Major Risk Management Changes Proposed for ASX Listed Entities

Summary of Proposed Changes

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If you are involved in the management of an ASX Listed Entity you will undoubtedly be aware of the proposed amendments to the Corporate Governance Principles and Recommendations (ASX CGPRs) that are due to commence on 1 July 2014, as well as proposed amendments to the ASX Listing Rules.

Summary of Proposed Changes
The changes proposed to be introduced in the 3rd edition of the ASX CGPRs are significant and include:
•    A requirement to place a greater focus on risk management;
•    New criteria for determining the independence of directors;
•    Greater flexibility in reporting for smaller listed entities;
•    Expanded options to report gender equality indicators; and
•    The elevation of numerous best practice suggestions from the commentary to become reportable “Recommendations”.

In addition, the ASX proposes simultaneous amendments to its Listing Rules and Guidance Note 9 (Disclosure of Corporate Governance Practices) including:
•    The option to provide governance disclosure in your Annual Report or on your public website; and
•    The adoption of a new Appendix 4G which provides a “checklist” to confirm their compliance with the Listing Rules.

The ASX is also introducing a new Listing Rule (3.19B) commencing on 1 January 2014 which will require any on-market purchases under the terms of an employee/director equity scheme to be disclosed to the marketing within five business days.

Specific Risk Management Requirements
Under the new ASX CGPRs, ASX listed entities will be required to establish a risk committee (either as a stand-alone risk committee or part of an audit committee) headed by an independent director, or to otherwise alternatively show they have implemented “alternative processes for identifying, measuring, monitoring and managing the material business risks they face”.

The boards of listed entities will be required to review their company’s risk management framework with management on at least an annual basis. In addition, as part of a company’s risk management disclosures, a new Recommendation requires listed entities to disclose whether, and if so how, they have regard to economic, environmental and social sustainability risks.

The ASX’s increased emphasis on risk management is consistent with moves taken by regulators, including ASIC, to structure compliance obligations around effective risk management systems.

“One of the most important lessons from the GFC was the critical need for listed entities to have robust processes to identify, measure, monitor and manage risk,’’ says the consultation paper on the proposed changes.

Whilst most of these changes will not come into effect until after July 1, 2014, the message to ASX listed entities is loud and clear. You can no longer play lip service to risk management. Nothing short of having a a fully- operational risk management system is in place will do by the commencement of the new rules.

For years we have been highlighting to clients the danger of misleading governance disclosures relating to risk management. Principle 7 makes it clear that listed entities must have an appropriate framework to identify, measure, monitor and manage risk on an ongoing basis and makes reference to the Australian Risk Management Standard ISO AS/NZ 31000:2009 as providing appropriate guidance as to what this entails.

ASX listed entities that continue to play lip service to risk management are likely to become instant prey for class action lawyers and litigation funders. There will be increased grounds for litigation when results fall well short of expectations and a causal link can be established to deficient risk management practices or a significant gap between what is publically disclosed and what is actually done.

If you would like to test out the overall effectiveness of your organisation’s risk management program why don’t you complete CompliSpace’s free Enterprise Risk Management Maturity Assessment.

How can CompliSpace help?
CompliSpace combines specialist governance, risk and compliance consulting services with practical, technology-enabled solutions.
If you are looking to update your existing governance, risk or compliance programs and make them more relevant to your organisation, contact us via the details below:
P: +61 (2) 9299 6105 (Sydney) / +61 (8) 9288 1826 (Perth)
E:  contactus@complispace.com.au
W: http://www.complispace.com.au

This blog is a guide to keep readers updated with the latest information. It is not intended as legal advice or as advice that should be relied on by readers. The information contained in this blog may have been updated since its posting, or it may not apply in all circumstances. If you require specific or legal advice, please contact us on (02) 9299 6105 and we will be happy to assist.

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