On 16 August 2013, the ASX Corporate Governance Council (Council) issued a consultation paper seeking comments on a proposed third edition of its Corporate Governance Principles and Recommendations (P&R). To download a copy of the Council’s consultation package click here.

Contemporaneously with the release of the consultation paper by the Council, ASX released its own consultation paper about some changes to the Listing Rules and Guidance Note 9 to give effect to the reforms proposed in the draft third edition of the P&R. ASX is also taking the opportunity to propose a number of other minor governance-related changes to other Listing Rules. To download a copy of ASX’s consultation package click here.

What prompted a review of the Principles and Recommendations?

The Council decided in 2012 that it would be appropriate to review and update the P&R to incorporate the lessons of the Global Financial Crisis (GFC) and corporate governance developments in Australia and internationally since the second edition of the P&R was published in 2007. 

What are the proposed changes to the structure of the Principles & Recommendations?

The basic structure of the draft third edition of the P&R has not changed. Like the current edition:

  • principles: the draft third edition of the P&R is structured around, and seeks to promote, 8 central principles. The 8 principles are the same as the existing principles, but in some cases have been modified to clarify the drafting and/or establish a stronger link between the principle and the supporting recommendations;
  • recommendations: there are 30 specific recommendations intended to give effect to the general principles. However, the recommendations have been substantially revised; and
  • commentary: there is explanatory commentary in relation to both the principles and recommendations intended to provide additional guidance to listed entities. However, the commentary has been streamlined, recognising the higher level of understanding of governance issues since the P&R were first published in 2003.  

The draft third edition of the P&R has been restructured to improve readability, including relocating recommendations and amalgamating related recommendations into a single recommendation. Two significant and helpful structural changes in the draft third edition of the P&R are:

  • removal of “Guide to reporting on principle…”: The separate reporting recommendations headed “Guide to reporting on principle X” under each of the principles have been removed and instead there are now “self-contained” recommendations which include all applicable reporting requirements that need to be met for an entity to “follow” that recommendation. This change should make it easier for listed entities to make sure they have met their reporting obligations; and
  • separate section on trusts and externally managed entities: A number of the recommendations require modification when applied to externally managed listed entities. The draft third edition of the P&R includes a separate section explaining how externally managed listed entities should apply and make disclosures against the recommendations.

The draft third edition also incorporates additional guidance on disclosure of corporate governance practices and the link between the P&R and the Listing Rules from ASX Guidance Note 9 on Disclosure of Corporate Governance Practices.

What substantive changes to the Principles & Recommendations have been proposed?

Key substantive changes in the draft third edition of the P&R are:

