Proposed amendments to ASX Corporate Governance Principles and Listing Rules

On 22 April 2010 the ASX Corporate Governance Council (CGC) issued an exposure draft of amendments it is proposing to make to its Corporate Governance Principles and Recommendations.  The amendments follow reports from three recent inquiries instigated by the federal government:


i.  The CAMAC Report “Aspects of Market Integrity” (June 2009);


ii. The Corporations and Markets Advisory Committee (CAMAC) Report “Diversity on Boards of Directors” (August 2009); and


iii. The Productivity Commission Inquiry Report “Executive Remuneration in Australia” (January 2010).


It is proposed that any changes in the reporting requirements will apply to an entity’s first financial year commencing on or after 1 January 2011, but the Corporate Governance Council is encouraging early adoption, especially in the case of the recommendations on diversity.


The CGC’s explanations for the proposed changes are summarised below.


Insider trading


The CAMAC market integrity report addressed the effect of a number of market practices on the integrity of the Australian financial market, including directors entering into margin loans, trading by company directors in “blackout” periods, spreading false or misleading

information, and corporate briefings to analysts.  The CGC considered these matters, and supported ASX proposals to deal with them through the introduction of new Listing Rule requirements for the adoption and disclosure of trading policies that provide for restrictions on trading by directors and other key management personnel during sensitive periods to address the perception of and potential for insider trading. (See below re the ASX exposure draft on the proposed listing rules amendments).  It is interesting to note that CAMAC also noted that some of the problems could be better addressed if its recommendations in its last insider trading report have not been left languishing since the report was published in 2003!  Several required government action.  This included allowing directors and executives to trade securities via trading trusts, which has been advocated by Guerdon Associates since we were little (see HERE). The relevant sections will be deleted from the CGC Principles and Recommendations once the revisions to the Listing Rules come into effect. 


Women and diversity


The CAMAC report on board diversity focused particularly on the participation of women.  It discussed the role and structure of boards, the current state of diversity, ways of promoting greater board diversity and ways to assist in developing a broader pool of skilled and experienced candidates.  The report noted that the proportion of women on the boards of the ASX top 200 listed entities is 8.3%, which is down from 8.7% in 2006.  CAMAC also noted that the proportion of women represented in the ASX top 200 listed entities has remained in the 8% band since 2002.


CAMAC concluded that a “focus on a more robust and open approach to board appointments, and initiatives to encourage the development of women in executive management, are the most effective ways to foster a governance culture that embraces diversity in the composition of corporate boards”.  


After reviewing other research and international practice, the CGC concluded that the Principles and Recommendations should be amended to include a recommendation that companies establish and disclose a diversity policy with measurable gender diversity objectives.  As we have noted before, this, in effect, brings board nomination committees to the fore in the governance reporting process (see HERE)


The CGC’s position is that there is a strong case for including a recommendation in the Principles and Recommendations calling for companies to include in their annual reports details of the proportion of women on the board, in senior executive positions and employed in the whole organisation.  According to the CGC, an ‘if not, why not’ requirement for the establishment of measurable objectives, together with recommendations promoting greater transparency of such policies and companies’ achievements against their objectives, will help shareholders, and the market more generally, to play a role in promoting greater gender diversity on boards and within senior management.


The CGC also proposes that commentary and guidance in the Principles and Recommendations be expanded to include consideration of diversity in candidate selection processes for board appointments.


Remuneration committee and their advisers


Two of the Productivity Commission recommendations aimed at strengthening the integrity of remuneration setting by boards and enhancing the effectiveness of boards’ engagement with their shareholders called for amendments to the Principles and Recommendations.  They were:


Recommendation 2, which suggested the introduction of ‘if not, why not’ recommendations specifying that the remuneration committee should comprise at least three non-executive directors, with a majority and the chair independent, and that remuneration committees have a charter setting out procedures for non-committee members attending meetings; and


Recommendation 10, which suggested the introduction of an ‘if not, why not’ recommendation for companies to disclose information regarding the use of expert advisers in the remuneration of directors and key management personnel. 


