Overview / In a nutshell… 

  • In February this year, the ASX Corporate Governance Council (Council) released the 4th edition of the ASX Corporate Governance Principles and Recommendations (4th Edition).
  • A key focus of the changes is on establishing and instilling a corporate culture across the organisation of acting lawfully, ethically and responsibly. Other key changes relate to whistleblower and anti-bribery and corruption policies, gender diversity, shareholder engagement, and increased guidance around environmental and social risks.
  • The 4th Edition will take effect for an ASX listed entity's first full financial year commencing on or after 1 January 2020. For a company with a 30 June financial year end, this means FY21 (1 July 2020 – 30 June 2021). However, as with previous versions, the Council encourages listed entities to adopt the 4th Edition earlier.

Key changes introduced by the 4th Edition 

Broadly speaking, the 4th Edition retains the same 8 core Principles in the 3rd edition and the non-prescriptive, “if not, why not” approach to reporting. However, significant changes have been made to Principle 3 to address emerging governance issues around corporate values and culture.

Corporate values and culture – The Council has changed Principle 3 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 responsibly”. In its consultation paper released last year, the Council noted that the changes proposed by (the consultation version of) the 4th Edition “respond to various enquiries and reviews that have taken place since the publication of the 3rd edition in 2014 that have highlighted governance issues arising from poor conduct or culture and perceived lack of accountability. The Council considers it important to address these issues around corporate values and culture in the Principles and Recommendations as a way to help arrest the loss of trust in business.”1

One important change between the consultation version and the final version of the 4th Edition was the removal of the term “social licence to operate” from Principle 3 – which was described by the Council in its consultation response as “unquestionably the most polarising issue addressed in the consultation feedback”. The reasons cited by the Council for dropping this term included concerns raised by certain respondents to the consultation that the term could be confused and conflated with community opposition, which in turn might expose listed entities to “social engineering agendas and objectives”. Some respondents also raised concerns about the application of this term to entities involved in industries that raise particular social issues, such as gaming, alcohol, tobacco and fast food. Instead, the term “social licence to operate” has now been replaced with references to “reputation” and “standing in the community”, which the Council considers synonymous with “social licence to operate” and consistent with the views put forward by Commissioner Kenneth Hayne in the Hayne Royal Commission, but are less controversial.

The revised Principle 3 is supported by:

  • 3 new Recommendations: Recommendation 3.1 (disclosure of core values), 3.3 (requirement for a whistleblower policy) and 3.4 (requirement for an anti-bribery and corruption policy). The requirement for a whistleblower policy under the new Recommendation 3.3 reflects recent amendments to the Corporations Act 2001 (Cth), which will take effect on 1 July 2019, that are aimed at consolidating existing whistleblower schemes for the private sector and expanding the scope of existing whistleblower protections as to who can make a protected disclosure, who can received a protected disclosure, and the matters on which a protected disclosure be made. The new law requires both public and large proprietary companies to have in place before 1 January 2020 a whistleblower policy that contains certain mandatory content, including what protections are available to whistleblowers, how and to whom an individual can make a disclosure, how the company will support whistleblowers and protect them from detriment, how the company will investigate disclosures that qualify for protection, how the company will ensure the fair treatment of employees that are mentioned in protected disclosures, and how the policy will be made available to officers and employees of the company.
  • expanded commentary to existing Recommendation 1.1 (the role of the Board and management), including emphasising the importance of having a Board Charter that sets out the responsibilities of the Board, matters reserved to the Board and those delegated to management. In particular, the expanded commentary recommends that the Board should be responsible for approving the entity’s statement of values and code of conduct to underpin the desired culture within the entity, and whenever required, challenging management and holding it to account; and
  • amendments to existing Recommendation 3.1 (which becomes Recommendation 3.2) to require the Board be informed of any material breaches of the entity’s code of conduct by a director or senior manager and of any other material breaches that call into question the culture of the organisation.

