clear focus by the CGC on a move towards integrated financial reporting, as has recently been a focus of ASIC (see our comments in the blog dated 2 July 2013).
  • Principle 4 has been updated to provide for ‘formal and rigorous’ processes for financial reporting (which we expect is derived from recent cases such as the Centro decision). 
  • In relation to remuneration, CGC has provided a new recommendation for implementation of a ‘clawback policy’, which sets out when an entity may clawback performance-based remuneration for its senior executives (e.g. if there is a material misstatement of financial results).  This reflects relatively recent legislation proposed by the Australian Government.  The approach by CGC, that this is a matter best dealt with through an ‘if not, why not’ regime, rather than specifically through legislation, seems sensible – particularly in light of the complexities that have been faced by listed entities through the advent of the ‘two-strikes’ rule and other remuneration-related provisions of the Corporations Act.

To the ASX Listing Rules and Guidance Note 9:

  • Listing Rule 4.10.3 is to be amended to give greater flexibility for listed entities to make their corporate governance disclosures either in the annual report or on their website, and to make clear that an entity should disclose if it has not followed a recommendation for any part of the reporting period.  There is also an added requirement for an entity to state that the corporate governance statement has been approved by the board of directors, to ensure it receives appropriate focus at board level.
  • Perhaps the most significant change from an administrative viewpoint, is the proposed introduction of a new ASX form (Appendix 4G) to be completed and lodged with ASX each year (at the same time as the annual report).  This is intended to provide a key to assist investors and other stakeholders in locating an entity’s various corporate governance disclosures, recognising the flexibility being given by the amendments so that an entity’s corporate governance statements may not be in a single location on the company’s website or dealt with exclusively in the company’s annual report.  ASX has also indicated its hope that the Appendix 4G will act as a verification tool and reduce concerns in relation to standardised boilerplate documents.  We question whether the new Appendix 4G will achieve this outcome or simply become an additional administrative burden for entities during an already busy reporting period.
  • Although not directly governance-related, ASX is proposing to introduce a new Listing Rule 3.19B requiring specific disclosure of on-market purchases of securities (i.e. through a trustee structure) on behalf of employees, directors or their related parties within 5 business days.  ASX has indicated that, although it does not consider security holder approval is required, it is appropriate for disclosure to be made to the market, for such transactions.
  • Additional guidance has also been provided to highlight how the Principles and Recommendations apply differently to externally managed listed entities.

The majority of the changes are intended to become effective on 1 July 2014, with some of the amendments to the ASX Listing Rules to come in earlier (on 1 January 2014).  ASX and the CGC have asked for comments by 15 November 2013.  We will be collating any responses received from our clients on the consultation papers and considering appropriate submissions to make to ASX and CGC.  We will also continue to monitor and comment on the developments in this area, which will result in a revised Chapter 4 of The Chairman’s Red Book in due course. 

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