The fourth edition of the ASX Corporate Governance Council’s Principles and Recommendation (ASX CGP&R) has been released. It is applicable to listed entities on an “if not, why not,” basis for financial years commencing on or after 1 January 2020.

Significant changes from the third edition

While the eight core principles remain largely intact, the total number of recommendations has grown from 29 to 35 (see our initial assessment of the draft HERE) .

The most significant changes being those made to Principle 3 – now expressed as articulating and disclosing a company’s values which “Instil a culture of acting lawfully, ethically and responsibly” – and its constituent recommendations.  While the word ‘culture’ appears, helpfully it is anchored to the articulation of behavioural standards and reporting to the board where material breaches occur.

Revised or new recommendations to give effect to Principle 3 include requiring entities to:

• articulate and disclose a formal statement of ‘values’ (3.1);
• elevation of the disclosure of material breaches of codes of conduct to the board or a board committee (3.2);
• to have and disclose a whistle-blower policy with material breaches to be reported to the board or a board committee (3.3); and
• to have and disclose an anti-bribery policy with material breaches to be reported to the board or a board committee (3.4).

Whistleblowing policies will, in any case, be necessary to ensure compliance with new laws passed by the federal parliament that consolidate and broaden existing protections and remedies (see HERE) .

We note that the emphasis of each recommendation is for a board to be informed of material breaches.

Some may say this is not good enough. A board may best not ensure material breaches by monitoring the nature and extent of all breaches, material or otherwise. This would provide an indication of broad behavioural standards, and a benchmark for continuous improvement.

None of Principle 3’s recommendations require a board to “monitor and act to minimise or eliminate breaches”. Simple enough – close the stable door to ensure the horse does not bolt.

The concept of a “social licence to operate” did not find its way into the final version of the Principles, the concept not translating universally across all sectors and industries (gambling, tobacco etc) In effect, it was replaced with references to “reputation” and “standing in the community” in the final Principles.  Some may find it perverse that the emphasis here was to preserve reputation rather than act with integrity. This is despite the ASX CGP&R’s reference to Commissioner Hayne’s observations that:

“But to preserve and enhance a reputation… the enterprise must do more than not break the law. It must seek to do ‘the right thing’” (see p 54-55 HERE) .

Note that Commissioner Hayne’s emphasis was to the right thing, rather than preserve reputation.

Boards may want to consider if the focus is reputation, or doing the right thing. After all, a focus on reputation may have unintended consequences, such as the concealment of bad things.

Climate change

The area of environmental and social risks saw a change from the third to the fourth edition. The commentary to revised recommendation 7.4 (“a listed entity should disclose whether it has any material exposure to environmental or social risks and, if does, how it manages or intends to manage those risks”), now asks entities that believe that they do not have any material exposure to environmental or social risks to “consider carefully their basis for that belief and to benchmark their disclosures in this regard against those made their peers”.

Consistent with the approach taken by regulators like ASIC and APRA over recent years, the Principles encourage (rather than require) listed entities with material exposure to climate change risk to consider implementing the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. Given large asset owners now look for these disclosures, we expect they will disclosed by the majority rather than a minority of ASX 200 companies (as they are now).

30% female directors

The Principles have hard-coded a target of 30% female directors applied to the ASX 300 (revised Recommendation 1.5) requiring disclosure of the specific timeframe by which it will be reached.

No-one seems to have acknowledged that this is, in effect, a quota.

Remuneration

Remuneration principles now link remuneration and culture (8.2) zeroing in on performance based remuneration having alignment with the company purpose and values in addition to strategic objectives and risk appetite.  As we noted in our preliminary review this is new territory for boards and management who will be challenged by the shift in perception and the need to prove direct alignment between a performance incentive and the company purpose and values rather TSR and financial targets.

Boards may have some engagement challenges given investor preference for short term TSR (see HERE).

Other changes

The revised Principles also contain a range of other changes including:

• Generally, requiring policies to be disclosed in full, not in summary form;
• Amending commentary under indicators of ‘independence’ (Recommendation 2.3) to broaden personal ties to ‘family, friendship or other social or business connections’;
• Increasing expectations on director professional development and induction processes (Recommendation 2.6);
• Requiring all material ASX announcements to be sent to directors promptly after they have been made (new Recommendation 5.2);
• Specifying that all substantive resolutions at a meeting of security holders should be decided by a poll rather than a show of hands (new Recommendation 6.4); and
• Amending commentary on remuneration (Recommendation 8.1) to reference the need for listed entities to ensure that incentives encourage senior executives to pursue the growth and success of the entity without rewarding conduct that is contrary to the entity’s values or risk appetite, and to consider the implications for its reputation and standing in the community if it is seen to pay excessive remuneration.

The new Principles and Recommendations can be seen HERE

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