ASX Corporate Governance Council releases third edition of Corporate Governance Principles and Recommendations

The third edition of the ASX Corporate Governance Principles and Recommendations (Principles and Recommendations) was released on 27 March 2014, with certain changes reflecting global developments in corporate governance.  In our experience, the Principles and Recommendations not only assist listed entities with their corporate governance compliance, but also constitute a very useful set of best practice principles for many large, unlisted companies to strive to attain.  In an era where the focus on good governance and shareholder and regulatory action continues to grow, it is important for all companies, large and small, to ensure that their governance practices are given due attention.

Timing

The third edition of the Principles and Recommendations (available here) will take effect for a listed entity’s first full financial year commencing on or after 1 July 2014.  This means that entities with a 30 June or 30 December balance date will be expected to measure their corporate governance practices against the recommendations in the third edition commencing with the financial year ending on 30 June 2015 and 31 December 2015 respectively.  However, the ASX Corporate Governance Council encourages early adoption of the new edition of the Principles and Recommendations, which sets the ‘best practice’ standard for corporate governance in Australia.

What are the changes?

The third edition of the Principles and Recommendations maintains the 8 core principles with some drafting changes to clarify their intent and to emphasise the link between the principles and the supporting recommendations.  In many cases, the new recommendations are not entirely ‘new’, with a number of them already discussed in the commentary of the second edition.  However, by elevating the status of certain items to “recommendations”, listed entities will now need to disclose the extent of their compliance with these recommendations in their annual report or corporate governance statement.

Some of the key changes you should know about are summarised below:

• Recommendation 1.2(a) – background checks on directors: a new recommendation has been introduced which requires that listed entities should undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director.
• Recommendation 1.4 – role of company secretary: recommendation 1.4 now provides that the company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters concerning the proper functioning of the board.  The substance of this new recommendation was previously reflected in the commentary of the second edition.
• Box 2.3 – factors relevant to assessing the independence of a director: box 2.3 sets out a revised set of factors relevant to assessing the independence of a director.  Additional commentary has also been inserted to assist listed entities in determining ‘independence’.  A new factor has been inserted which provides for independence to be assessed by (among other things) considering whether a director has been a director of the entity for such a period that his or her independence may have been compromised.  There is recognition that the mere fact of a long tenure does not necessarily mean that a director has become too close to management to be considered independent, however, the commentary does recommend that the board regularly assess whether independence has been lost by a person who has served in the role of director for more than 10 years.
• Recommendation 6.1 – information on website: a new recommendation has been inserted which provides that a listed entity should provide information about itself and its governance to investors via its website.
• Recommendations 2.1, 4.1, 7.1, 8.1 and 7.3 – nomination, audit, risk and remuneration committees: these recommendations have been amended to allow for listed entities to employ alternative governance practices in respect of nomination, audit, risk and remuneration functions.  This recognises that it may not be practicable for certain entities (for example, entities with smaller boards) to establish separate committees to perform these functions, and the changes will enable those entities to report positively (rather than negatively) that they have complied with the recommendations.
• Recommendation 7.4 – sustainability risks: a new recommendation has been inserted which provides that a listed entity should disclosure 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.  This recommendation has been included to reflect the lessons of the global financial crisis and the ASX Corporate Governance Council encourages listed entities to review the enhanced risk recommendations carefully to consider whether their practices in this area need to be upgraded.

Related changes to ASX Listing Rules

In conjunction with the release of the third edition of the Principles and Recommendations, some related changes to the ASX Listing Rules are required.  ASX released a supplementary consultation paper on 21 February 2014 in relation to those changes and it is expected that the related changes to the Listing Rules will come into effect on 1 July 2014.

The changes which have been foreshadowed include:

• giving listed entities the choice between disclosing their corporate governance practices in their annual report or in a corporate governance statement on their website; and
• requiring listing entities to lodge a new ‘Appendix 4G’ together with their annual report each year.  The Appendix 4G will act as a checklist for relevant corporate governance disclosures and will direct investors to where corporate governance disclosures for an entity can be found.

Listed entities should consider their current corporate governance practices in light of the changes to the second edition of the Principles and Recommendations, in order to begin preparing themselves for complying with (or where necessary, disclosing against) the third edition.