asx governance principles update

The fourth edition of the ASX Corporate Governance Council’s Principles and Recommendations has been released after extensive stakeholder consultation. The new guidelines will apply to listed entities on an “if not, why not,” basis for disclosure for financial years commencing on or after 1 January 2020 (although, as with earlier editions, listed entities are encouraged to “early adopt” if they wish). It addresses issues around culture, values and trust against a backdrop of low levels of trust and community scepticism towards business and governance failings highlighted by the banking Royal Commission. The 19 members of the council, including the AICD, unanimously endorsed the revised Principles after issues raised during consultation were addressed in the final document, including concerns the Principles risked becoming too detailed and prescriptive.

ASX Corporate Governance Council chair Elizabeth Johnstone FAICD says changes in the fourth edition were “evolutionary, not revolutionary”. All but one of the recommendations proposed in the consultation draft were included, with the number of recommendations increasing to 35 (although commentary was significantly streamlined).

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. Johnstone says the use of the term was the most commented-on and polarising of the issues in the consultation draft. Stakeholder feedback revealed a 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 a subjective term was inappropriate in a quasi-regulatory document. “The council saw the force in these arguments,” says Johnstone. “Consequently, the council has replaced the references in the commentary to ‘social licence to operate’ with references instead to ‘reputation’ and ‘standing in the community’.”

“Changes to the fourth edition of the Principles are evolutionary, not revolutionary.” Elizabeth Johnstone FAICD, chair ASX Corporate Governance Council

The most significant changes are to Principle 3 — now expressed as requiring listed entities to “instil a culture of acting lawfully, ethically and responsibly”. It is underpinned by new recommendations for entities to articulate and disclose its values, whistleblower and anti-bribery and corruption policies, and the recommendation that a listed entity’s board should be informed of any material breaches of the entity’s code of conduct. The changes to Principle 3 are reinforced by revisions under Principle 1, which include mandating board charters and more detailed articulation about how management and board responsibilities should be split.

In the wake of the Hayne Royal Commission, the Principles make clear the senior executive team will usually be responsible for providing the board with accurate, timely and clear information on not only financial performance, but also compliance with material legal/regulatory requirements, and any conduct materially inconsistent with the entity’s values or code of conduct.

In the area of environmental and social risks, the commentary to revised recommendation 7.4 now asks entities that believe 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 ASIC and APRA over recent years, the Principles now also encourage 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.

The ASX Corporate Governance Council will conduct an explanatory roadshow during May.