The ASX Corporate Governance Council (the Council) published the finalised fourth edition of the ASX Corporate Governance Principles and Recommendations on 27 February 2019 (Fourth Edition). The most commented on change from the consultation draft, released in May 2018 (Consultation Draft), is the removal of the phrase “social license to operate”, replacing it with “reputation” and “standing in the community”.

The “social licence” language was a lightning rod and generated enormous criticism. However, dropping the term does not represent a back-down, with the changes being more form than substance (the Council itself stating that the amendments retain the spirit of the initial draft). This is clearly correct; the Fourth Edition is without doubt a document that reflects the temperature of these dramatic times in corporate governance. The foreword explicitly notes that the revision of the Principles was embarked upon to address emerging issues around culture, trust and values fuelled by examples of corporate behaviour falling short of community expectations. This absolutely comes through in the document which incorporates references to “values” and “community standing” type concepts throughout. Like Commissioner Hayne in his final report following the Financial Services Royal Commission, the Principles now explicitly link the importance of acting ethically and preserving reputation with sustaining long term shareholder value. In line with this approach, the changes relative to the third edition are clearly aimed at meaningful substantive adherence to good corporate governance principles, as opposed to rote box-ticking.

What’s changed relative to the third edition?

The changes in the Fourth Edition can be summarised as a combination of:

  • recommendations that encourage listed entities to focus on the organisation’s culture of “acting lawfully, ethically and responsibly”, including taking account of a range of stakeholders beyond just shareholders;
  • recommendations that would require specific action, such as articulating 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:
    • codes of conduct;
    • whistleblower; and
    • anti-bribery and corruption policies.

The recommendations are directed at placing accountability squarely at the feet of directors, and are intended to provide boards with the information required to effectively monitor compliance. In this light, there is a clear expectation that a board will have satisfied itself that appropriate frameworks exist for relevant information to be reported up, and that management will be challenged and held to account when required. This all has echoes of the 2018 APRA report into CBA and the relatively new Banking Executive Accountability Regime – showing again that the Fourth Edition has been drafted to be highly responsive to the hot-button issues in Australian corporate governance over the last few years.

If there was any remaining doubt, Boards are now clearly expected to take action to “set the tone from the top”.

What’s changed in the Fourth Edition relative to its Consultation Draft?

There are several changes between the Fourth Edition and the Consultation Draft. These changes are summarised below:

  • All but one of the 9 new recommendations in the Consultation Draft have been adopted in the Fourth Edition. The recommendation that has fallen away is recommendation 8.4, which dealt with approval for, and disclosure of, agreements for the provision of consultancy services by directors, senior executives or related parties;
  • All of the changes concerning culture and values relative to the third edition of the Principles and Recommendations have been retained, but with some drafting changes to reflect feedback received during consultation;
  • The commentary proposed in the Consultation Draft has been shortened. It has also been clarified that the commentary is guidance and not prescriptive in nature. This seems in part due to the significant criticism received during the consultation period around the continuous creep in length and complexity in the Principles and how this compares unfavourably to comparable guidance in overseas jurisdictions (particularly the UK);
  • The effective date for the application of the Fourth Edition has been deferred to the first full financial year commencing after 1 January 2020; and
  • The recommendations which applied to a small subset of foreign incorporated or other listed entities have been hived off into a separate section 9 entitled “Additional recommendations that apply only in certain cases”.

What does the Fourth Edition seek to achieve?

The Fourth Edition retains the structure and flexibility of the “if not, why not” disclosure framework of previous versions. The disclosure framework requires ASX listed entities to comply with the Principles and Recommendations, or explain why they don’t comply[1].

As highlighted above, the drafting to the revised Principle 3, which deals with responsible and ethical behaviour, has been tweaked by removing the phrase “social licence to operate” which was proposed in the Consultation Draft and replacing it with “reputation” and “standing in the community”. The reason for this is that the Council felt the replacement terms were more likely “to be better understood and more consistently applied”. That said, the essence of the changes to Principle 3 remains the same; 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 a significant development from the Third Edition and is very timely given the expectations around long term stakeholder impact demanded by the final report of the Hayne Royal Commission.

When will the proposed changes be effective?

The Fourth Edition will be effective for listed entities’ first full financial year commencing after January 2020. For example, entities with 31 December 2018 balance dates must report against the Fourth Edition for the financial year beginning 1 January 2020 and ending 31 December 2020.

What should I focus on?

The following table sets out a summary of the key changes in the Fourth Edition relative to the third edition. The summary is organised in the order of the Principles and sets out the changes to the relevant recommendations. Where the text of a Principle has changed, the final version of that Principle is set out. Finally, it ends by covering the new section 9 containing the recommendations that only apply to a small subset of listed entities, mostly on the basis of foreign incorporation.