Revised Corporate Governance Principles Released
06/08/2007
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The ASX Corporate Governance Council has released its revised Corporate Governance Principles and Recommendations late on Thursday 2 August 2007.

This is the first revision of the Council’s Corporate Governance Principles since they were issued in March 2003.
 
The aspects directly impacting remuneration are restricted to anti option hedging policies and disclosures, and issues of options to non-director executives.
 
The Council considered each of the more than 100 public submissions received on the proposed changes to the Principles.  Overall, the submissions showed strong support for the principles and the ‘if not, why not’ approach to corporate governance disclosure.  
 
In summary, the key changes, with our comments in italics, are:
 
• ‘Best practice’ has been removed from the title and the text of the document – to be known as the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations – to eliminate any perception that the principles are prescriptive and so not to discourage companies from adopting alternative practices and ‘if not, why not’ reporting where appropriate.  Some may consider the rationale for this amendment to be inconsistent with the still prescriptive recommendations (provided as “guidelines”) that tend to accompany each statement of principle.
 
• There are now eight Principles instead of ten, with Principle 8 amalgamated into Principles 1 and 2, and Principle 10 amalgamated into Principles 3 and 7.  These changes structure the guidance more logically.
 
• Guidance to Principle 2: Structure the Board to Add Value, sets out a list of “relationships affecting independent status” that a company should take into account when determining the independence of a director rather than providing a definition of independence.  Companies are required to disclose their reasons for considering a director ‘independent’ notwithstanding the existence of one of these relationships.  The Council has retained guidelines for what constitutes independence, but has inserted the word “may” in front of these.  The outcomes of this amendment will be interesting to observe.  There has been much debate that investors may benefit from bringing back into the fold non-independent directors (at least under the old prescriptive definition of independence), and that their value can be explained in disclosures.  Now the absence of consistency may just confuse investors, and increase reliance on proxy advisory firms.  What’s the bet that proxy advisory firms will stick to standard definitions, while discussing the value of the director to investors?
 
• Council recommends that companies’ trading policies should prohibit hedging unvested options and that any hedging of vested options should be disclosed to the company under Principle 3: Promote Ethical and Responsible Decision-Making. Whereas the Government amendment to the Corporations Act that we brought to your attention last month (see HERE) requires companies to disclose their policy on hedging of options, the Council goes a step further with their recommendation that companies prohibit hedging.  (It also appears that the Council believes that the Government is still proposing an amendment to the Corporations Act, whereas it has been enacted by Federal Parliament and received Royal Assent over a month ago).
 
• Principle 7: Recognise and Manage Risk now makes it clear that material business risks involve both financial and non-financial risks. Companies are encouraged to adopt appropriate risk oversight, management policies and internal control systems rather than disclosing specific material business risks. Submissions overwhelmingly opposed disclosure of specific risks.
 
o Recommendation 7.2 now deals with “material business risks” in broad terms. Where a company has risks relating to sustainability or corporate social responsibility (CR) that are material to its business they should be considered in the context of the revised Recommendation 7.2.
 
o Recommendation 7.3 contains a revised version of the existing “assurance” or “sign-off” on financial reporting risks. The Recommendation requires the board to disclose that it has received assurance from the CEO/CFO that the declaration under section 295A of the Corporations Act is founded on a sound system of risk management and internal control that is operating effectively in all material respects in relation to financial reporting risks.  (At this point we should be on red alert for the next review of the Principles, as this revision is possibly just a few steps away from, in effect, the expensive Sarbanes Oxley Act of the US).
 
• Recommendation 9.4 has been deleted and instead commentary has been added to Recommendation 8.2 suggesting companies “submit” to shareholders equity-based incentive plan proposals involving the issue of new shares to executives, other than directors, prior to implementing them.  The Guidelines retain wording that executives should only be permitted to trade equity-based remuneration during trading windows. Actually, the ASX Governance Council’s press release has used the words “consult with”.  We have referenced the actual “submit” wording used in the Principle’s recommendation.

There has been no change to the suggested composition of the remuneration committee.  That is, the committee is not required or recommended to be comprised of just independent non-executive directors.  Australia differs from the US, Canada and UK in this regard.
 
Other major findings to emerge from the review:
 
• Strong support for the ‘if not, why not’ reporting approach and general agreement that there should be no exemption from the Principles for small and medium-sized entities.
 
• Significant interest in sustainability and CR issues, although submissions indicate that sustainability/CR has a wide variety of meanings. The bulk of submissions focused on the risk and risk management aspects of sustainability/CR.  Many submissions said that any new recommendation should avoid constraining the ability of companies to adopt approaches that best suit their circumstances and the needs and interests of their investors and stakeholders, and should not restrict their ability to comment on other aspects and objectives of their sustainability/CR activities.
 
• Council considers that sustainability/CR issues are best reflected in the ‘mainstream’ of corporate governance activities; that is, through strengthened risk management processes and reporting.
 
• The importance of material business risks, including those related to sustainability/CR, should be clarified and recognised. Companies are encouraged to establish appropriate risk management and oversight policies and structures, and to disclose a description of those policies in the context of Principle 7. 
 
The start date for the revised Principles will be the first financial year commencing on or after 1 January 2008.
 
The complete documents can be located HERE.

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