Proposed changes to the ASX Corporate Governance Principles and Recommendations that we foreshadowed in our last newsletter (see HERE) have been released.

The Council proposes to expand the number of recommendations from 29 in the third edition to 38 in the fourth edition. The new edition maintains eight principles, however, throughout there is a greater emphasis on values, ethics, and broader stakeholder accountability.

Notable changes, with Guerdon Associates comments where appropriate, are below.

Recommendation 1.1 – Boards are now recommended to have and disclose a charter. In the commentary, the guidelines have a new emphasis on the board’s role in setting the tone from the top with the creation of the code of the conduct, culture and values and ethics of the organisation. For the first time, the commentary suggests a charter will require a board to establish the entity’s purpose. It would appear that many of the ethical dilemmas revealed by recent enquiries stem from confusion regarding purpose.In addition, the board’s role includes ensuring a remuneration framework that is “aligned with the entity’s purpose, values, strategic objectives and risk appetite”. The remuneration emphasis in the commentary is welcome. Currently very few remuneration reports disclose remuneration frameworks in these terms and, frankly, many would be hard pressed to prove a direct alignment to “purpose, values, strategic objectives and risk appetite”. If boards take this commentary to heart then there should be major improvement in pay frameworks.

Recommendation 1.4 – As expected, the Council has upped the ante on board and company diversity, both in terms of gender diversity and diversity in its broader definition. It has hard-wired a requirement for women on the board. If the entity was in the S&P/ASX 300 index at the commencement of the reporting period, the Council recommends it have a measurable objective to be met in a specified period that the board be comprised of not less than 30% of its directors of each gender. Hardwiring a target will probably be helpful. Australian boards have been stuck at about the 27% women on board average for over three years (see HERE). Purists may also prefer the Council to be more specific (i.e. at least 30% men and at least 30% women). Gender politics and terminology is undergoing significant change, and indicating 30% of each gender may not be possible under some scenarios (for example, Tumblr specifies 112 genders see HERE).

The Council has also charged the board to charge management with designing, implementing and maintaining programs and initiatives to help achieve those measurable objectives and order an annual review of the company’s progress towards its gender objectives. The last two requirements are prescriptive on how objectives should be achieved. Perhaps it is better to indicate that the board ensure management achieves these objectives.

Recommendation 1.6 – Board effectiveness reviews are recommended to occur annually, rather than periodically as was previously the case.

Principle 2 – Entities should not only have a board of an appropriate size, composition, skills and commitment, but also a board with knowledge of the entity and the industry in which it operates. This has been a common criticism of the boards of some companies facing industry challenges and external pressures.

Recommendation 2.2 – Board skills matrix disclosure has been one area that has received criticism from multiple parties, as it is generally seen as uninformative and cookie cutter. The Council has attempted to address this with a focus on skills aspirations and gaps rather than existing skill sets.

Recommendation 2.3 – The council’s guide to who is an independent director has been tweaked and streamlined. For example, directors receiving performance-based remuneration (including performance rights or options) are not considered independent.

Recommendation 2.6 – Boards should review Directors skillsets to see whether they need professional development. Examples in the commentary of possible areas where training might be required included legal frameworks or accounting skills.

Recommendation 2.7 – A new recommendation has been introduced to address the growing number of “global” directors who might not be fluent in English, the language of company accounts and most meetings for ASX listed companies. Boards must disclose how they are ensuring non-fluent directors understand the documentation and meetings.

Principle 3 – (a listed entity should act ethically and responsibly) has undergone significant changes. It now requires a board “instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”. This is one principle that has come out worse for the review. It references something that we know directors and executives struggle with, even though the mass and social media appear to be in the know, and that is the word “culture”. Guerdon Associates much prefers the former version, which today remains relevant. That is, a listed entity acts lawfully, ethically and in a socially responsible manner. Behaviour, we think, is what counts.

Despite our concerns, there is are improvements in commentary. There is more explicit recognition that directors consider a broad range of stakeholders in the company and not just shareholders, and an emphasis on the company’s “social licence to operate”.

Recommendation 3.1 – In addition to the previous requirement for a code of conduct, this recommendation requires directors to “articulate and disclose” the company’s core values so management can disperse these values throughout the organisation.

Recommendation 3.2 – The dreaded word “culture” finds its way into this recommendation i.e. any other material breaches of the code of conduct that call into question the culture of the organisation. Surely the issue is breaches of a code of conduct (i.e. bad behaviour), and not a fuzzy, if trendy, concept like culture.

Recommendation 3.3 and 3.4 – The company should have and disclose a whistleblower and anti-bribery and anti-corruption policy and ensure the board is informed of any breaches of those policies. The commentary provides suggested content for such policies. This is new, and welcome.

Recommendation 4.4 –This new recommendation has been added, requiring boards to have and disclose a process to validate the company’s annual and other corporate reports. The intent is to ensure they are accurate, balanced, understandable and provide investors with necessary information. We are not sure that this requirement will add much. After all, directors are already liable for false or misleading reporting.

Recommendation 5.2 – The board should ensure it receives all ASX announcements promptly after they have been made. We are not sure that this requirement will add much. After the James Hardie case, directors should not need any encouragement to receive ASX announcements.

Recommendation 5.3 – Prior to analyst or investor briefings, the presentations should be disclosed to the ASX.

Recommendation 6.4 – Addressing a bone of contention, companies must ensure meeting resolutions are decided by a poll rather than a show of hands.

Principle 7 – This principle now more explicitly outlines the board’s role in setting the company’s risk appetite and ensuring that management is operating with regard to that appetite. The commentary under recommendation 7.1 also provides additional insight into the role of the risk committee while the commentary under 7.2 and 7.4 encourage transparency around environmental and social risks and the outcomes of risk management framework reviews in general.

Principle 8 – The amended principle emphasises that remuneration should have a short-, medium- and long-term focus. This is prescriptive, and fails to recognise that boards often wrestle with optimisation of value and the time to realise it. Optimal value may mean foregoing some short term value (although short sellers may not see it that way) for better longer term outcomes. This is the essence of realising a vision. It notes in commentary that remuneration should reference the company’s risk appetite (at last, it has taken a long time – type Guerdon Associates and risk into your search engine), values and social licence to operate. It also suggests that the remuneration process include benchmarking to verify the amounts are not excessive.

Recommendation 8.4 – This new recommendation governs the use of consultancy arrangements with directors or executives. A key point here is that the board needs “independent” advice when considering the appropriateness of such arrangements, which will make them more work, especially as regards the consideration of what is reasonable remuneration. The new recommendations aims to reduce potential conflicts and “double dipping” with remuneration and fees.

Responses to the proposed principles and recommendations are required by 27 July. It is currently envisaged that the fourth edition of the Principles and Recommendations will come into effect for companies with financial years starting after 1 July 2019.

They can be found HERE.

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