  • Disclosure in annual report or on website: A listed entity will have the option to include its corporate governance statement in its annual report or publish its corporate governance statement on its website and simply include in its annual report the URL of the page on its website where the statement is located.
  • Alternative approaches to establishing committees: The recommendations on nomination, audit, risk and remuneration committees (recommendations 2.4, 4.1, 7.1 and 8.1 respectively) have been amended to include alternatives that recognise that the boards of smaller listed entities may reasonably decide not to establish committees and instead adopt alternative practices to address the issues that those committees would typically address. This change would enable those smaller entities to report that they comply with the recommendations, rather than “if not, why not” reporting.
  • Elevating existing commentary into recommendations: The inclusion of new recommendations derived from commentary in the current edition of the P&R, which are regarded by the Council as representing contemporary governance standards against which entities should be required to report. New recommendations that fall within this category are:
    • Recommendation 1.2(b) – provide security holders with all material information relevant to a decision on whether or not to elect or re-elect a director.
    • Recommendation 1.3 – have a written agreement with each director and senior executive setting out the terms of their appointment.
    • Recommendation 1.4 – the company secretary should have a direct reporting line to the chair.
    • Recommendation 2.4(a) – the composition of a nomination committee.
    • Recommendation 2.6 – have an induction and education program for directors and disclose a summary of the main features of that program.
    • Recommendation 4.3 – attendance of external auditors at AGM and availability to answer questions.
    • Recommendation 6.1 – provide information about itself and its governance to investors via its website.
    • Recommendation 6.3 – disclose the policies and processes it has in place to facilitate and encourage participation at security holder meetings.
    • Recommendation 6.4 – give security holders the option to receive and send communications to the entity and its registry electronically.
    • Recommendation 7.3 – disclose if the entity has an internal audit function, how the function is structured and what role it performs or if it does not have an internal audit function, the processes its employs for evaluating and continually improving the effectiveness of its risk management and internal control processes.
  • Criteria for a director to be considered independent: The criteria for a director to be considered “independent” are set out in Box 2.1 of the P&R. The criteria are amended to:
    • expand the references to “material supplier or customer of the entity or any of its related entities, or an offer of, or otherwise associated directly or indirectly with, such a supplier or customer” to cover such relationships going back 3 years;
    • include close family ties; and
    • include service on the board for more than 9 years as an indicator that a director may not be independent.
  • The meaning of “measurable objectives”: Greater guidance is given in the commentary on the meaning of “measurable objectives”; the key message being that they should be “appropriate and meaningful benchmarks that are able to be, and are, measured and monitored for effectiveness in addressing any gender imbalance issues in an organisation”. The commentary states that “Objectives such as introducing a diversity policy or establishing a diversity council by themselves are unlikely to be effective unless they are backed up with appropriate numerical targets”. 
  • Option to report “Gender Equality Indicators” instead of respective proportions of men and women: Those entities who report annually to the Workplace Gender Equality Agency on six “Gender Equality Indicators” as required by the Workplace Gender Equality Act 2012 will be permitted to treat that reporting as meeting the requirements to publish their gender diversity statistics under the P&R. If an entity instead reports on their gender diversity statistics under the P&R, the entity will be required to define “senior executive” for these purposes.
  • Investor relations program: A new recommendation is introduced that a listed entity should design and implement an investor relations program to facilitate effective two-way communication with investors. The Council is not proposing to require any specific disclosures in relation to an entity’s program, other than the general disclosure about whether or not the entity has such a program and, if not, why not.
  • Risk management: As would be expected in a review conducted post the GFC, the issue of risk management has received much closer attention in the draft third edition. The Council is proposing to:
    • replace current recommendation 7.1 in relation to the establishment and disclosure of a risk management policy with a stronger recommendation calling for the establishment of a stand-alone risk committee or a combined audit and risk committee. As noted above under the bullet point entitled “Alternative approaches to establishing committees”, this recommendation will provide for an alternative where a board of a smaller listed entity may reasonably decide not to establish a risk committee or an audit and risk committee and instead adopt alternative practices to address the issues that those committees would typically address, but still report that they comply with the recommendation;
    • strengthen recommendation 7.2 to state that the board of a listed entity should review its risk management framework with management at least annually so as to satisfy itself that the framework is sound, to determine whether there have been any changes in the material business risks the entity faces and to ensure that they remain within the risk appetite set by the board and disclose in relation to each reporting period, whether such a review has taken place;
    • introduce an internal audit function recommendation in new recommendation 7.3 (see above under the bullet point “Elevating existing commentary into recommendations”); and
    • introduce recommendation 7.4 that an entity should disclose whether, and if so how, it has regard to economic, environmental and social sustainability risks. Council has indicated that this recommendation seeks to address, in a measured and non-prescriptive manner, the increasing attention being given by the investment community to environmental and social issues and the investment risks they raise.
  • “Clawback” policy: In February 2012, the Australian Government announced that it would be introducing amendments to the Corporations Act to require a listed company to disclose to shareholders in its remuneration report, on an “if not, why not” basis, the steps it had taken to claw back bonuses and other remuneration from senior executives where there had been a material misstatement of financial results in the company’s financial statements. The proposed amendments have been postponed in light of the upcoming election. However, new recommendation 8.3 seeks to tackle the concerns that the proposed amendments to the Corporations Act were intended to address, but within the framework of the P&R.  

What key changes to the Listing Rules is ASX proposing to give effect to the third edition of the P&R?

