regulator

Businesses large and small have well-established rules to govern their behaviour, especially public companies listed on the stock exchange. There are the ASX listing rules, as well as the Corporations Act 2001 (Cth) itself applying to all 2.3 million companies in Australia. In addition, and perhaps less widely known, there are the ASX Corporate Governance Council Corporate Governance Principles and Recommendations. Covering such diverse areas as board composition and structure, employment and remuneration policies and practices, disclosure practices and risk management, they seek to provide practical guidance on many aspects of running a listed business.

ASIC is not, and never has been, a member of the ASX Corporate Governance Council. But we do support the concept behind it, and its aims. However, ASIC is concerned that the corporate governance statements sometimes lack transparency and don’t adequately reflect the actual practices of companies.

”Any set of standards should meet the primary purpose of providing investors with clear disclosure of the actual corporate governance practices of an entity.”

ASIC’s view is that any set of standards should meet the primary purposes of providing investors with clear disclosure of the actual corporate governance practices of an entity, and encouraging improvements in those practices. As it is, the ASX Listing Rules (LR4.10.3) only specify reporting against the Principles — meaning, in effect, companies are required to disclose the existence of a governance policy or framework rather than how that company implements it. This may lead to unhelpful disclosure — the existence of a policy does not necessarily mean that the policy is being implemented. And the investing public and others can do without statements comprising largely “boilerplate” disclosure, reiterated year after year.

However well intentioned, such tick-the-box approaches to corporate governance disclosure detract from the objectives of driving improvements in practices or even of setting an effective baseline standard of governance for larger listed companies. To put it another way, there may be a stark contrast between how the major financial institutions have characterised their behaviour and performance — and the reality.

We all want to see more transparent and practical reporting, one following a process of objective analysis. This would also significantly improve the value of disclosures made by the listed community, which ASIC would expect to have a follow-on impact on tangible governance practices adopted elsewhere. This does not mean more red tape. One model could be a two-part governance disclosure regime showing the effectiveness of various policies without increasing the length or frequency of disclosures — currently done on an annual basis.

Firstly, there could be a standalone document outlining the corporate governance framework, readily accessible by investors in a central place (the company website, for instance). A reference or link to this document could be included in the entity’s corporate governance statement. This document would include many of the disclosures currently provided to demonstrate compliance with the Principles — simply put, an overview of the company’s governance framework. The corporate governance statement or annual report would then focus on what the entity has done in practice in any given year, describing how those policies were implemented over the previous year. This would provide investors with an insight into the effectiveness of the corporate governance framework.

In the case of a code of conduct, for example, the information would show how it was implemented that year, how it was monitored, and whether there were any material breaches. And, of course, what was actually done to correct the situation.

ASIC is also of the view that a minimum level of corporate governance practice, to be adopted by the larger listed entities, should be strongly encouraged. Indeed, perhaps some or all of the Principles might be made mandatory for larger listed companies. At the least, regular consideration of this point is important.

These principles should represent “best practice”, drafted and applied to raise and maintain the standards of governance within listed companies. For the larger listed entities, compliance should be viewed as a baseline standard of governance. Such a practical, investor-centric and user-friendly approach would reinforce Australia’s reputation internationally as a jurisdiction that is well regulated with strong corporate governance.