The new draft ASX Corporate Governance Council Principles appear to require more work
13/08/2018
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In recent weeks, since several prominent company directors expressed a point of view that ASX Corporate Governance Council Principles had inadvertently contributed to poor governance, there has been a flurry of media attention and commentary.

This is welcomed by, if not all members of the ASX Corporate Governance Council, at least some of them, as well as many directors and investors.

Prior to this flurry of attention, Guerdon Associates also expressed a point of view on the Principles, put through the appropriate channels, direct to the Council.

In the proposed fourth edition (see HERE), the ASX Corporate Governance Principles and Recommendations will increase from 29 to 38 recommendations, and the number of pages increases from 40 to 55. This increase contrasts with the recently released update to the UK Financial Reporting Council’s revised Code, which is significantly shorter and sharper than the prior Code (15 pages versus 30, no less!), although the UK’s structure (i.e. ‘Principles’ supported by ‘Provisions’) and ‘comply or explain’ approach have been retained and are broadly similar in the way they apply to the ASX Governance Council’s Principles.

It appears that the increase in recommendations and pages involves significantly more prescription, such that the Principles and Recommendations are moving away from their original purpose of guiding principles to a prescriptive set of rules.

This may not necessarily improve corporate governance in Australian boardrooms, as its length and prescription may foster a ‘tick-the-box’ approach. A reversion to a higher-level principles-based approach on the other hand may foster less box-ticking on governance matters and more critical thinking on how the company can best meet the higher principles.

To that end, Guerdon Associates suggested that it would be preferable to determine a concise set of higher level principles that guide rather than prescribe behaviours and outcomes.

Like others, Guerdon Associates had a few problems with the draft. One of our main bug bears was the proposed replacement of:

Principle 3 “Act ethically and responsibly: A listed entity should act ethically and responsibly.”

With:

“Instil the desired culture: A listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner.”

To the best of our knowledge, there is no accepted definition of culture. Even if there were, it is the actions of a company, its directors and its employees that are important. Coincidently, actions are understood, measurable, and observable. Culture is not.

It was the commentary regarding a “social licence to operate” accompanying the changed wording in this Principle that has elicited the recent media furore, and a response from the Council this week denying that it had been taken over by left wing activists and inferences that that the commentary may replace the “social licence” term with references to ‘brand, reputation, and trust”.

Why not just repeat the original, simple wording, and minimise any further commentary? “A listed entity should act ethically and responsibly” says it all.

The Council has heard the noise. We trust it sees the light.

Our submission can be found HERE.

© Guerdon Associates 2020
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