Update to members on ASX Corporate Governance Council Principles and Recommendations

The consultation period in relation to the draft 4th edition of the ASX Corporate Governance Council Principles and Recommendations (Principles) has now closed.

The AICD, as a member of the ASX Corporate Governance Council and a backer of their Principles since their inception, supports the current review of the Principles and is committed to working closely with fellow Council members towards finalising a revised version that will continue to enjoy broad support from listed entities, boards and other stakeholders.

It is important that this level of support continues given the Principles represent a self-regulatory standard by which listed entities are judged by investors and other stakeholders – which is, as outlined in our submission, a testament to their value to the market.

The AICD has approached the current review from this starting point. The AICD submission, which was prepared following broad member consultation , can be accessed here. It sets out a number of overarching comments at the outset which were informed by consistent feedback from members.

Overall, it is important to keep in mind that Australia’s corporate governance model – underpinned by statute - is robust and is well respected globally. Ongoing improvement is of course important, and we need to keep pace with governance developments and emerging trends. However, we should not lose sight of the fact that the Principles sit within a broader context and that their purpose is to provide guidance to companies on good governance practices. After all, it is well accepted, including by the Council, that which governance practices a listed entity chooses to adopt is fundamentally a matter for the board. For this reason, the “if not why not” reporting model serves the business and investor community well.

On a related point, the AICD submission expresses our strong view that the Principles should avoid granularity and prescription. The draft 4th edition of the Principles is significantly longer than the current edition (including nine new recommendations and more extensive commentary, some of which sets a higher bar for action by entities). We have a number of concerns about the consequences of a more prescriptive approach, including that the Principles may come to be seen as a “tick the box” compliance exercise; that they may lose a measure of support, particularly among smaller entities who are resource-constrained; and that the principles-based approach may be diluted.

While the AICD notes the critical role played by the Principles in setting a benchmark for corporate governance, we also acknowledge that they cannot be a panacea for the challenges facing corporations, including the trust deficit with the community. Instead this trust must be re-built from the ground up, with each organisation, led by its board and senior management.

The AICD position on some of the other material changes are as follows:

• Social licence to operate: Our submission addresses concerns regarding the approach to proposed new Principle 3. The AICD supports the Principles promoting a focus on long-term value creation and recognising the importance of engagement with stakeholders and community expectations. We are concerned, however, that concepts proposed to be introduced such as “social licence to operate” and acting in a “socially responsible manner” are subjective and will cause unnecessary complexity and uncertainty. It is important that the Principles reflect the legal and fiduciary obligations of directors to avoid creating unintended confusion.
• Governance: A number of proposed changes relate to the board’s role, composition and operation. The AICD broadly supports many of the changes – for example, the clarification in Recommendation 1.1 that listed entities should have a board charter and the additions to the list of responsibilities of the board in the commentary, including defining an entity’s purpose and approving an entity’s statement of core values and code of conduct. In terms of board performance evaluations, the AICD submission suggests that annual evaluations for all boards, committees and individual directors may be too prescriptive, particularly for smaller cap entities.
• Reporting: The AICD received consistent feedback that the proposal in Recommendation 4.4 for entities to have and disclose the process to “validate” their annual directors’ report and any “other corporate report it releases” was of concern, given it may suggest a requirement to prove each statement made in all corporate reports (akin to prospectus level verification). We understand this was not the intent of the recommendation and suggest in our submission that this be made clear in the explanatory commentary.
• Climate change: The AICD supports the proposed updated commentary in relation to climate change-related risk. We note that investors are increasingly seeking greater disclosure on such issues, and that over the last twelve months key regulators have highlighted the importance of companies taking a proactive approach to climate change risk management. We also support the Council encouraging “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 (TCFD)”.
• Diversity: The AICD supports the proposed introduction of a new 30% measurable gender objective for the ASX 300. The AICD supports board diversity generally, and believes that the new recommendation will help keep up the momentum towards more gender balanced boards which we have seen over recent years. Of course, while all organisations should seek to achieve a diverse workforce and leadership team, the starting premise must always be to appoint individuals with the requisite skills and experience.

It is intended that the draft be finalised over the coming months and that the 4th edition of the Principles will take effect for an entity’s first full financial year commencing on or after 1 July 2019. We look forward to continued involvement in this important review and will keep members informed of material developments.