Corporate Governance Principles

The fourth edition – the result of an extensive stakeholder consultation process carried out by the Council in 2018 - will see the Principles applicable to listed entities on an “if not, why not,” basis for financial years commencing on or after 1 January 2020. As with previous editions, earlier adoption is encouraged by the Council.

In particular, the latest edition seeks to address issues around culture, values and trust, against a backdrop of community scepticism towards business and a 2018 marked by corporate scandals and governance failings highlighted at the Financial Services Royal Commission.

The AICD is an active member of the Council and strongly endorses the revised set of Principles as a sensible and practical framework to assist listed entities with their own governance practices.

The most significant comments raised by the AICD in its submission to last year’s consultation were ultimately addressed in the final document, including concerns that the Principles risked becoming too detailed and prescriptive.

Significant changes from the third edition

While the eight core principles remain largely intact, in total the number of recommendations has grown from 29 to 35, with the most significant changes being those made to Principle 3 – now expressed as “Instil a culture of acting lawfully, ethically and responsibly” – and its constituent recommendations.

While this might not seem like much of a change from the third edition – “Act ethically and responsibly” - the experience of 2018 showed that there had been too many instances where unlawful behaviour went unchecked and unpunished.

Revised or new recommendations to give effect to Principle 3 include requiring entities to:

  • articulate and disclose their ‘values’ (3.1);
  • disclose material breaches of codes of conduct to the board or a board committee (3.2);
  • to have and disclose a whistle-blower policy with material breaches to be reported to the board or a board committee (3.3); and
  • to have and disclose an anti-bribery policy with material breaches to be reported to the board or a board committee (3.4).

Having in place robust whistleblowing policies will be particularly critical for organisations to prioritise, with new laws being passed by the Federal Parliament on 19 February 2019 that consolidate and broaden existing protections and remedies.

Importantly, the concept of a “social licence to operate” – the subject of heated debate during the public consultation process on the draft – did not find its way into the final version of the Principles. Stakeholder feedback had demonstrated a wide gulf in opinion between those who saw the concept as pivotal to business operating in a broader societal context, and others, like the AICD, who believed that such a subjective term had no place in a quasi-regulatory document.

Ultimately, in the interests of certainty and more consistent market application, the Council decided that references to “social licence to operate” in the consultation draft should be replaced with references to “reputation” and “standing in the community” in the final Principles.

These changes to Principle 3 have been reinforced by revisions under Principle 1 (“Lay solid foundations for management and oversight”) including mandating board charters (Recommendation 1.1), and more detailed articulation of how management and board responsibilities should be split, including the board’s responsibility for defining the entity’s purpose, approving the entity’s statement of values and code of conduct, and satisfying itself that remuneration policies are aligned with the entity’s purpose, values, strategic objectives and risk appetite.

Timely information

Commissioner Hayne’s incontrovertible statement that “Boards cannot operate properly without having the right information. And boards do not operate effectively if they do not challenge management”, is also referenced.

Importantly, following on from the Financial Services Royal Commission, and the APRA prudential inquiry into the CBA, the Principles make clear that the senior executive team is responsible for providing the board with accurate, timely and clear information regarding not only financial performance, but also compliance with material legal and regulatory requirements, and any conduct that is materially inconsistent with the entity’s values or code of conduct.

Risks

The area of environmental and social risks was another which saw a change from the third to the fourth edition. The commentary to revised recommendation 7.4 (“a listed entity should disclose whether it has any material exposure to environmental or social risks and, if does, how it manages or intends to manage those risks”), now asks entities that believe that they do not have any material exposure to environmental or social risks to “consider carefully their basis for that belief and to benchmark their disclosures in this regard against those made their peers”.

Consistent with the approach taken by regulators like ASIC and APRA over recent years, the Principles now also encourage (rather than require) listed entities with material exposure to climate change risk to consider implementing the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

30% female directors

In a boost for promoting greater diversity on boards, for the first time, the Principles will see a hard-coded target of 30% female directors applied to the ASX 300 (revised Recommendation 1.5). The move follows on from a year that finished with the AICD’s target of 30% female representation on ASX 200 boards being almost achieved (29.7%). Australia is the first country in the world to achieve 30% gender diversity in top 100 boardrooms without regulatory intervention or quotas.

On corporate reporting, new recommendation 4.3 requires entities to disclose their process for verifying the integrity of any periodic corporate report released to the market that is not audited or reviewed by an external auditor. This final position saw a slight shift in language from the consultation draft in which the use of the word “validate” had made some question whether prospectus level processes were being required (which was not intended by the Council secretariat).

Other changes

The revised Principles also contain a range of other changes including:

  • Generally, requiring policies to be disclosed in full, not in summary form;
  • Amending commentary under indicators of ‘independence’ (Recommendation 2.3) to broaden personal ties to ‘family, friendship or other social or business connections’;
  • Increasing expectations on director professional development and induction processes (Recommendation 2.6);
  • Requiring all material ASX announcements to be sent to directors promptly after they have been made (new Recommendation 5.2);
  • Specifying that all substantive resolutions at a meeting of security holders should be decided by a poll rather than a show of hands (new Recommendation 6.4); and
  • Amending commentary on remuneration (Recommendation 8.1) to reference the need for listed entities to ensure that incentives encourage senior executives to pursue the growth and success of the entity without rewarding conduct that is contrary to the entity’s values or risk appetite, and to consider the implications for its reputation and standing in the community if it is seen to pay excessive remuneration.

There are also two recommendations that apply only to a small subset of listed entities (additional disclosure obligations for boards with non-English speaking directors, new Recommendation 9.1; and requiring security holder meetings for entities established outside of Australia to be held at a reasonable place and time, new Recommendation 9.2).

Moving from the social licence debate

The public debate around “social licence” and the role of business in the community will not end with the release of the fourth edition of the Principles. With a federal election only months away, we can expect to see more calls for greater regulation of corporate Australia, including questions about whether our current governance frameworks remain fit-for-purpose.

The AICD will continue to be an active participant in this conversation, while acknowledging that it is incumbent on the director community to recalibrate relationships with customers, employees, stakeholders and the broader community. As Commissioner Hayne observed, “In the longer term, the interests of all stakeholders associated with the entity converge…pursuit of the best interests of a [financial services] entity is a more complicated task than choosing between the interests of shareholders and the interests of customers”.

We look forward to supporting directors in discharging their significant responsibilities and supporting the implementation of the Principles by listed entities and their boards.