Proposed ASX Corporate Governance Principles and Recommendations changes – Expanded risk disclosures and more

On 27 February 2024, the ASX Corporate Governance Council released its Consultation Draft, proposing changes to its Fourth Edition of the Corporate Governance Principles and Recommendations, published in 2019.

One of the critical changes we have identified is the proposed amendments to Recommendation 7.4. The requirement to disclose the entity’s environmental and social risks is expanded to cover all material risks, which aligns with the Australian Securities and Investments Commission’s (ASIC’s) recent focus areas and Regulation Guide 247 Effective disclosure in an operating and financial review.

The Consultation Draft retains the eight principles and contains 33 general recommendations and seven additional recommendations that apply only in particular circumstances. While many of the principles and recommendations remain the same, there are improvements to layout and expression, simplified language, and additional clarity where there has been evidence of poor disclosure quality in certain areas.

Key changes

Below, we highlight some key changes proposed for the fifth edition of the Corporate Governance Principles and Recommendations.

The Consultation Draft proposes deleting the following recommendations because they are already covered by other Australian legislation.

Recommendation

Topic

Recommendation 3.3

Disclosure of whistleblower policy

Recommendation 3.4

Disclosure of anti-bribery and corruption policy

Recommendation 4.2

CEO and CFO declaration for financial statements

Recommendation 6.4

Substantive security holder resolutions on a poll

Recommendation 6.5

Offering electronic communications to security holders

Recommendation 8.2

Separate disclosure of remuneration policies for non-executive directors, other directors and senior executives

Recommendation 8.3

Policy on hedging of equity-based remuneration

Recommendation 1.5 has also been deleted and split into two new recommendations: Recommendation 2.3 deals with board diversity, and Recommendation 3.4 covers diversity and inclusion in the workforce (these will be discussed later).

Recommendation 2.2 is expanded to include disclosure of the board’s processes for assessing its directors’ relevant skills and experience (i.e., explain the assessment methodology). The proposed commentary also emphasises that it is better practice to include information on the skills of individual directors.

Proposed Recommendation 2.3 is similar to Recommendation 1.5 of the Fourth Edition but only focuses on board diversity. An additional recommendation also proposes that if the board considers any diversity characteristics besides gender for board membership, it should disclose those characteristics.

For entities in the S&P/ASX 300 index at the start of the reporting period, the measurable objective of having not less than 30 per cent of directors of each gender within a specific period is proposed to be increased to:

  • At least 40 per cent of men
  • At least 40 per cent of women
  • Up to 20 per cent of any gender.

The factors relevant to assessing the independence of a director in Box 2.4 of Recommendation 2.4 refer to a ‘10% holder’ rather than a ‘substantial holder’. This applies when considering if the director is or represents a ‘10% holder’, or has been an officer, employee or a material professional adviser in the last three years to a ‘10% holder’. A ‘substantial holder’ has a five per cent or more security holding, so this test will be less onerous than the test in the Fourth Edition.

Recommendation 3.2(c) proposes that the entity disclose, on a de-identified basis, the outcome during the last reporting period of actions taken by the entity in response to material breaches of the code of conduct. The additional commentary notes that the entity may exclude disclosure to the extent they relate to actions that are not yet finalised. It also notes that entities may wish to consider published guidance when considering what constitutes responsible business conduct. This applies, for example, to the human rights of Aboriginal and Torres Strait Islander peoples, combating bribery and corruption, technology competition and taxation matters.

Recommendation 3.3 (whistleblower policy) is deleted and replaced with a new recommendation that the listed entity should regard the interests of the entity’s ‘key stakeholders’, including having processes to engage with them and report material issues to the board.

‘Key stakeholders’ may include security holders, employees, customers, suppliers, Aboriginal and Torres Strait Islander peoples, local community, law makers and regulators. They may also include organisations representing stakeholders’ interests, such as unions, environmental groups or consumer groups. Aboriginal and Torres Strait Islander stakeholders may be business partners, land owners, host communities, employees, customers, or have other relationships with the listed entity.

When considering the interests of stakeholders other than security holders, these should be consistent with the long-term interests of security holders.

Proposed Recommendation 3.4 is similar to Recommendation 1.5 of the Fourth Edition but only focuses on workforce diversity and also deals with inclusion.

