Do you pass the test?

Have you implemented changes to deal with:

• diversity initiatives and measurable objectives for gender diversity
• disclosure of Board selection processes
• directors’ education and skills
• announcement of significant group briefings
• remuneration committee independence
• distinguishing the structure of remuneration between non-executive directors and executive directors, and
• share trading policies?

Recent media reports have focussed heavily upon ASX changes encouraging greater diversity, particularly Board participation by women. Given the significant nature of these changes, the media attention is certainly warranted. In the absence of media attention, however, many listed companies are unaware of the other big changes that they will need to consider and take action on, in some cases immediately.

The ASX Corporate Governance Council (Council) released its changes to the Corporate Governance Principles and Recommendations (2nd edition) (Principles) on 30 June.

Diversity

The report ‘Diversity on Boards of Directors’ (CAMAC August 2009) concluded that a ‘focus on a more robust and open approach to board appointments, and initiatives to encourage the development of women in executive management, are the most effective ways to foster a governance culture that embraces diversity in the composition of corporate boards’. In that context, the changes to the Principles include:

• a recommendation that companies establish and disclose a diversity policy, which contains measurable objectives for gender diversity
• a recommendation that companies include in their annual report their achievement against the measurable objectives noted above
• a recommendation that companies include meaningful disclosure in its annual report outlining the proportion of women on the board, in senior executive positions and generally within the company
• a requirement that companies disclose the mix of skills and diversity for which the board is looking for in its membership
• extending the commentary and guidance in defining the responsibilities of any nomination committee so that the committee is obliged to make recommendations to the board in relation to strategies to address board diversity and consider diversity as an issue in succession planning, and
• commentary on the revision of the charter for any nomination committee to recommend that the charter provide for regular review of the proportion of women employed at all levels within the company.

Companies working towards establishing diversity policies and objectives as discussed above should take into consideration the nature of the business and whether the objectives they choose to adopt are realistic and achievable, as the Council suggests that board performance should be reviewed on a regular basis as against various indicators which include the diversity objectives.

Remuneration

The Council made two recommendations which centre around the role of boards in setting executive remuneration and in ensuring an proficient labour market for executives. They suggest the following ‘if not, why not’ recommendations:

• the remuneration committee should consist of a majority of independent directors, is chaired by an independent director and have at least 3 members, and
• to clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior management.

The marked up amendments have omitted a reference previously contained in the proposal paper which suggested committee composition might be mandated for ASX ‘Top 300’ companies under future Listing Rule changes. Miscellaneous amendments cover the transparency of Board selection processes, Board skills, Board interaction and corporate culture and values, as well as directors’ ongoing education.

Market integrity

The Corporations and Market Advisory Committee (CAMAC) released a report on ‘Aspects of Market Integrity’ in July 2009. The focus of the report in the context of the Principles has been centred on trading by company directors in blackout periods and also corporate briefings of analysts, where the briefings may create the perception that material information is being disclosed selectively and is not available to other analysts, shareholders and the public.

Accordingly, the ‘if not, why not’ approach on trading policies under the current Principles will instead be replaced with minimum requirements contained in the ASX Listing Rule Guidelines. These will provide for the adoption and disclosure of trading policies that provide for restrictions on trading by directors and other key management personnel during sensitive periods. At the date of this Focus, no revised Guidelines have been released.

In response to the issues surrounding analyst briefings, the Council has amended the Principles to encourage listed entities to provide notification of group briefings, make such briefings more accessible to shareholders through use of technology and to also make a record of group analyst briefings.

Timing and what this means for you

The ‘Marked-Up Amendments dated 30 June 2010 to the Second Edition August 2007 of the Corporate Governance Principles and Recommendations’ and a ‘Comparative table of changes to the Principles and Recommendations’ are available on www.asx.com.au.

The changes to the reporting requirements will apply to an entity’s first financial year commencing on or after 1 January 2011. This means that if a company’s financial year begins on 1 July, disclosure will be required in relation to the financial year ending 30 June 2012 and will be made in the annual report published by the end of October 2012.

The Council has, however, encouraged listed entities to adopt the changes early and in particular, in respect of the diversity initiatives, report against the new recommendations in respect of the year ending 30 June 2011.

This means that companies should begin implementation of their diversity policy and set measurable objectives now, in order that they can be reported against in due course. The changes will in practical terms also require companies to amend their Board Charter (and committee structures). Share trading policies, whether a sub-set of the Board Charter or standalone, will also likely need to be amended once the applicable Guidelines are issued.

McCullough Robertson will be publishing on its website additional Focuses on this topic and providing practical guidance on establishing a diversity policy via a seminar. To register interest in our forthcoming seminar please contact Kent Stone on kstone@mccullough.com.au.

Further information

For further assistance or enquiries regarding this focus please contact:

Brett Heading on 07 3233 8956
Jim Peterson on 07 3233 8559
Diana Lohrisch on 07 3233 8845
Derek Pocock on 07 3233 8628
Reece Walker on 07 3233 8654.