On 2 May 2018, the ASX Corporate Governance Council issued a consultation paper and draft version for a proposed 4th edition of its Corporate Governance Principles and Recommendations.

Why is this interesting?

The ASX Corporate Governance Principles and Recommendations apply to all entities listed on ASX. While the principles are not binding, they operate on an “if not, why not” basis. This means that if the board of a listed entity considers that a Recommendation is not appropriate to its circumstances, it is not required to adopt it. In such case, the entity must explain why it has not adopted the recommendation.

In addition, the boards of many unlisted companies seek to adopt or comply with the Recommendations as a means of best corporate governance practice.

The draft retains the same eight core principles covering the same broad governance themes as the third edition. The fourth edition addresses a number of issues including corporate culture and values, gender diversity, whistleblower policies, anti-bribery and corruption, management processes, diversity and professional development.

A summary of the key highlights of the proposed changes is set out below.

Updating Principle 3 to ‘instil the desired culture’

Significant changes are proposed to the principle which requires a listed entity to ‘act ethically and responsibly’. A substantial redraft is required to address emerging issues around corporate values and culture, and social licence to operate. It is proposed to re-word this principle as “a listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”. This aims to reduce governance issues arising from poor conduct or culture and perceived lack of accountability.

New recommendations

Whistleblower policy

A listed entity should have and disclose a whistleblower policy that encourages employees to come forward with concerns that the entity is not acting lawfully, ethically or in a socially responsible manner. In addition, a whistleblower should be afforded suitable protections and the board should be informed of any material concerns raised under that policy.

This requirement is in line with the Australian government’s proposed new whistleblower protection regime which creates a single regime to cover the corporate, financial and credit sectors.

Anti-bribery and corruption policies

A listed entity should have and disclose an anti-bribery and corruption policy and ensure that the board is informed of any material breaches of that policy.

Disclosure of Process

A listed entity should have and disclose its process to validate that its annual directors’ report and any other reports it releases to the market are accurate, balanced and easy to understand. The current recommendations only deal with financial reporting, rather than “corporate reporting” more broadly.

Voting

All resolutions at a meeting of members should be decided by a poll rather than by show of hands. This is intended to improve voting processes and ensure the results of a vote fairly reflect the will of the meeting.

Amending existing recommendations

The Council is also proposing to amend the existing recommendations in respect to:

  • Role of board and management - to recommend that a listed entity has a board charter.
  • Background checks - to recommend that a listed entity undertake appropriate background checks on senior executives and directors before engaging them.
  • Diversity - to achieve better gender diversity, recommend that an entity in the S&P/ASX 300 have as a measurable objective at least 30% of directors of each gender on its board.
  • Director induction and professional development – a listed entity should have a program for inducting new directors and for periodically reviewing whether existing directors need to undertake professional development to maintain the skills and knowledge needed to perform their role as directors effectively.

When will the Principles and Recommendations take effect?

Submissions on the consultation paper close on 27 July 2018. ASX anticipates that the final version of the fourth edition of the Principles and Recommendations will be released in early calendar 2019.

Listed entities will be expected to measure their governance practices against the updated Principles and Recommendations for their first full financial year commencing on or after 1 July 2019.