  • Listing Rule 4.10.3 (corporate governance disclosures) is proposed to be amended:
    • so that listed entities can include their corporate governance statement in their annual report or on their website;
    • to make it clearer what an entity should disclose if it has not followed a recommendation for any part of the reporting period; and
    • to add a requirement that an entity’s corporate governance statement must specify the date at which it is current, which must be the balance date or a later date specified by the entity, and state that it has been approved by the board of the entity (in the case of a trust, the board of the responsible entity of the trust).
  • A new Appendix 4G is being added to the Listing Rules which will provide a key to where a listed entity’s various corporate governance disclosures can be found. A listed entity will be required to complete the Appendix 4G and give it to ASX at the same time as it lodges its annual report with ASX.
  • Listing Rule 4.7 (entity to give ASX annual report) is proposed to be amended to require a listed entity to lodge with ASX a completed Appendix 4G and if the entity chooses to include its corporate governance statement on its website rather than in its annual report, to lodge a copy of the corporate governance statement with ASX, at the same time as it lodges its annual report with ASX.
  • Condition 13 of Listing Rule 1.1 (requirements for ASX Listing) is proposed to be amended to make it clearer what a listing applicant must disclose if it does not intend to follow a recommendation after it is listed. This amendment is consistent with the proposed changes to Listing Rule 4.10.3.

What other governance-related changes to the Listing Rules is ASX proposing?

  • The list of exclusions to Listing Rule 3.16.4 (notification of material terms of employment, service or consultancy agreements with a CEO, director or related party) is proposed to be amended:
    • to add a further exclusion for provisions requiring an entity to indemnify officers or exempt them from liability that conform with section 199A of the Corporations Act; and
    • to qualify the exclusion related to directors and officers insurance to require the insurance arrangements to conform with section 199B of the Corporations Act.
  • A new Listing Rule 3.19B is proposed to be added requiring any on-market purchases under the terms of a scheme that provides for the purchase of securities by or on behalf of employees or directors or their related parties to be disclosed to the market within 5 business days.
  • Listing Rule 4.10 (information to be included in annual reports) is proposed to be amended to recognise that listed entities often file their annual reports with ASX well before sending the printed version to their security holders. Rather than requiring the information specified in that rule to be current as at a date specified by the entity, which is not “more than 6 weeks before the report is sent to security holders”, it is proposed to modify the rule so that the information must be current as at a date that is on or after the entity’s balance date and not “more than 6 weeks before the report is given to ASX”.
  • Listing Rule 10.1 (approval required for certain acquisitions or disposals involving persons in a position of influence) is proposed to be amended to improve and clarify its drafting and to delete the notes referring to the meaning of “associate”, given the new definition proposed for that term in Listing Rule 19.12 (see below).
  • Listing Rule 10.14 (approval required to acquire securities under an employee incentive scheme) is proposed to be amended:
    • to extend the exception for on-market purchases under a share scheme to cover share schemes that provide for purchases by or on behalf of related parties of an employee or director, as well as purchases by or on behalf of an employee or director; and
    • to extend the rule to a “related party” of a director, instead of their “associates”.
  • Listing Rule 10.16 (underwritings by directors and associates) is proposed to be amended to extend the rule to a “related party” of a director, instead of their ”associates”.
  • Listing Rule 14.11.1 (voting exclusion statements) is proposed to be amended to recognise and incorporate the definition of “associate” proposed to be added to Listing Rule 19.12 (see below).
  • Listing Rule 19.12 (definitions) is proposed to be amended:
    • to add a new definition of “associate” for the purposes of Listing Rules (more specifically, Listing Rules 10.1 and 14.11 and the definition of “promoter” in Listing Rule 19.12); and
    • to make changes to the definition of “promoter” to improve its drafting and to acknowledge and incorporate the new definition of “associate”.

The proposed new definition of “associate” for the purposes of the Listing Rules references sections 12 and 16 of the Corporations Act. There are instances in the current Listing Rules where the definition of “associate” is referenced to section 13 of the Corporations Act. Section 13 is drafted to apply for the particular purposes of Chapter 7 of the Corporations Act and relates specifically to persons who are associated with each other in connection with a financial services business. This is not considered to translate well into the Listing Rules.  

Timeline

Submissions on both the draft third edition of the P&R and the proposed changes to the Listing Rules and Guidance Note 9 can be made until Friday, 15 November 2013. A single submission responding to both consultations can be made.

It is currently envisaged that the Council will release the final version of the third edition of the P&R early in 2014. On this timeline, the third edition of the P&R is likely to come into effect for an entity’s first full financial year commencing on or after 1 July 2014. Entities with a 30 June balance date will be expected to benchmark their governance practices with the third edition commencing with the financial year ended 30 June 2015, while entities with a 31 December balance date will be expected to do so commencing with the financial year ended 31 December 2015.

The changes to the Listing Rules and Guidance Note 9 are proposed to come into effect on 1 July 2014, the same date as the new edition of the P&R.