The ASX Corporate Governance Council's proposals would, if implemented, radically transform key areas of corporate governance in Australia.
On 2 May 2018, the ASX Corporate Governance Council published a consultation draft of a proposed fourth edition of the Principles and Recommendations. While the proposed amendments are extensive, we have published a paper that draws attention to the three key areas where the proposals are transformative.
1. The role and responsibilities of the Board
The proposals, if implemented to the full extent drafted by the ASX, have the potential to import the most fundamental change in the approach to corporate governance of listed entities that has occurred for many years.
A consistent theme throughout the proposed changes is requiring the board of directors to discharge their responsibilities having regard to the interests of a broader group of stakeholders than simply shareholder interests. For example:
- Under the Board Charter, the Board is responsible for defining the entity's "purpose", the implication being that entities are explicitly expected to have a positive impact on its stakeholders and society at large (Recommendation 1.1).
- The Board and Management are expected to instil a culture across the entity of acting lawfully, ethically and in a socially responsible manner ie. be "good corporate citizens". The explicit reference to a listed entity's "social licence to operate" is designed to compel entities to ensure a broad range of stakeholders are borne in mind (Principle 3).
- The Board is expected to define the entity's "core values", which must include providing positive outcomes for a variety of stakeholders, including employees, customers, local communities and shareholders, and not just shareholders (Recommendation 3.1).
- The Board must ensure that is reviews the listed entity's risk management framework so that it is taking into account long-term risks (such as climate change, environmental and social risks) that correlate with broader stakeholder interests (Recommendations 7.2 and 7.4).
2. Skills and composition of the Board
The ASX proposals respond to a growing concern across the corporate community that directors need to have a requisite level of relevant skill and knowledge in order to properly perform their oversight function over management. For example:
- Increased emphasis on directors having "knowledge of the entity and the industry in which [the entity] operates" in order for the Board to be effective (Principle 2).
- Reformed Board "skills matrix" process so that boards are transparent in disclosing the skills and knowledge the Board requires, and comparing that to the existing skills and knowledge of the current directors (Recommendation 2.2).
- Explicitly highlighting how the "currency of a director's knowledge or skill" or the impact of "other commitments" can inhibit the director's ability to properly perform their oversight and monitoring responsibilities (Recommendation 1.6).
- New emphasis on professional development for directors in a number of key areas such as the entity's structure, business operations, history and culture, as well as legal duties and responsibilities as a director, and a basic level of understanding of accounting matters (Recommendation 2.6).
The ASX changes to the Diversity Policy Recommendation 1.5 reflect calls for increased diversity amongst senior management and leadership positions across the corporate communities, as well as normative changes in how society values diversity. For example:
- Diversity at the board level is now seen as an "asset to listed entities and a contributor to better overall performance", which is reflective of empirical evidence
- New emphasis on "numerical, measureable objectives" for diversity at all levels of a listed entity, include the composition of its board, senior executives and workforce generally.
- The explicit target has been set for listed entities to have not less than 30% of its directors of each gender on the board within a specified period, representing a shift away from "aspirational objectives" to hard, numerical targets.
- Board composition should now factor in other aspects of diversity in addition to gender, such as geographic and cultural.
Getting ready for the ASX Corporate Governance principles
Although the submissions period has closed, the debate on these proposals will likely be ongoing throughout the year. The Council currently plans to release the final version of the fourth edition in early 2019, so we expect on that timeline that the new Principles and Recommendations will come into effect for an entity's first financial year commencing on or after 1 July 2019.
If the proposals are substantially kept the same after the consultation period, this will represent a dramatic shift in the way listed entities must approach their corporate governance obligations in Australia.