The ASX Corporate Governance Council is consulting on proposals to update and issue a fourth edition of its Corporate Governance Principles and Recommendations. The Council writes that the proposed changes both 'anticipate[d] and respond to' some of the governance issues identified in recent enquiries, such as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry among others. The closing date for submissions is Friday 27 July 2018.
Accountability, governance and social licence to operate are a key focus of the proposed changes.
Enhanced guidance on climate risk disclosure.
The ASX Corporate Governance Council is consulting on proposals to update and issue a fourth edition of its Corporate Governance Principles and Recommendations. The Council proposes to retain the same eight core principles as in the third edition (though with significant changes to principles 3) and to expand the number of recommendations from 29 to 38. The Council writes that the proposed changes both anticipate and respond to some of the governance issues identified in recent enquiries, such as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry among other issues. The closing date for submissions is Friday 27 July 2018.
Timeframe: The Council intends to release a final version in early 2019 and that the new Principles and Recommendations will take effect for an entity’s first full financial year commencing on or after 1 July 2019.
Accountability, governance, culture and social licence to operate: The key change to the principles highlighted by the Council is the proposed substantial redrafting of Principle 3 and the accompanying commentary to address governance concerns related to an entity's values, culture and social licence to operate. The Council also proposes to introduce three new recommendations (3.1 (core values), 3.3 (whistleblowing policies) and 3.4 (anti-bribery and corruption policies) to support the revised principle.
Diversity: To promote better diversity outcomes, the Council proposes to include, as part of recommendation 1.5 the following amendments (among others):
A requirement that entities in the S&P/ASX 300 set a measurable objective to have a minimum of 30% of directors of each gender on their boards by a specified date.
Amendments 'making it clear' that a 'listed entity’s measurable gender diversity objectives should be targeted at achieving gender diversity in the composition of the entity’s senior executive team and workforce generally, as well as in the composition of the board'.
Requiring a listed entity to disclose its diversity policy in full and removing its ability to disclose only a summary of the policy.
Including guidance in the commentary that a listed entity’s diversity policy 'should express its commitment to embrace diversity at all levels and in all its facets, including gender, marital or family status, sexual orientation, gender identity, age, physical abilities, ethnicity, religious beliefs, cultural background, socio-economic background, perspective and experience'.
[Note: The most recent AICD report on progress towards achieving 30% female representation across ASX 200 boards by the end of 2018 released in March 2018 found women currently account for 26.7% of ASX 200 directorships and that across the ASX 200, a total of 74 companies have reached or exceeded the 30% target. See: Governance News 09/03/2018]
Increased guidance on carbon risk: The Council proposes to amend recommendation 7.4 (sustainability disclosures) to refer to 'environmental and social risks' rather than 'economic, environmental and social sustainability risks' and to expand the commentary accompanying the recommendation. Among other things, it's proposed that in line with a recommendation from the Senate Economics References Committee for increased guidance around carbon risk, that the commentary be amended to suggest that listed entities with material exposure to climate change risk, implement the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) among other things.
[Note: On 2 February 2016, the Senate referred an inquiry into carbon risk disclosure to the Senate Economics References Committee. The committee report, released on 21 April 2017, recommended among other things that ASIC review its guidance to directors on meeting their disclosure obligations in the context of climate risk and that the ASX Corporate Governance Council review guidance material regarding the circumstances in which a listed entity's exposure to carbon risk requires disclosure under Recommendation 7.4 of the Australian Stock Exchange Corporate Governance Principles. The Government response to the report, released on 7 March, expressed 'agreement in principle' with both of these recommendations. See: Governance News 12/03/2018]
Shareholder engagement — Use of Polls not 'show of hands' to decide resolutions: The inclusion of a new recommendation (6.4) that a listed entity should ensure that all resolutions at a meeting of security holders are decided by a poll rather than by a show of hands.
[Note: ASIC's report on 2017 AGM season expressed concern that a relatively high number of ASX 200 companies (25 companies in the ASX 200) continued to decide resolutions by a show of hands rather than by conducting a poll and encouraged companies to decide resolutions by poll. See: Governance News 05/02/2018.]
Cyber risk: The Council proposes amendments to the commentary on recommendation 2.2 (board skills matrix) to provide more detailed guidance on what should be included in a board skills matrix. The proposed amendments include that that it should cover the skills needed to address existing and emerging governance and business issues eg cyber risk (among other risks). In addition, the Council proposes an amendment to recommendation 2.6 (director induction and professional development) and the accompanying commentary to reflect the importance of ensuring boards have the necessary skills to address new or emerging issues including cyber risk, that regular reviews of board skills be undertaken and that professional development programs address any skills gaps.
