KEY POINTS

  • The third edition of the ASX Corporate Governance Principles have been released and will apply to listed entities’ financial years commencing from 1 July 2014.
  • There are nine new Recommendations, most of which result from concepts from the commentary in the second edition being upgraded to separate Recommendations.
  • This has resulted in increased compliance requirements, as entities must ensure that they comply with the new Recommendations or provide adequate disclosure on an ‘if not, why not’ basis when making corporate governance disclosures.
  • Related amendments to the ASX Listing Rules were recently released and are intended to commence on 1 July 2014.

The ASX Corporate Governance Council released the third edition of its Corporate Governance Principles and Recommendations on 27 March 2014, which will apply to listed entities in respect of financial years commencing on or after 1 July 2014.

The 8 overarching Principles contained in the second edition have been retained in the new edition (with minor amendments).  Compliance with the third edition continues to be on an ‘if not, why not’ basis, whereby listed entities must make corporate governance disclosures under ASX Listing Rule 4.10.3 and explain why it has failed to comply with a particular recommendation.  Proposed amendments to the Listing Rules published on 6 May 2014 require the corporate governance statement to also specify the date at which it is current and state that it has been approved by the entity’s board.

While the Principles and Recommendations contain many structural changes, there are a total of 9 substantively new Recommendations.  Most of these concepts have been elevated from commentary contained in the second edition on the basis that these matters should be considered contemporary governance standards as opposed to mere guidance.

Recommendation 1.2 – A listed entity should: (a) undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and (b) provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re elect a director.

Part (a) of this Recommendation is a new concept and the supporting commentary suggests that this should include checks as to the person’s character, experience, education, criminal record and bankruptcy history.  Australian Standard AS 4811-2006 Employment Screening is referred to as a guide for entities to understand the types of checks that may be undertaken and, as such, formal criminal history Police checks are not expressly required for the entity to meet the requirement to conduct ‘appropriate checks’ as to a candidate’s criminal record if Police checks are not ordinarily conducted by the entity.

Any material adverse information revealed by the checks should be provided to security holders to enable them to make an informed decision on whether or not to elect the candidate. The board must also provide a statement as to whether it supports the election or re-election of the candidate and whether the candidate would qualify as an independent director.

It should be noted that there appears to be some inconsistency in ASX’s approach between requiring ‘appropriate checks’ to be conducted in respect of incoming directors and the strict requirement to conduct police checks for all proposed directors when the entity is applying to the ASX for initial quotation or re-compliance with Chapters 1 & 2 following a backdoor listing (ASX Guidance Note 12 provides further details about this requirement).

Recommendation 1.3 – A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment.

The content of old Box 1.1 of the second edition has been largely set out in the commentary to new Recommendation 1.3, which provides a list of information that should be contained in agreements with directors and senior executives. In the case of executive directors or other senior executives, the agreement should also set out a description of the position, duties and responsibilities of the executive; the person or body to whom the executive will report; the circumstances in which the executive’s service may be terminated and any entitlements on termination.

Recommendation 1.4 – The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board.

As provided in the new commentary, the role of the company secretary should include:

  • advising on governance matters
  • monitoring that board and committee policies and procedures are followed
  • coordinating the timely completion and despatch of board and committee papers
  • ensuring that the business at board and committee meetings is accurately captured in the minutes
  • helping to organise and facilitate the induction and professional development of directors.

Recommendation 2.6 – A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors.

While the list of matters previously set out in the commentary in respect of induction programs has not been carried across to the new edition, the new commentary does provide that the board should regularly review whether the directors as a group have the skills, knowledge and familiarity with the entity and its operating environment required to fulfil their roles on the board and committees effectively.

This reflects the decision in ASIC v Healey [2011] FCA 717 and provides that entities should provide resources to help develop and maintain the directors’ skills and knowledge.  This includes ensuring that all directors have sufficient understanding of accounting matters to fulfil their responsibilities in relation to the entity’s financial statements, and that they receive ongoing briefings on developments in accounting standards.

Recommendation 4.3 – A 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.

This Recommendation captures listed entities that were not otherwise required to comply with sections 250PA, 250RA and 250T of the Corporations Act 2001 (Cth), which provide rights for members to question an entity’s external auditor – either in writing or by the members as a whole at the entity’s AGM. Trusts, externally managed entities and foreign companies should ensure that shareholders can ask questions at, or ahead of, any AGM.

Recommendation 6.1 – A listed entity should provide information about itself and its governance to investors via its website.

New commentary acknowledges that investors expect information about listed entities to be freely and readily available, and suggests that listed entities’ websites contain a corporate governance landing page, from where all relevant corporate governance information can be accessed. As well as suggesting a list of information that investors may find helpful to be on the website, the commentary suggests that the corporate governance page should include links to the entity’s:

  • constitution, charters and corporate governance policies
  • annual reports and financial statements
  • ASX announcements and notices of meetings
  • webcasts or transcripts of meetings of security holders (if it keeps them)
  • biographical information about directors and senior executives.

Recommendation 6.4 – A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically.

Electronic communications sent to shareholders should be formatted to be easily readable on a computer screen and other electronic devices commonly used for that purpose, and include a printer-friendly option.

Recommendation 7.3 – A listed entity should disclose: (a) if it has an internal audit function, how the function is structured and what role it performs; and (b) if it does not have an internal audit function, the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes.

If an entity does have an internal audit function, the head of that function should have a direct reporting line to the board or to the board’s audit committee to bring the requisite degree of independence and objectivity to the role.  This statement (which is set out in the commentary to Recommendation 7.3) removes the suggestion contained in the second edition commentary that the internal audit function and the audit committee be accountable to each other.  In particular, the previous edition provided that ‘the internal audit function and the audit committee should have direct access to each other and should have all necessary access to management and the right to seek information and explanations’.

Recommendation 7.4 – A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages those risks.

Recommendation 7.4 is a new concept based on increasing international calls for the business community to address matters of economic, environmental and social sustainability, paired with increasing demand for investor transparency on these issues.

Although not required to do so, if an entity publishes a Sustainability Report, the entity can comply with this Recommendation by simply cross-referring to that report.

New definitions of ‘economic sustainability, ‘environmental sustainability’ and ‘social sustainability’ have been incorporated into the Glossary of the document – all of which have been defined as the entity’s ability to continue operating ‘over the long term’ with respect to particular levels of economic production, the health of ecosystems and operating in a manner that meets accepted social norms and needs respectively.

The third edition of the Principles and Recommendations also contains other changes, which include:

  • enhancements to Recommendations 7.1 – 7.4 regarding the management of risk to reflect lessons of the global financial crisis
  • a series of amendments which expressly allow an entity to comply with certain Recommendations by adopting and reporting on alternative practices (namely in relation to nomination, audit, risk and remuneration committees) – this allows more entities to positively report under ASX Listing Rule 4.10.3 that they have complied with the Recommendations
  • the ability for ‘relevant employers’ under the Workplace Gender Equality Act 2012 (Cth) to report on Gender Equality Indicators as set out in that Act
  • an amendment to old Box 2.1 (now Box 2.3), which sets out examples that might cause doubts about the independence of a director, to include that the person has been a director of the entity for such a period that his or her independence may have been compromised.  While the mere fact that a director has served on a board for a substantial period does not mean that the director’s independence is compromised, boards should regularly assess whether the director has become too close to management to be considered independent in respect of any director who has served in that position for more than 10 years.

Related amendments to the ASX Listing Rules were published on 6 May 2014 together with a Supplementary Consultation Response.  The amendments extend beyond corporate governance issues and are intended to come into effect on 1 July 2014.