The 3rd edition of the ASX Corporate Governance Principles and Recommendations was released on 27 March 2014 with revisions aimed at the latest developments in corporate governance.
What are the Principles and Recommendations?
The ASX Listing Rules require ASX listed companies to disclose their corporate governance practices by reference to the ASX Corporate Governance Council’s Recommendations. It is a non-prescriptive, flexible approach of disclosing on an “if not, why not” basis. If an entity does not adopt any Recommendation, it must disclose the fact and reasons why.
The Principles and Recommendations will require listed companies to comply with a higher standard of corporate governance practices and more detailed reporting.
The Principles and Recommendations take effect for a listed company’s first full financial year commencing on or after 1 July 2014. However, early adoption by listed companies is encouraged.
Related changes to the ASX Listing Rules are proposed to come into effect on 1 July 2014.
Disclosure
Currently, a listed company is required to include its corporate governance statement in its annual report. The changes will require the corporate governance statement to be in the listed company’s annual report or on its website. If the company includes its corporate governance statement on its website rather than in its annual report, it must also lodge the corporate governance statement with ASX at the same time as it lodges its annual report with ASX.
Some key points
The majority of the new Recommendations were previously provided as guidance in commentary to the 2nd edition of the Principles and Recommendations. They are now elevated to Recommendations to reflect them as governance standards rather than mere guidance. Accordingly, listed companies must now disclose whether they adopt the corporate governance Recommendation or, if not, why it has not adopted the Recommendation.
Internal Audit
A listed company must disclose if it has an internal audit function, how the function is structured and what role it performs.
If a company does not have an internal audit function, it must disclose that fact and the process it employs for evaluation and continually improving the effectiveness of its risk management and internal control processes.
External Auditor
A listed company should ensure that its external auditor attends its AGM and is available to answer shareholders’ questions relevant to the audit. The Corporations Act imposes an obligation on an auditor (or a suitably qualified audit team member) to attend the AGM at which the audit report is considered to answer questions about the audit.
Director Independence
A director’s independence needs to be considered regularly and assessed by the board or nomination committee. Additional guidance has been provided to assist companies in determining directors’ ‘independence’ through additional commentary.
One factor inserted as relevant to assessing a director’s independence is whether the director has been a company director for such period that his/her independence may have been compromised.
It is acknowledged that long service as a director does not necessarily mean that the director has become too close to management to be considered independent. However, the board should regularly assess whether independence may have been lost by a director who has served in that role for more than 10 years.
Director Appointments
There are new Recommendations regarding director appointments.
A listed company should undertake appropriate checks before appointing a person or putting a candidate forward for election as a director and provide all material information in its possession relevant to a decision on whether or not to elect (or re-elect) a director.
The company should also have a written agreement with each director and executive setting out their appointment terms.
A listed company is required to disclose the material terms of any employment, service or consultancy agreement that it or a related entity enters into with its CEO, any of its directors, or any other person or entity who is a related party of its CEO or any of its directors.
Risk Recommendations
The Recommendations on risk have been enhanced.
Risk Committee
The board of a listed company should have a committee or committees to oversee risk and make various disclosures. Alternatively, if it does not have a risk committee or committees, it should disclose that fact and the processes employed for overseeing its risk management framework.
A listed company has obligations to include in its operating and financial review part of the directors’ report information on the prospects for future financial years. This part will outline financial performance and outcomes that the company expects to achieve overall. It should also describe material business risks that could adversely affect the achievement of the financial prospects for those future years.
Sustainability Risks
A listed company should disclose whether it has any material exposure to economic, environmental and social sustainability risks. If it does, the company should disclose how it manages or intends to manage those risks. Material exposure means as a real possibility that the risk in question could substantively impact the company’s ability to create or preserve value for security holders over the short, medium or long term.
Nomination, audit, risk and remuneration committees
The Recommendations dealing with nomination, audit, risk and remuneration committees now allow listed companies to adopt and report alternative governance practices.
This provides more flexibility for compliance with these Recommendations by those companies which may not consider it appropriate or effective to establish separate committees to perform such functions.