Other areas of focus by the Council include:

  • Diversity – A number of changes have been made to Recommendation 1.5 (diversity) which are intended to promote better diversity outcomes. These include a new requirement that entities included in the S&P/ASX 300 should set a measureable objective to have not less than 30% of their directors of each gender within a specified period.
  • Board skills matrix and director professional development – The Council has amended the commentary to Recommendation 2.2 (Board skills matrix) to provide greater guidance on what should be included in a Board skills matrix. In particular, the Board should regularly review its skills matrix to ensure it covers the skills needed to address existing and emerging business and governance issues relevant to the entity.
  • Director independence – Additional guidance on director independence (Recommendation 2.3) is provided, including that the Board should rule a director not to be independent if they fall within one or more of the examples in Box 2.3, unless it is clear that the matter is not material and will not interfere with the director’s capacity to make an independent judgment. The list of factors relevant for assessing independence in Box 2.3 has also been updated to include a new example to cover directors who receive performance based remuneration (including options or performance rights) or participate in an employee incentive scheme.
  • Shareholder engagement – Under the new Recommendation 6.4, a listed entity should ensure that all substantive resolutions at a shareholder meeting are decided by a poll rather than by a show of hands. This echoes ASIC’s view that companies should adopt a poll on all resolutions “as a matter of course, as good corporate governance”. In its Report 564 on the 2017 AGM season, ASIC expressed its concern with ASX 200 companies deciding resolutions by a show of hands, and wrote that polls “more democratically reflect the principle of ‘one share one vote’ and reflect the wishes of shareholders attending the meeting as well as those who have voted by proxy”, Changes are also made to Recommendations 6.2 and 6.3 to require further disclosure of the processes in place to facilitate participation at shareholder meetings.
  • Environmental and social risks – The Council has amend Recommendation 7.4 (sustainability disclosures) to refer to “environmental and social risk” rather than “economic, environmental and social risk” and also expand the accompanying commentary. The definitions of “environmental risk” and “social risk” have also been modified to provide greater guidance on what these risks cover. In line with the recommendations from the Senate Economics References Committee report on Climate Risk Disclosure, the commentary includes increased guidance around climate change risk, including a suggestion that listed entities with material exposure to climate change risk should implement the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.
  • Directors who do not speak the language in which key documents are written – A new section 9 has been created with the title “Additional recommendations that apply only in certain cases”. In particular, new Recommendation 9.1 requires entities that have directors who do not speak the language in which board or shareholder meetings are held or key documents are written to disclose the processes in place to ensure those directors understand and can contribute to discussions at those meetings, and understand and can discharge their obligations in relation to those documents. The Council noted that it is important that these Recommendations appear somewhere in the 4th Edition in view of the increased number of cross-border listings on ASX.

The changes also require key policies to be disclosed in full. Entities will need to disclose codes of conduct and diversity, whistleblowing, anti-bribery and corruption, and continuous disclosure policies in full rather than disclosing a summary.

The consultation draft to the 4th Edition had included further guidance on managing exposure to emerging business and governance issues, such as risks around culture and conduct risk, digital disruption, cyber-security, sustainability and climate change risks. In response to concerns that the 4th Edition had become too prescriptive, references to these examples were removed from the final version. However, directors of listed entities should take note of these emerging risks identified by the Council.

When does the 4th Edition come into effect?

The 4th Edition will come into effect for an entity’s first full financial year commencing on or after 1 January 2020 (i.e. an entity with a 30 June balance will be expected to report against the 4th Edition for its financial year ending 30 June 2021). This is later than the original date proposed in the consultation draft to the 4th Edition, allowing entities more time to transition to the changes.

While the effective date of the 4th Edition has been deferred, listed entities should start taking note of the key themes and areas of concern highlighted by the Council, and review their corporate governance practices. In particular, we recommend starting by reviewing internal codes of conduct and core values, implementing whistleblower and anti-bribery and corruption policies, refreshing diversity goals and considering the entity’s exposure to, and management of, climate change risks and other contemporary and emerging issues.

Details of the changes introduced by the 4th Edition

Please see the pdf version here for:

  • A list of new Recommendations introduced by the 4th Edition; and
  • A list of the existing Recommendations which have been modified by the 4th Edition.

A full copy of the 4th Edition is available on the ASX website here.