First anniversary of revised ASX Corporate Governance Principles and Recommendations

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It’s now been (just) over a year since the 3rd edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (CGPRs) came into effect on 1 July 2014.

All ASX listed entities whose financial year ended on 30 June should be considering how they (many for the first time), will now report against these updated Recommendations for the 2015 financial year.

Some entities may have adopted the CGPRs prior to 1 July 2014 and have previously reported on their compliance with the CGPRs.

In either case, all entities are currently in the dark on the extent to which institutional investors, advisers and analysts will use information disclosed (or not) in accordance with the CGPRs to challenge or reward boards over their corporate governance commitments at reporting time.

Refresh on what has changed

As explained in our previous blog pre-empting the changes, the new ASX CGPRs were completely re-written and re-ordered from the 2nd Edition (2010) which has led to many obvious and not so obvious changes.

Key differences include:

  • greater flexibility with respect to how you publish your Corporate Governance Statement: either in an Annual Report or on a public website;
  • the requirement to lodge a new ‘Appendix 4G’, which is essentially a detailed checklist of each of the recommendations set out in the ASX CGPRs through which an entity must disclose whether they follow a recommendation and “if not why not”;
  • changes to director independence criteria;
  • disclosure of a board skills matrix; and
  • ensure you have a properly articulated risk framework that is working in practice.

Overall, a more comprehensive reporting standard is required from ASX entities.

CompliSpace developed the 2014 ASX Governance Disclosure Checklist which details exactly which disclosures ASX listed entities will need to make either on their public websites or in their Annual Report.  The 2014 ASX Disclosure Checklist is available for download on the CompliSpace website.  Click here to download.

A Greater Focus on Risk Management

An area that was greatly emphasised by the latest edition of the CGPRs was risk management and the need for boards to establish an entity’s ‘risk appetite’. This should be a core consideration in an entity’s risk management approach, the phrase basically meaning the amount and type of risk that an organisation is willing to take in order to meet their strategic objectives. The CGPRs extended the risk management obligations and disclosure requirements of listed entities.

Our previous blog includes information to familiarise yourself with what the industry expects regarding compliance with the CGPRs and relevant developments in risk management for your organisation.

It’s also worthwhile to consider how ‘culture risk’ features in your (current or future) risk register.  ASIC’s recent emphasis on culture coming from above, in the context of improving compliance, means that ASIC is sending a message to directors that they have a duty not only to ensure the viable functioning of a business, but also to ensure that a culture of regulatory compliance, risk management and proper corporate governance exists and is enforced in their organisation.

Gender diversity – if not now, when?

It’s impossible to ignore the media and shareholder focus on listed entities and their diversity policies.  The recent ‘name and shame’ article that featured in the Sydney Morning Herald, naming some of the ASX top 200 entities who have none, or very few, female board members should be the stuff of PR nightmares for any entity. That said, the article points out that many of the ‘shamed’ entities have more of ‘a private-company culture – one that pays less attention to modern-day corporate governance principles’ – which is in part due to the dominance of a majority shareholder over minorities who may have stronger diversity priorities.

Basically, their culture ‘led from above’, is an obstacle to gender diversity at senior levels.

Recommendation 1.5 of the new CGPRs sets out the requirements of an entity’s diversity policy, including that the board set ‘measureable objectives for achieving gender diversity’ and disclose its achievement of those objectives at the end of a reporting period.

ASX entities who may not have succeeded in implementing this recommendation in the 2015 financial year, or who have failed to set and/or achieve measurable objectives, should be wary of the shareholder and media scrutiny which may result.

Achieving gender diversity on boards is a global priority and a recent Credit Suisse report on women in senior management also shows that companies with more women in the boardroom bring better returns and outperform the stock market. The Credit Suisse report is based on its global survey of 28,000 senior managers at over 3,000 companies across 40 countries in all major sectors.  The report makes the point that as the globalisation of economies increases, so too will a cultural change which should make female representation at elite levels in organisations a priority, if not a requirement, of doing business between companies and countries.

Will the 2015/2016 financial year be the year of greater gender diversity for your organisation?

What should your organisation be doing?

For early adoptees of the new CGPRs, the reporting process should not be too much of a rude shock as you have already taken practical steps to implement the changes to the principles and recommendations.

Most of the work will come down to creating a corporate governance statement and having it approved by the board and completing and lodging an Appendix 4G.

For those entities who were late to adopt and implement the new CGPRs, now is the time to get up to speed on the principles and recommendations and understand what steps you should be taking to ensure your organisation’s governance strategy aligns with the CGPRs.

A recent article Raising the Bar by Tony Featherstone, which previously appeared in the May 2015 edition of Company Director magazine,  is a useful resource for all ASX entities to understand what steps they should take to ensure that their governance practices align with the new CGPRs – especially if you are one of those entities who may not have been an early adoptee of the changes.

In his article Mr Featherstone quotes governance expert Steven Cole FAICD, who says: “I suspect some boards will have gone to sleep on these recommendations because they didn’t have to introduce them for 12 months. There’s a lot more in the implementation of these recommendations than meets the eye. There’s also a lot more prescription around how to disclose governance information and the general expectation is that disclosure will need to be more meaningful than it has in the past.”

The ‘name and shame’ article clearly emphasises the importance of taking meaningful steps to implement the diversity recommendations of the CGPRs in an entity’s governance structure and culture.

Mr Featherstone’s article provides 13 board considerations for implementing the CGPRs, with a particular focus on how to address the new increased disclosure obligations in relation to board skills and structure.

How can CompliSpace help?

CompliSpace has been working with ASX-listed entities for over 10 years, assisting them to develop risk and internal control systems that allow them to meet their compliance obligations and most importantly to obtain real value from their investment in robust governance, risk and compliance infrastructure.

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