In preparing corporate governance statements in their annual reports, entities should consider two KPMG reports released by ASX.
The reports review the adoption and reporting by listed entities on the new or modified recommendations in the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, which came into effect for listed entities’ first full financial year commencing on or after 1 July 2014. One report deals with the modified diversity recommendations in the third edition. The other report deals with all other new or modified recommendations in the third edition.
The reports analyse corporate governance statements made by listed entities for the financial years ended between 1 January 2015 and 31 December 2015. The review covered all S&P/ASX 200 entities and a sample of all other ASX listed entities. The reports include examples of disclosures.
KPMG considered that the greatest variation in approach to disclosure was in relation to Recommendation 2.2 (board skills matrix) and Recommendation 7.4 (sustainability risks). ASX has indicated that it will be looking for an improvement in disclosures in these areas in 2016 annual reports.
Board Skills Matrix
The KPMG report indicates that there was high adoption by S&P/ASX200 companies of Recommendation 2.2:
“A listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership.”
However, the quality of disclosure in relation to the Recommendation was variable and significantly lower than in respect of the other new or modified recommendations (with the exception of Recommendation 7.4, in relation to sustainability risks).1
This is consistent with a February 2016 report by Global Proxy Solicitation on the 2015 AGM season, which found that only 2.5% of S&P/ASX 200 companies in the 2015 AGM season provided what Global Proxy Solicitation describes as “enhanced disclosure” of the board skills matrix. Almost 50% provided what Global Proxy Solicitation defines as “poor” disclosure.2
KPMG considered there could be better disclosure of gaps/opportunities in the skills matrix, and that skills such as geographic experience, technology and people skills appeared under-represented.3
Recommendation 7.4 provides:
“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.”
KPMG found that there were significant differences in the interpretation of what constituted material risks and that a number of entities provided “little, or no information to support the way in which they determined whether they had any material risks”. KPMG stated that the Corporate Governance Council may consider aligning the material risk definition with ISO:31000:2009.4
KPMG also stated that it considers it “unlikely that over 20 percent of entities do not have any material economic, environmental and/or social sustainability risks”.5
Many entities also cross-referenced risk disclosures in the entity’s operating and financial review, without specifically addressing non-economic sustainability risks.6
There was a significantly lower adoption by S&P/ASX200 companies of Recommendation 7.4.7
The KPMG report found an improvement in reporting on diversity, following additional guidance on diversity in the third edition of the Corporate Governance Principles and Recommendations.
92% of the S&P/ASX 200 entities which had established diversity policies had set measurable objectives for gender diversity. Of those, 94% disclosed details of the measurable objectives and 87% disclosed their progress in attaining them.8
Measurable objectives are not limited to quotas. Examples included conducting unconscious bias training with senior executives, undertaking pay equity reviews, etc.9 Overall, few entities disclosed transparent measurable objectives.10