New Corporate Governance Principles and Recommendations for listed entities – No need for ‘social licence to operate’

Directors and boards should take note that on 27 February 2019, the ASX Corporate Governance Council (Council) issued its Fourth Edition of its Corporate Governance Principles and Recommendations. We encourage you to familiarise yourselves with the revised content as it may require some adjustment or additions to your corporate governance processes, as well as to your Corporate Governance Statement required under Listing Rule 4.10.3.

Regarding the Fourth Edition:

  • There are still 8 principles but there has been some tinkering around the edges with subtle wording changes
  • Nine recommendations have been added on how to apply the principles, resulting in 35 in total (up from 29 in the Third Edition). However, three of these recommendations only apply in certain limited cases, and
  • Additional commentary has been added to various principles and recommendations.

History

The proposals to amend the Corporate Governance Principles and Recommendations included in the May 2018 Consultation Paper sparked much debate amongst the business community, with 100 submissions made to the ASX Corporate Governance Council. This has resulted in a somewhat ‘toned down’ version being issued as the Fourth Edition.

The following proposals in the Consultation Paper have been scrapped when drafting the Fourth Edition:
  • Listed entities need a social licence to operate i.e. be good corporate citizens and act in a socially responsible manner
  • Boards members should come from different cultural or socio-economic backgrounds to order to bring different perspectives and experience and to avoid ‘group think’
  • Entities should not engage in aggressive tax minimisation schemes, and
  • Entities only enter into consultancy arrangements with directors or senior executives (or their related parties) for work that is outside the scope of that person’s duties as a director or senior executive if certain conditions have been met.

Key changes

The table below summarises some of the major changes proposed in the Consultation Paper, as well as whether these were included in the final amendments (Fourth Edition).

Items shaded in grey were not included in the Fourth Edition.

Theme

Proposal included in Consultation Paper

Included in Fourth Edition

Gender diversity (all entities)

Clarifying that the measurable objectives for achieving gender diversity is to specifically focus on the entire entity, i.e. the board, senior executives, and the workforce generally.

Recommendation 1.5(b)

The board to consider setting KPI targets for senior executives on gender participation in their areas of responsibility, and linking part of their remuneration to the achievement of these KPIs.

Commentary to Recommendation

Gender diversity (S&P/ASX 300 Index at the beginning of the reporting period)

The measurable objective for achieving gender diversity in the board composition should be a target of not less than 30% of directors of each gender to be achieved within a specified period.

Commentary to Recommendation

Other aspects of diversity

Boards should consider facets of diversity besides gender when considering the composition of the board, including having directors of different ages and ethnicities and from different cultural or socio-economic backgrounds to provide different perspectives and avoid ‘groupthink’.

Commentary to Recommendation

Social licence to operate

Listed entities should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner.

Principle 3 only requires the entity to act responsibly

Entities would need to be seen to be ‘good corporate citizens’ and have a ‘social licence to operate’ whereby the board and management would need to have regard to the views and interests of parties other than shareholders and regulators, such as employees, customers, suppliers, creditors, consumers, taxpayers and local communities.

 

Entities would not engage in aggressive tax minimisation schemes.

Desired culture

New recommendation for the entity to articulate and disclose its values.

Recommendation 3.1 added

New recommendation for the entity to have and disclose a ‘whistle blower policy’, and to ensure the board is informed on any material concerns raised that call into question the culture of the organisation1.

1 The Fourth Edition wording instead refers only to the board needing to be informed of material incidents reported under the policy

Recommendation 3.3 added

New recommendation for the entity to have and disclose an anti-bribery and corruption policy and to ensure the board is informed of any material breaches of that policy.

Recommendation 3.4  added

Validating market releases

New recommendation for the entity to have, and disclose, its process for validating that the annual directors’ report and other market releases are accurate, balanced and understandable and provide investors with appropriate information to make informed decisions2.

2 The Fourth Edition wording instead refers to disclosing its process to verify the integrity of any periodic corporate report it releases to the market that is not audited by the external auditor

Recommendation 4.4  added

Timely and balanced disclosure

New recommendation for the entity to ensure the board receives copies of all announcements under Listing Rule 3.1 (continuous disclosure requirements)3 promptly after they have been made.

3 The Fourth Edition wording amended to all material market announcements

Recommendation 5.2  added

New recommendation that if a listed entity gives a new4 investor or analyst presentation, it should release a copy of the presentation materials on the ASX Market Announcements Platform ahead of the presentation.

4 The words ‘and substantive’ have been added in the Fourth Edition

Recommendation 5.3  added

Rights of security holders

New recommendation that the entity should ensure that all5 resolutions at shareholder meetings are decided by a poll rather than a show of hands.

5 The words ‘substantive’ have been added in the Fourth Edition

Recommendation 6.4  added

Environmental risk includes climate change risks

Recommendation 7.4 dealing with disclosure of environmental and social risks:

  • Commentary added to highlight climate change as a particular source of environmental risk, and
  • Entities with material exposure to climate change are encouraged to consider implementing the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD)6.

6 The Fourth Edition adds that entities are encouraged to consider whether they have a material exposure to climate change risk by references to the TCFDs, rather than assuming that they don’t

Commentary to Recommendation

Remuneration

New recommendation that an entity should only enter into consultancy arrangements with directors or senior executives (or their related parties) if:

  • It has received independent advice that the services fall outside the scope of that person’s duties as a director or senior executive, the agreement is on arm’s length terms and the remuneration is reasonable, and
  • The material terms have been disclosed to security holders.

Additional recommendations that only apply in certain cases

The following additional recommendations have also been added in the Fourth Edition, but these only apply in certain circumstances (extracted from the Fourth Edition):

Recommendation Description
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 discussions 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.
Recommendation 9.3 A listed entity established outside Australia, and an externally managed listed entity that has an AGM, should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit.

Effective date

The amendments introduced by the Fourth Edition are effective for full financial years beginning on or after 1 January 2020. Listed entities with 31 December year-ends will therefore apply these changes for the first time to 31 December 2020 financial years, and those with a 30 June year-end, to 30 June 2021 financial years.