Whistleblower policies and anti-bribery and corruption policies: The Council proposes that a new recommendation (3.3) be included that a listed entity should:
Have and disclose a whistleblower policy that encourages employees to come forward with concerns that the entity is not acting lawfully, ethically or in a socially responsible manner and provides suitable protections if they do; and ensures that the board is informed of any material concerns raised under that policy that call into question the culture of the organisation.
A new recommendation (3.4) that a listed entity should: have and disclose an anti-bribery and corruption policy; and ensure that the board is informed of any material breaches of that policy.
[Note: Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 was introduced into the senate on 7/12/2017 and is yet to pass either house, though the senate economics legislation committee recommended it be passed. MinterEllison partner, Gordon Williams recently released an update on the Bill and its possible implications see: 24/04/2018.]
Remuneration: The Council proposes the inclusion of a reference in principle 8 (remunerate fairly and responsibly) and the accompanying commentary to remuneration being aligned with 'the creation of value for security holders over the short, medium and longer term' and changes to the commentary to that principle.
Proposed changes to principles
Changes to principle 3: The Council identifies the proposed redrafting of principle 3 as the primary change to the principles on which it is consulting.
The Council proposes to change principle 3 from '[a] listed entity should act ethically and responsibly' to '[a] listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner'.
The Council explains that the proposed revision is aimed at recognising the 'the fundamental importance of a listed entity’s social licence to operate and the need for it to act lawfully, ethically and in a socially responsible manner in order to preserve that licence. It also proposing to acknowledge that, in doing this, a listed entity must have regard to the views and interests of a broader range of stakeholders than just its security holders'.
The Council adds that the 'proposed changes respond to various enquiries and reviews that have taken place since the publication of the third edition in 2014 that have highlighted governance issues arising from poor conduct or culture and a perceived lack of accountability. The Council considers it important to address these issues around corporate values and culture in the Principles and Recommendations as a way to help arrest the loss of trust in business'.
The Council proposed that the redrafted principle 3 be supported by:
Three new recommendations: Recommendation 3.1 (core values); Recommendation 3.3 (whistleblowing policies); and Recommendation 3.4 (anti-bribery and corruption policies).
Expanded commentary to existing recommendation 1.1 (the role of the board and management).
Existing recommendation 3.1 (codes of conduct) which is proposed to become recommendation 3.2 in the fourth edition, to require the board to be informed of any material breaches of a listed entity’s code of conduct by a director or senior manager and of any other material breaches of the code that call into question the culture of the organisation.
The Council is also consulting on some minor changes: to principles 1 (lay solid foundations for management and oversight); 2 (structure the board to add value); 4 (safeguard integrity in corporate reporting); 6 (respect the rights of security holders) and 8 (remunerate fairly and responsibly). According to the Council. The Council writes that the proposed changes are primarily directed to refining the drafting of the principles and establishing a stronger linkage between the principles and their supporting recommendations.
Proposed new recommendations
The Council is consulting on proposals to add nine new recommendations which, if implemented, would expand the total number of recommendations in the fourth edition to 38.
Proposed new recommendations are:
'Recommendation 2.7: A listed entity with a director who is not fluent in the language in which board or security holder meetings are held or key 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 3.1: A listed entity should articulate and disclose its core values.
Recommendation 3.3: A listed entity should:
have and disclose a whistleblower policy that encourages employees to come forward with concerns that the entity is not acting lawfully, ethically or in a socially responsible manner and provides suitable protections if they do; and
ensure that the board is informed of any material concerns raised under that policy that call into question the culture of the organisation.
Recommendation 3.4: A listed entity should:
have and disclose an anti-bribery and corruption policy; and
ensure that the board is informed of any material breaches of that policy.
Recommendation 4.4: A listed entity should have and disclose its process to validate that its annual directors’ report and any other corporate reports it releases to the market are accurate, balanced and understandable and provide investors with appropriate information to make informed investment decisions.
Recommendation 5.2: A listed entity should ensure that its board receives copies of all announcements under Listing Rule 3.1 promptly after they have been made.
Recommendation 5.3: A listed entity that gives a new 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 resolutions at a meeting of security holders are decided by a poll rather than by a show of hands.
Recommendation 8.4: A listed entity should only enter into an agreement for the provision of consultancy or similar services by a director or senior executive or by a related party of a director or senior executive:
if it has independent advice that:
the services being provided are outside the ordinary scope of their duties as a director or senior executive (as applicable);
the agreement is on arm’s length terms; and
the remuneration payable under it is reasonable; and
with full disclosure of the material terms to security holders.'
In addition, the Council proposes various amendments to existing recommendations and commentary.