The Times They Are A (slightly) Changin’: release of proposed ASX Corporate Governance Principles and Recommendations (5th edition)

By Michelle Eastwell, Chris Wright and Meher Kyani

The ASX Corporate Governance Council (CGC) recently released a consultation draft for a proposed 5th edition of the ASX Corporate Governance Principles and Recommendations (Principles).

When will the new edition take effect?

The CGC has requested submissions on the consultation draft by 6 May 2024.

The anticipated release of the 5th edition of the Principles is expected in early 2025, potentially applying to financial years commencing on or after 1 July 2025. Entities would then report against the finalised form of this edition for that financial year and later. However, it’s important to note this timeline is indicative only and subject to change, pending feedback solicited during the consultation process.

What are the key changes in this new edition?

 The draft 5th edition proposes changes to the current 4th edition, including:

  • Emphasis on stakeholder consideration: several of the proposed amendments address how an entity interacts with its stakeholders. ‘Stakeholders’ isn’t expressly defined but is noted to include not only security holders, but also employees, customers, suppliers, Aboriginal and Torres Strait Islander peoples, local community, law makers and regulators, as well as organisations representing the interests of stakeholders such as unions. Principle 3 now incorporates dealings with an entity’s external stakeholders (instilling a culture of acting lawfully, ethically and responsibly).
  • Risks: enhanced commentary around the disclosure of material risks, including but not limited to environmental, social and (newly included) governance risks, and how the entity manages or intends to manage these risks.
  • Climate disclosure: there’s a general theme of increased climate and sustainability reporting in the 5th edition draft Principles, with drafting notes specifically mentioning the exposure draft of legislation related to disclosing climate-related financial information.
  • Board skills matrix: while it’s currently recommended that entities have and disclose a board skills matrix, the commentary has previously been this can be done collectively across the board as a whole. While this is still the case, the commentary now indicates better practise is to include information on the skills of individual directors, along with the criteria for meeting those skills. Additionally, it‘s now recommended the entity disclose its process for how it assesses the relevant skills and experience of its directors.
  • Diversity: entities must have and disclose a measurable objective and timeframe for achieving gender diversity on their boards. They must also disclose the effectiveness of their diversity and inclusion practices, including progress toward achieving their objectives. If considering other relevant diversity characteristics for the board, they should disclose those as well.
  • Additional board composition targets (for entities in the S&P/ASX 300 Index): for entities listed in this index at the start of a reporting period, the board’s measurable objective should be to have a ‘gender balanced board’, defined as at least 40% women, at least 40% men and up to 20% from any gender. This differs from the 4th edition, which required not less than 30% of directors to be of each gender.
  • Disclosure of code of conduct breaches: listed entities must disclose (in a de-identified manner) the outcomes of actions taken in response to material breaches of the code of conduct during the last reporting period. This is intended to promote a culture of transparency and remediation. The commentary clarifies matters that aren’t finalised can be excluded from this disclosure, as well as matters that can’t be appropriately de-identified. Even with this clarification, entities will need to be careful in managing disclosure to avoid any breaches of privacy and other laws.
  • Remuneration: there‘s now an express recommendation that listed entities not give performance-based remuneration or retirement benefits to non-executive directors (where previously this was just stated in commentary). While non-executive directors can still receive securities as part of their remuneration to align their interests with the company, they shouldn’t receive performance-based remuneration, such as options with performance hurdles or performance rights. This measure aims to prevent potential biases in decision-making and safeguard objectivity. ASX suggests if remuneration or retirement benefits don’t comply with this recommendation, the listed entity should consider obtaining security holder approval. Further, listed entities should have remuneration structures capable of clawing back or limiting performance-based remuneration for senior executives after award, payment or vesting, and should disclose (in a de-identified manner) the use of such provisions. However, entities must be careful when making such disclosure to ensure they are meeting their privacy obligations.
  • Auditors: enhanced disclosure is now required regarding the tenure of appointed auditors, including the timing of the most recent review of the auditor’s appointment and the outcomes of that review).

While some recommendations have been entirely removed (such as the current recommendation 3.3 regarding the need to have and disclose a whistleblower policy), don’t get too excited - this has been done where there’s already significant regulation or duplication in existing Australian laws.

What does this mean for listed entities?

 The proposed changes don’t significantly deviate from the prior edition, and we expect most of them will be workable in practice. However, with several proposed changes from the prior edition, listed entities should assess their performance against the amended Principles prior to the implementation date. They should take appropriate steps to meet the amended Principles, reporting on an ‘if not, why not’ basis. Additionally, due to the proposed changes, including the removal and addition of recommendations, listed entities must carefully review and update their reporting against the Principles from the position taken in previous financial years.

What’s next?

This draft 5th edition is for consultation purposes only. Submissions can be made to the ASX by 6 May 2024 through an online questionnaire or by uploading a document. The CGC has stressed they’re very interested in receiving feedback and queries on this consultation draft. You can access the draft consultation and related documents on the ASX website here.

Historically, while the CGC hasn’t tended to make material changes between a consultation draft and the finalised new edition of the Principles, there are usually enough changes to warrant a thorough review of the final 5th edition once it’s released.

Hall & Wilcox has extensive experience advising listed entities on all aspects of their listings compliance. If you require any assistance, please contact us.

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