Culture shock: ASX corporate governance review

1 GTLAW.COM.AU 2018 ASX CORPORATE GOVERNANCE REVIEW GOVERNANCE REVIEW GTLAW.COM.AU 2 1 EXECUTIVE SUMMARY The ASX Corporate Governance Council (the Council) is consulting the public in relation to a revised fourth edition of the ASX Corporate Governance Principles and Recommendations . The proposed changes are moving with the current tide of public scrutiny of governance standards, which may prompt ASX listed boards to meaningfully reflect on their own governance framework rather than being viewed as a compliance obligation. The proposed changes in the draft Principles and Recommendations are a combination of: + recommendations that encourage listed entities to focus on the organisation’s culture of “acting lawfully, ethically and in a socially responsible manner”, including taking account of a range of stakeholders beyond just shareholders; + recommendations that would require specific action, such as articulating their core values and adopting a whistleblower policy and an anti-bribery and corruption policy; and + recommendations directed at improving corporate governance practices, including board reporting on material breaches of their code of conduct, whistleblower policy and anti-bribery and corruption policy. The recommendations are directed at placing accountability squarely at the feet of directors. The changes are intended to provide corporate boards with the information required to effectively monitor, and then those boards are expected to take action where required to “set the tone from the top”. This is a well-timed release of the consultation paper in an environment of heightened awareness that corporate governance shortcomings can have a real impact on the performance of a company. 2 WHAT IS THE REVIEW SEEKING TO ACHIEVE? The review seeks to retain the structure and flexibility of the “if not, why not” disclosure framework set out in the Principles and Recommendations. The disclosure framework requires listed entities to comply with the Principles and Recommendations, or explain why they don’t comply . The review explicitly seeks to avoid a more prescriptive, rules-based regulation of corporate governance. Principle 3 of the current third edition, which already deals with responsible and ethical behaviour, has been recast to emphasise the “social licence to operate”; entities can no longer only consider their commercial imperatives (including maximising shareholder value), but must also incorporate the society and environment within which they operate into their plans. This is not a new concept and has existed for a number of years in the mining and minerals industry, but is new to the ASX corporate governance regime. 3 WHEN WILL THE PROPOSED CHANGES BE EFFECTIVE? The Council intends that the final version of the fourth edition will be effective for listed entities’ first full financial year commencing on, or after, 1 July 2019. For example, entities with financial years ending on 30 June will be expected to apply the fourth edition Principles and Recommendations to the financial year ending 30 June 2020. 4 WHAT SHOULD I FOCUS ON? The most important proposed changes are those to the recommendations, as they are what trigger the disclosure obligations in terms of the Principles and Recommendations, and against which listed entities are measured. In other words, they are the “working end” of the principles and how they are actually to be applied in practice. The following table sets out a summary of the key changes in the recommendations. Submissions are due by Friday 27 July 2018. 2 3 1 Principle 1: Solid foundations for management and oversight Theme Recommendation Additional board requirements – new responsibilities, background checks and review processes Requirements for listed entities to: + have and disclose a board charter, including additional responsibility to define the entity’s purpose, approving a statement of core values and code of conduct to underpin culture, overseeing management in instilling the entity’s values and ensuring that the remuneration framework is aligned with the entity’s purpose, values, strategic objectives and risk appetite – recommendation 1.1; + undertake background checks on senior executives (not just board members) before engaging them – recommendation 1.2; + institute annual review processes for the board and management - recommendations 1.6 and 1.7. Emphasis on diversity Substantial changes to the “Diversity” recommendation 1.5, including: + the obligation to disclose the diversity policy; and + requiring entities in the S&P/ASX 300 to have the object of at least 30% of each gender represented in their boards. 4 2 Principle 2: Structure for the board to be effective and add value Recognition of the importance of the board having directors with “knowledge of the entity and the industry in which it operates” Theme Recommendation A board should rule a director not to be independent if falling within certain examples unless clear that the interest, position, affiliation or relationship is not material and will not interfere with independent judgment Refinements to recommendation 2.3 relating to the test for director independence, including: + a focus on “personal relationships” as opposed to “family relationships”; and + scrutiny of directors with performance based remuneration. Focus on not only induction for new directors but also ongoing development Requirement for listed entities to have programmes for periodically reviewing the need for existing directors to undertake professional development programs – recommendation 2.6. 