The ASX Corporate Governance Council recently introduced the 3rd edition of its Corporate Governance Principles and Recommendations (Principles). The new Principles take effect for a listed entity's first full financial year commencing on or after 1 July 2014. If you have a 30 June balance date, you will be required to report any non-compliance with the new Principles from next month under "comply or explain" rules.
Most of the changes in the 3rd edition of the Principles upgrade suggestions or guidance from the 2nd edition into formal Recommendations. Although many listed entities had already adopted that guidance, if you don't comply with it you will now be obliged to explain the reasons for non-compliance. See below for the more significant upgrades.
In addition, there are some new requirements:
1. Appoint a Risk Committee
Risk management is a formal Board responsibility. A listed entity should have a Board committee, or divide responsibility between several Board committees, to oversee risk. The committee (or, if more than one, each committee) is to be comprised of at least three members, a majority of whom are independent directors including its Chair.
As part of the risk management framework, listed entities now have to report annually whether or not they have an internal audit function, and (if so) describing its structure and role.
Many listed entities already have formal risk responsibilities allocated within an Audit and Risk Committee, and this will satisfy the Principles so long as the composition requirements for the Committee are met.
2. Perform formal background checks on all new directors
For the last few years, new ASX listings have been required to do formal background checks on their directors. What's new is that an already listed entity now has to undertake background checks before appointing a new director or putting a new candidate to shareholders for election.
The checks should include the person's character, experience, education, criminal record, and any bankruptcy history. These are similar to the checks performed for directors of new listings.
3. CEO and CFO to provide Board declaration on half year financials
The CEO and CFO are already required to give the Board a declaration before the full year accounts are approved, including their opinion as to proper maintenance of financial records, compliance with accounting standards, and that the financial statements give a true and fair view. ASX has extended this requirement to the half year financial statements as well.
4. Option to reduce Annual Report content
A change to the ASX Listing Rules from 1 July will help cut down the increasing size of the Annual Report. Now, instead of dedicating several pages to the corporate governance statement in the Annual Report, a listed entity can put the statement up on its website and just include a link to it in the Annual Report.
The 3rd edition of the Principles has upgraded a number of what were previously suggestions and guidance into formal Recommendations. None of the following items is new, but now non-compliance will have to be reported (even if it applies for only part of the financial year):
- Have a written appointment agreement for all directors. Most companies already had a formal letter of appointment for non-executive directors, which is still suitable for this purpose.
- Assess director independence against the ASX checklist, and explain why any departures were considered acceptable. Note that the ASX checklist has been tightened up, and for the first time requires consideration of length of service on the Board (specifying 10 years' service as a threshold for regular assessment of whether the director has become too close to management to be considered independent).
- Nomination Committee to be comprised of a minimum of three members, with at least a majority to be independent directors including its Chair.
- Have an induction program for new directors, and provide professional development opportunities for existing directors.
- Ensure the Company Secretary is accountable to the Board, through the Chair, on matters to do with proper functioning of the Board.
- Give security holders the option to have electronic communications to and from the listed entity and its security registry.
- If they are not already there, upload all of your corporate governance information, policies and documents to a dedicated page on the corporate website.