The CGC Exposure Draft only addresses PC Recommendation 2, given that the Government has announced that it will amend the Corporations Act 2001 to introduce the requirements of PC Recommendation 10, and also to introduce additional disclosure obligations in relation to the fees paid to remuneration consultants.


The CGC was of the view that a majority of smaller listed entities would face difficulty complying with a requirement that remuneration committees should be comprised solely of non-executive directors without hiring additional directors to serve on their boards.  The CGC saw this as effectively prescribing that listed entities appoint a minimum number of three non-executive directors in order to be in a position to adopt the Council’s Principles and Recommendations.  It took the view that such prescription would contribute to increased regulatory costs and may pose an inappropriate burden on smaller listed entities.  The CGC was also of the view that such a prescriptive approach is not necessary to achieve the underlying policy objective articulated by the Productivity Commission of ensuring that independent directors have a significant influence on remuneration decisions. So rather than prescribing who should be on the remuneration committee, the CGC proposes to elevate the existing commentary and guidance in Principle 8 on the composition of the remuneration committee to a new Recommendation 8.2.  New commentary is to be included highlighting the potential for conflict of interest in having executive directors serve on the remuneration committee.


The CGC also decided that it would be more appropriate to deal with the PC recommendation that the remuneration committee charter should set out procedures for non-committee members attending meetings as part of the CGC’s commentary and guidance rather than include it as a new recommendation with a reporting requirement.


The CGC noted that the ASX has decided to make it mandatory for ASX top 300 companies to have a remuneration committee comprised solely of non-executive directors, consistent with the Productivity Commission’s Recommendation 3.  These companies currently represent about 90% of the aggregate market capitalisation of companies listed for quotation on the ASX. 


The CGC acknowledged that there is an expectation on listed entities to introduce more rigorous corporate governance practices as they grow and develop, and indicated that it would encourage companies outside of the ASX top 300 to put in place procedures for adopting recommended practices relating to remuneration committees, such as considering the appointment of non executive directors sufficient to enable them to comply with the proposed ASX listing rule.


The CGC has invited the ASX to take the opportunity to consult on whether it should be mandatory under the ASX Listing Rules for ASX top 500 companies to have a remuneration committee as a step in the growth and development of corporate governance practices appropriate to the stage of development of those companies and their place in the capital market.  The ASX adopted the suggestion, which is covered in the next section of this article.


The Corporate Governance Council exposure draft, including an overview of the key proposed changes by principle and a marked up version of the amended principles and recommendations, is available HERE.


Proposed ASX Listing Rule Amendments


Also on 22 April (and as noted in the section above on the CGC exposure draft), the ASX issued an exposure draft of proposed amendments to its Listing Rules to require the top 300 ASX listed entities to have a remuneration committee that is comprised solely of non-executive directors. 


The exposure draft also reports on the outcomes of public consultation undertaken on the proposed amendments to the Listing Rules introducing requirements for the adoption, content and disclosure of company trading policies.  These proposed amendments have been revised to take account of the key issues raised in submissions responding to ASX’s Consultation Paper “Listing Rule Amendments – Company Policies on Trading ‘Windows’ and ‘Blackout’ Periods”, dated 4 December 2009.  


The revised proposed listing rule requirements for company trading policies, which are included in the exposure draft, have been informally lodged with the Australian Securities and Investments Commission (ASIC). Informal lodgement is the first step in the regulatory approval process whereby, after considering advice from ASIC, the Minister for Financial Services, Superannuation and Corporate Law has the opportunity to disallow any rule change made by ASX. 


The proposed listing rule changes to require the top 300 ASX listed entities to have a remuneration committee that is comprised solely of non-executive directors have not yet been informally lodged with ASIC and there is an opportunity for comment on these proposed amendments.  In particular, the ASX seeks comments on whether the requirement to have a remuneration committee, but not the requirement that it be comprised solely of non-executive directors, should be extended to the top 500 ASX listed entities.


The Listing Rules exposure draft is available HERE.

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