3 Principle 3: Instil the desired culture Change from “a listed entity should act ethically and responsibly” to “a listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner” Theme Recommendation Focus on an entity’s “social license to operate” This requires the board and management of listed entities to consider not just shareholders but their employees, customers, suppliers, creditors, regulators, consumers, taxpayers and the local communities in which they operate. Core values to express the standards and behaviours expected from directors and all staff to be articulated across the organisation Listed entities must articulate and disclose their core values (which is separate to the code of conduct) setting out their aspirational guiding principles – recommendation 3.1. Board to be informed of material conduct breaches that call into question the corporate culture Listed entities must disclose a code of conduct and have systems to inform the board of material breaches of codes of conduct – recommendation 3.2. To create and disclose a whistleblower policy and an antibribery and corruption policy Listed entities must create and disclose a whistleblower policy (with board reporting of material concerns that calls into question the corporate culture) and an anticorruption and bribery policy (with board reporting of material breaches) – recommendations 3.3 and 3.4. 4 Principle 4: Produce corporate reports of high quality and integrity Change from “safeguard integrity in corporate reporting” to “produce corporate reports of high quality and integrity” Theme Recommendation Focus on corporate reports of higher quality and integrity to inform investors Listed entities must have and disclose a process to validate that their annual directors’ report and other corporate reports are accurate, balanced and understandable, and provide appropriate information for investors to make informed investment decisions – recommendation 4.4. 5 5 Principle 5: Make timely and balanced disclosure Theme Recommendation Directors should have timely visibility of information being disclosed to the market Listed entity boards must receive copies of all Listing Rule 3.1 announcements promptly after publication - recommendation 5.2. All security holders should have timely access to investor or analyst presentations New investor/analyst presentations should be published on the ASX Markets Announcements Platform ahead of the actual presentation –recommendation 5.3. 6 Principle 6: Respect the rights of security holders Theme Recommendation Active consideration to be given to the use of technology to manage shareholder participation Listed entities must disclose how they facilitate and encourage participation at meetings of security holders – recommendation 6.3. Voting by a show of hands is inconsistent with one vote for each security Resolutions at meetings of security holders should be decided by poll, rather than a show of hands – recommendation 6.4. 7 Principle 7: Recognise and manage risk Theme Recommendation Board to monitor the adequacy of the risk management framework Listed entities must evaluate whether they are operating with “due regard” to the risk appetite set by the board – recommendation 7.2. Focussing board attention on environmental and social risks Refinements of the disclosure obligations in relation to sustainability so that they focus on “environmental and social risks”, instead of “economic, environmental and social sustainability risks" – recommendation 7.4. 8 Principle 8: Remunerate fairly and responsibly Addition to the principle to clarify that shareholder value and the interests of senior executives and shareholders must align “over the short, medium and longer term” Theme Recommendation Managing conflicts and double-dipping on fees and remuneration An agreement for consultancy or similar services with directors or senior executives, or their related parties requires independent advice that the agreement is on arm’s length terms and full disclosure of material terms to security holders – recommendation 8.4. 6 TIM GORDON T +61 2 9263 4251 E tgordon@gtlaw.com.au ADAM D’ANDRETI T +61 2 9263 4375 E adandreti@gtlaw.com.au HIROSHI NARUSHIMA T +61 2 9263 4188 E hnarushima@gtlaw.com.au NIRANGJAN NAGARAJAH T +61 3 8656 3332 E nnagarajah@gtlaw.com.au GTLAW.COM.AU SARAH TURNER T +61 8 9413 8433 E sturner@gtlaw.com.au SYDNEY Level 35 International Towers Sydney 200 Barangaroo Avenue Barangaroo NSW 2000 Australia T +61 2 9263 4000 F +61 2 9263 4111 MELBOURNE Level 22 101 Collins Street Melbourne VIC 3000 Australia T +61 3 8656 3300 F +61 3 8656 3400 PERTH Level 16 Brookfield Place Tower 2 123 St Georges Terrace Perth WA 6000 Australia T +61 8 9413 8400 F +61 8 9413 8444 For more insight and advice on how to deal with these changes, reach out to your usual G+T contact. 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