Additional commentary to Recommendation 4.1 proposes that the audit committee should consider their skills and whether they require support in evolving areas – for example, climate and other sustainability-related matters supported by the work of a sustainability committee.

Recommendation 4.2 (previously 4.3) proposes extra disclosure about the verification process for all periodic corporate reports released to the market, including the extent to which it has been audited, or the subject of assurance by an external auditor. This proposal aims to improve the quality of disclosures in periodic corporate reports not audited or reviewed by the external auditor.

New Recommendation 4.3 proposes that listed entities should disclose:

  • The tenure of the audit firm and the audit engagement partner at the end of the reporting period
  • When the appointment of the external auditor was last comprehensively reviewed, and the outcomes of that review.

Recommendation 7.4 in the Fourth Edition only references environmental and social risk disclosure.

The proposals expand risk disclosure to cover material risks, including environmental, social and governance risks.

References in the commentary to the International Integrated Financial Reporting Council and the Task Force on Climate-related Financial Disclosures are deleted, and a substantial amount of new commentary is added. Key points to note in the expanded commentary include:

  • Material risks are those which are material to the entity’s prospects over the short, medium or longer term
  • Entities that believe their prospects may not be impacted by any material environmental, social or governance risk should consider carefully their basis for that belief
  • Although the recommendation refers to environmental, social and governance risks, it is not necessary to report against each of these categories separately because some risks may span more than one category
  • Entities can satisfy this disclosure by referencing the Operating and Financial Review in the directors’ report
  • A sustainability report is not expected when reporting under Recommendation 7.4. However, sustainability concepts may assist the entity in its approach to reporting material risks
  • Listed entities should consider ongoing developments in sustainability standard-setting when making disclosures under this recommendation. If no relevant standard applies, the entities may wish to consider global standards in developing their thinking on material risk issues and metrics that may be relevant to the entity
  • This recommendation does not require climate-related financial disclosures, but entities may find it helpful to consider definitions and guidance in relevant standards (for example, about physical and transition risks) when making this disclosure
  • An entity should have reasonable grounds for making forward-looking statements and may wish to provide context for its forward-looking information
  • Information may be excluded if it is likely to result in unreasonable prejudice to the entity (for example, by giving a competitor an unreasonable advantage or impacting the effectiveness of cyber risk management). Disclosure is expected here unless the detriment to the entity is both likely and material
  • Cyber risk is provided as an example that spans strategic, operational, social and governance risk, and includes digital disruption, platform obsolescence, cyber resilience, the retention and use of data, and the application of artificial intelligence
  • Climate change risk is also provided as a risk example that may have an impact, even for entities that operate in non-emission-intensive industries.

Two new recommendations regarding remuneration structures have been introduced for listed entities. Firstly, they should not give performance-based remuneration or retirement benefits to non-executive directors (Recommendation 8.2). Secondly, they should also have a remuneration structure that allows them to clawback, or otherwise limit performance-based remuneration outcomes for senior executives after they have been awarded, paid or vested. On a de-identified basis, they should also disclose if these ‘clawback’ provisions have been used during the reporting period.

The Consultation Draft proposes, amongst others, deleting the following Fourth Edition recommendations because they are dealt with elsewhere under Australian law. However, it also proposes adding additional recommendations for these items where listed entities are established outside Australia because they generally reflect expectations under Australian law.

Fourth Edition Recommendation

Topic

Proposed new Recommendation

Recommendation 4.2

CEO and CFO declaration for financial statements

Recommendation 9.3

Recommendation 6.4

Substantive security holder resolutions on a poll

Recommendation 9.4

Recommendation 6.5

Offering electronic communications to security holders

Recommendation 9.5

Recommendation 8.3

Policy on hedging of equity-based remuneration

Recommendation 9.7

Effective date

The effective date for the fifth edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations could be for financial years beginning on or after 1 July 2025. This would apply then to financial years ending 30 June 2026 or 31 December 2026, depending on whether the entity has a June or December reporting date.

While the Consultation Draft does not specify the effective date for the changes, it is noted in the communique that it is envisaged that the final version of the fifth edition will be released in early 2025, ready for a 1 July 2025 start date.

Comments due

Submissions on the proposals in the Consultation Draft are due by 6 May 2024. Please contact our IFRS & Corporate Reporting team if you would like to discuss any of these corporate governance proposals.