What governance requirements need to be observed in Australia?
Investors need to be aware of the governance rules that apply to entities in Australia.
In Australia, companies and trusts, particularly those listed on the ASX, are subject to a large range of corporate governance requirements, which arise from various sources including:
- the Corporations Act;
- the ASX Listing Rules for listed entities;
- the ASX Corporate Governance Council’s “Corporate Governance Principles and Recommendations” (ASX Recommendations) for listed entities;
- prudential standards issued by APRA for regulated financial and superannuation institutions, including banks, building societies and insurers; and
- other industry standards which are adopted voluntarily, often in line with those adopted in the United States and the United Kingdom.
The board of directors
Most listed entities in Australia have boards of directors which comprise more non-executive, independent directors than executive non-independent directors. The ASX Recommendations make various recommendations regarding director selection, appointment and independence of directors and also the role of the chairman. In Australia, it is rare for the chairperson of a listed entity to hold an executive position with the entity.
Larger listed entities usually establish board committees to address oversight of audit, risk, compliance, nomination and remuneration issues.
Generally, directors of both listed and unlisted entities may delegate any of their powers to another director, a committee of directors, an employee of the company, or any other person.
Directors’ duties in Australia are prescribed by legislation, in particular the Corporations Act, and an extensive body of case law (common law). Directors owe stringent duties:
- to act honestly;
- to exercise care and diligence;
- to act in good faith in the best interests of the company and for a proper purpose;
- not to improperly use their position or company information; and
- to disclose their material personal interests and avoid conflicts of interest.
Directors have duties regarding financial reporting and other forms of reporting and disclosure and can be liable under various laws. If the company they manage is in financial distress, there are additional duties and issues that arise for them. Breaches of directors’ duties carry a range of fines or terms of imprisonment, or both. Some defences are available to directors under the Corporations Act.
Directors may be granted indemnities for performance of their office from the subject company or its parent (subject to the law). Companies often take out D&O (directors’ and officers’) insurance to cover directors’ liabilities to the extent permissible.
With exceptions for small proprietary companies and small companies limited by guarantee, all companies must appoint an independent auditor. The ASX Recommendations suggest that listed entities in Australia have audit committees comprising only non-executive directors, a majority of whom are independent directors. This is obligatory under the ASX Listing Rules for entities in the top 300 of the S&P / ASX All Ordinaries Index.
What are the relevant disclosure obligations?
Financial and other reporting
All listed entities must prepare and lodge an annual audited financial report and an audited or audit-reviewed half year financial report. These reports must comply with Australian accounting standards and also, in the case of major corporations which sometimes are listed in the US or the UK, with the accounting standards for those jurisdictions. All directors (executive and non-executive) are responsible for the entity’s financial reports being accurate and complying with accounting standards.
Listed entities must describe their corporate governance practices in detail in their annual reports. They must report on whether they comply with the ASX Recommendations and if not, why not.
Unlisted companies and registered schemes are generally also required to prepare annual financial reports and directors’ reports each financial year. There is an exception for small companies limited by guarantee and small proprietary companies unless they have been controlled by a foreign company for all or part of a year.
Listed entities and the responsible entities of listed MISs must fully disclose price-sensitive information to the market (via communications made to the ASX) as soon as they become aware of the information, subject to limited carve-outs. Noncompliance with the requirement results in civil penalties (fines imposed by ASIC). Unlisted “disclosing entities” must provide similar information to ASIC.
What corporate conduct is prohibited?
Anti-bribery and anti-corruption
Australia’s foreign anti-bribery and anti-corruption laws make it a crime for companies and individuals to bribe foreign government officials to obtain or retain business. Corporations are deemed to be at fault if they expressly, tacitly or impliedly authorized or permitted the conduct. This includes failing to create and maintain a corporate culture of compliance with these laws.
In response to criticism from the OECD for failing to have in place meaningful false accounting laws, Australia introduced legislation in February 2016 which makes it a criminal offence for a person to make, alter, destroy or conceal an ‘accounting document’:
- intending to conceal the giving or receiving of a bribe; or
- reckless as to whether the giving or receiving of a bribe is concealed.
A director may be in breach of their duties under the Corporations Act if the bribery is found to have occurred within their organisation. In addition to regulatory investigations, companies and their directors are increasingly exposed to private actions from shareholders for failing to prevent and disclose bribery and corruption.
Insider trading and trading policies
Insider trading in securities and other financial and investment products is prohibited.
Listed entities must have trading policies which comply with minimum content requirements of the ASX Listing Rules, including specifying that key management personnel cannot trade in the entity’s securities or in financial products issued or created over or in respect of the entity’s securities during prohibited periods (including the periods before the release of annual and half yearly financial statements and before the AGM). The Corporations Act prohibits hedging of incentive remuneration.
Directors of listed entities must disclose to the ASX full details of trading in securities of those entities.
Manipulation of securities and financial markets is prohibited. The operators of those markets are also required to actively monitor transactions in their markets and report any suspicious trading to the corporate regulator.
Further, Australia’s laws include an overriding requirement that extends to financial transactions, which prohibits any person from engaging in misleading or deceptive conduct.
A director will contravene the insolvent trading prohibition of the Corporations Act if:
- the company incurs a debt while it is insolvent or becomes insolvent by incurring the debt; and
- there are reasonable grounds for suspecting that the company is insolvent or will become insolvent.
To monitor against the risk of insolvent trading, directors should keep themselves informed about the company’s financial position, regularly assess the company’s solvency, and obtain professional advice if necessary.
Related party transactions
Australia has strict rules about related party transactions, particularly for public entities. In general, shareholder approval is required unless the transactions are entered into on arm’s length terms. Listed entities are subject to additional rules for related party dealings.