Corporate Governance Principles and Recommendations to be refreshed

The ASX Corporate Governance Council (Council) has recently opened up public consultation on updating and issuing a fourth edition of its Corporate Governance Principles and Recommendations (Code). For further details, click here. The closing date for submissions is 27 July 2018.

The newest reiteration of the Code is set for release early next year and will take effect for an entity’s first full financial year commencing from 1 July 2019.

The ‘if not, why not’ reporting requirement (Listing Rule 4.10.3) remains unchanged. This means an ASX entity is still given the flexibility of being able to adopt alternative governance practices that best suit their circumstances, provided the board can provide reasons for doing so.

The proposed changes to the Code touch on the following areas:

• entities’ social license to operate
• corporate values and culture
• whistle-blower policies
• anti-bribery and corruption policies
• gender diversity
• carbon risks, and
• cyber-risks.

The Council proposes a major redraft of Principle 3 of the Code. A general and broad obligation to act ethically and responsibly will be replaced by a positive direction that requires companies to specifically instil and reinforce a lawful, ethical and responsible corporate culture. Three new Recommendations are to be added to the Code in support of this Principle:

• Recommendation 3.1 – will require a listed entity to articulate and disclose its core values
• Recommendation 3.3 – will require a listed entity to implement a whistle-blower policy and corresponding culture that ensures its board and management are informed of any material breaches of the entity’s code of conduct, and
• Recommendation 3.4 – will require a listed entity to create and disclose an anti-bribery and corruption policy and implement procedures that ensure the board is informed of any material breaches of that policy.

In addition to these Recommendations, changes to the commentary in the existing Recommendation 1.1 are also proposed. These changes will broaden the role of the board and managers as drivers of culture in an organisation.

The Council has indicated that the key purpose of revising Principle 3 is to ensure listed entities:

• value the importance of their social license to operate, and
• acknowledge that in administering this license they cannot simply focus on the interest of their shareholders at all costs.

In making this shift, the Council wants to ensure entities seek to address the loss of trust that has arisen in respect of certain corporate activities, including the Hayne Royal Commission. The proposed changes to Principle 3 and its supporting Recommendations, gives a good idea of the ‘top-down’ direction the Council wants to take with the new Code.

Other key changes include:

• changing the term ‘close family ties’ to ‘close personal ties’ in Recommendation 2.3, and
• a new provision that requires an entity in the S&P/ASX300 to have, as a measurable objective, at least 30% of each gender on its board within a specified period. The length of time for this ‘specified period’ is not yet defined.

Another Recommendation of note is the new Recommendation 2.7, which is in response to the emerging governance issue of entities in emerging markets appointing foreign board members. Recommendation 2.7 provides that a listed entity with a director who is not fluent in the official language used by the company must disclose the processes it has in place to ensure the director is still able to discharge their duties, despite the language difference.

For those interested parties, submissions can be made electronically to mavis.tan@asx.com.au or via mail. Unless submissions are explicitly marked otherwise, they will be made public on the ASX website.

We will continue to watch developments with the new Code closely.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.