The Major Changes
The ASX Corporate Governance Council has explained, in its Consultation Response (February 2019) that, just as the Third Edition of the Corporate Governance Principles and Recommendations focused on governance issues arising from the global financial crisis — such as risk, the Fourth Edition has focused on culture and values, to address the community’s loss of trust in business.
The changes can be summarised as follows, in terms of the hierarchy of Principles, Recommendations and Commentary:
- The eight core Principles remain substantially the same, apart from Principle 3, which now requires listed entities to instil and continually reinforce a culture across the organisation of acting lawfully, as well as ethically and responsibly. Principle 3 also includes three new Recommendations.
- The stand-alone section on the application of the Recommendations to externally- managed listed entities is now preceded by three Additional Recommendations that apply only in certain cases. They include the new Recommendations 9.1 and 9.2 and relocated Recommendation 4.3 (now Recommendation 9.3).
- There are now 35 Recommendations of general application. Seven new Recommendations have been added to the 29 Recommendations that were in the Third Edition, three of them relating to policies to address culture and values. (As noted above, Recommendation 4.3 has been relocated.)
- The Commentary has been reduced from the consultation version of the Fourth Edition, reflecting the concern expressed in a substantial number of submissions that the level of detail and prescription in that version was greater than in the previous version and did not align with the objective of a principles-based corporate governance framework.
The New Focus on Culture and Values
According to the Recommendations under Principle 3, a listed entity should:
- articulate and disclose its values (new Recommendation 3.1)
- ensure that material breaches of its code of conduct are disclosed to the board or one of its committees (Recommendation 3.1 in the Third Edition, now Recommendation 3.2)
- have and disclose a whistleblower policy and ensure the board or one of its committees is informed of material incidents reported under that policy (new Recommendation 3.3)
- have and disclose an anti-bribery and corruption policy and ensure the board or one of its committees is informed of any material breaches (new Recommendation 3.4).
The full policies, rather than summaries of them, are to be disclosed. (Personal or confidential information may be redacted from the disclosed copy.)
The guidance to listed entities (under “How to approach corporate governance disclosures”) suggests that “where a recommendation calls for a particular policy to be in place, it will aid transparency and promote investor confidence for the entity to disclose, where appropriate, action taken to promote compliance and whether there have been material breaches of the policy during the reporting period and how they have been dealt with”.
Recommendation 1.5, regarding a listed entity’s diversity policy, has been expanded to state that the measurable objectives for achieving gender diversity apply to gender diversity in the composition of the board, senior executives and the workforce generally (as previously suggested in the Commentary to Recommendation 1.5).
Responsibilities of the Board and Management
The focus on culture and values is also reflected in the new commentary on Recommendation 1.1, regarding the role and responsibilities of the board and management. For example, there is now an assumption that a board will have a charter (in the Third Edition, the commentary stated that the “role and responsibility of the board could be set out in a board charter or some other document published on the entity’s website or in its annual report”). Suggested new board responsibilities include:
- defining the entity’s purpose and setting its strategic objectives
- approving the entity’s statement of values and code of conduct to underpin the desired culture within the entity
- satisfying itself that an appropriate framework exists for relevant information to be reported by management to the board
- whenever required, challenging management and holding it to account.
Specific mention has been included:
- in relation to the board’s oversight of management’s implementation of the entity’s strategic objectives and its performance generally — of management’s instilling of the entity’s values
- in relation to the board satisfying itself that the entity has in place an appropriate risk management framework — of both financial and non-financial risks.
The Consultation Response explains that there was opposition to the proposed introduction, in the consultation version of the Fourth Edition, of the term “social licence to operate”. This term has been replaced in with references to “reputation” and “standing in the community”.
Other changes in the Fourth Edition include:
- changes to the Recommendations and Commentary under Principle 7 regarding the entity’s risk management framework; for example, including in the annual review a consideration as to whether the framework deals adequately with contemporary and emerging risks such as conduct risk, digital disruption, cyber-security, privacy and data breaches, sustainability and climate change
- new Recommendations 5.2 and 5.3, regarding the timing of disclosures
- the requirement, in the new Recommendation 6.4, for all substantive (not procedural) resolutions at a meeting of security holders, to be decided by poll, rather than by a show of hands.
Timing of the Transition to the Fourth Edition
The ASX’s guidance on the Fourth Edition, including its Guide on Transitioning to the Fourth Edition of the Corporate Governance Principles and Recommendations (ASX Transitioning Guide) and an updated and editable Appendix 4G, is published on its website under the heading “Corporate Governance Disclosures”.
The Consultation Response notes concerns that were expressed during consultation about the short timeframe for transition to the originally proposed date of 1 July 2019. Entities will now be required to make their first annual “if not, why not” report against the Recommendations in the Fourth Edition for their first full financial year that begins on or after 1 January 2020. For an entity with a 30 June EOFY date, the first full financial year will be from 1 July 2020 to 30 June 2021. An entity with a 31 December EOFY date will need to report against the Fourth Edition for the financial year 1 January 2020 to 31 December 2020.
As the ASX Transitioning Guide makes clear, if entities are to view their corporate governance statement as a demonstration of their commitment to proper and effective corporate governance arrangements rather than a compliance document, there is substantial work to be done. CompliSpace would welcome the opportunity to work with listed entities on their preparation for the transition.