ASX has released the third edition of Corporate Governance Principles and Recommendations and the final governance-related amendments to the Listing Rules. 

The ASX Corporate Governance Council (Council) recently released the final version of the third edition of its Corporation Governance Principles and Recommendations (Principles and Recommendations) following extensive feedback from the public in response to a consultation draft issued in August 2013. In conjunction with the Principles and Recommendations, ASX also released its final governance-related amendments to the ASX Listing Rules (Final Amendments).

The purpose of this article is to summarise the key differences between the second and third editions of the Principles and Recommendations, to discuss the Final Amendments to the ASX Listing Rules and to provide an overview of the action that listed entities should take in response to these changes.

Summary of key changes - Principles and Recommendations

The key changes to the Principles and Recommendations take effect for a listed entity’s first full financial year on or after 1 July 2014. Entities with a 30 June or 31 December balance date will be expected to consider their governance practices and take into account the recommendations in the third edition commencing with the financial year ending 30 June 2015 or 31 December 2015, respectively.

The key changes to the Principles and Recommendations include the following:

  • The introduction of nine new corporate governance recommendations (concepts of some of these had been reflected in the second edition but are now elevated to recommendations).
  • Modifications to the reporting requirements on gender diversity.
  • The expansion of the factors relevant to the assessment of the independence of a director.
  • A new recommendation that listed entities establish a single risk committee, or a group of committees to manage the various aspects of risk.

New recommendations

The new corporate governance recommendations in the third edition of the Principles and Recommendations are set out in a table at the end of this article.

All of the recommendations (except recommendations 1.2(a) and 7.4) appeared in the second edition of the Principles and Recommendations as commentary to other recommendations. The Council now considers the issues addressed each of these recommendations to be contemporary governance standards, such that they should be promoted from commentary to actual recommendations.

Recommendation 1.5 - Gender Diversity

Recommendation 1.5 has been revised to allow listed entities that are “relevant employers” under the Workplace Gender Equality Act 2012 (Cth) to report their “Gender Equality Indicators” instead of the respective proportions of men and women on the board, in senior executive positions and across the whole organisation. Where an entity chooses to provide the respective proportion of men and women on the board in senior executive positions, the entity should disclose how it has defined “senior executive” for that purpose.

Recommendation 2.3 - Factors indicating director  independence

The third edition of the Principles and Recommendations expands on the factors that are to be considered when assessing the independence of a director.

Box 2.3 (previously Box 2.1 in the second edition) now provides a more extensive list of indicators to assess the independence of a director, including:

  • “Close familyties” with a person who would not be considered independent under the Principles and Recommendations.
  • The duration of office that is for “such a period that his or her independence may have been comprised”. The consultation draft proposed that a director who had served for a period of more than nine years would no longer  be  considered  independent. Whilst this prescribed period was removed from the final version of the third edition, the new commentary provides that the board should regularly assess whether a person who has served as a director of the entity for more than 10 years has become too close to management to be  considered  independent.

Recommendations 7.1-7.4 - Risk

The recommendations on risk have been significantly developed in response to the global financial crisis. The Council has, for example, introduced the following recommendations:

  • Recommendation 7.1, which provides that an entity establish a single committee (e.g. a combined audit and risk committee) or a group of committees to oversee risk the different elements of risk.
  • Recommendation 7.4, which provides that 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 or intends to manage those risks.

“If not, why not” approach retained

The Council has retained the “if not, why not” approach to disclosure in the previous editions of the Principles and Recommendations. Accordingly, if an entity considers that a recommendation is inappropriate having regard to its particular circumstances, it has the flexibility not to adopt it.

Where alternative governance practices are adopted by an entity, the entity must provide an explanation to ensure that the market is provided with adequate disclosure of the entity’s governance arrangements.

Summary of Final Amendments

The Final Amendments to the ASX Listing Rules are intended to commence on 1 July 2014 (subject to certain regulatory approvals under the Corporations Act being obtained) to give effect to the changes in the third edition of the Principles and Recommendations. However, the annual reporting-related amendments will apply in relation to financial periods ending on or after 30 June 2015 (but listed entities may adopt the amendments in respect of earlier financial periods provided they also comply with the third edition of the Principles and Recommendations).

The Final Amendments provide that a listed entity:

  • Must prepare a corporate governance which sets out the extent to which it has complied with the Principles and Recommendations and if a recommendation is not followed for any period, the reasons for not following the recommendation and what (if any) alternative governance practices the listed entity adopted instead of following the recommendation (CG Statement).
  • May incorporate, in its CG Statement, material by reference (e.g. on its website or in another part of the annual report) provided such material is freely accessible and the CG Statement sets out where such material can be obtained or read.
  • Must include in its annual report the CG Statement or the URL of the page on the entity’s website where the CG Statement can be found.
  • Must disclose in its annual report all on-market purchases of securities under an employee incentive scheme as a one-off annual disclosure covering the entire reporting period. 

Further at the time of lodging its annual report with ASX, a listed entity must lodge:

  • A completed Appendix 4G, which provides details of where the relevant disclosures made in connection with the Council’s recommendations can be located and acts as a checklist for relevant corporate governance disclosures.
  • A copy of the entity’s CG Statement.

Additionally, the definition of “associates” has been revised so that a related party is taken to be an associate of the director or officer unless proven otherwise. One way to prove otherwise would be for the director, officer or related party to provide a statutory declaration or other certification to the listed entity stating that the related party is not the director or officer’s associate. However, it is anticipated that this is likely to be subject to ASX’s assessment and discretion as to whether such declaration or certification is sufficient.

What should listed entities do?

In light of the release of the third edition of the Principles and Recommendations and the Final Amendments, listed entities should review and revise their existing governance practices so that they can be in a position to comply for the full reporting periods commencing on or after 1 July 2014. Listed entities should also understand what additional documents are required when preparing their annual report, including a CG Statement and the Appendix 4G. Where the board of a listed entity does not consider it appropriate to adopt any of the new recommendations it must provide an explanation as to why such recommendation was not adopted and details of any alternative approach in its CG Statement.

Click here to view table.