ASX Governance Principles & Recommendations

May 1 2014

BOARDWORX BRIEFING | Publication of the 3rd Edition of the ASX Corporate Governance Principles & Recommendations 

After an extensive consultation period, the ASX Corporate Governance Council has published the 3rd Edition of the ASX Corporate Governance Council Principles and Recommendations.  This edition adopts the same non-prescriptive, flexible, ‘if not, why not’ disclosure approach. However there have been some significant structural changes that have resulted in the introduction of 9 new recommendations.

Some of these 9 new recommendations appeared in one form or another as guidance in the commentary, but have now been elevated to reporting recommendations in this 3rd edition to reflect their importance in the contemporary governance landscape.  For example – having a written agreement with each director, having a program for induction of new directors, give security holders the option to receive communications from the entity and its security registry electronically.

Some of the key changes are outlined below, but this list is not exhaustive and does not include the changes to commentary.  A list of the 9 new recommendations is included in the Appendix to this briefing.

Some Key Changes to the ASX Corporate Governance Principles and Recommendations

  • Director independence

The box setting out the indicators of director independence (Box 2.3) has been expanded.  The factors to consider when assessing a director’s independence now includes a review of overly long service as a director as a potential indicator of non-independence, without the controversial move of prescribing a random length of period of tenure to indicate non-independence (as foreshadowed in the draft).

The determination of the independence of directors should be considered on an annual basis and recorded in board minutes, and commentary then include in your corporate governance statement.  Your annual board calendar should include this as a compliance task.

  • Other requirements for new Directors

The Remuneration & Nomination Committee or your Board will need to ensure that appropriate checks are carried out before appointing a person or putting them forward to shareholders for election as a Director.

Whilst this may seem like an obvious process for most entities, you need to ensure that this is covered off in your minutes.

  • CFO – CEO Certification

Recommendation 4.2 (previously 7.3) has been upgraded such that the CEO and CFO sign off is now required for financial statements for any reporting period, not just to year-end financial statements, but half-year and quarterly reports.  The required wording of the certification has also been expanded.

Review your certification statement to ensure that the required wording is included.  Also add this to your annual board calendar compliance section to ensure the board minutes reflect receipt of this certification prior to adoption of quarterly, half-yearly and annual financial reports (as appropriate for your organisation).

  • Diversity

To prevent duplicate reporting, companies that already report their ‘Gender Equality Indicators’ under the Workplace Gender Equality Act 2012, can now use this information instead of reporting the respective proportions of men and women on the board, in senior executive positions and across the whole organisation.

There is an additional requirement to provide enhanced commentary on the meaning of ‘measureable objectives’ and on the steps a listed entity can take to measure its achievements against the diversity objectives it has set.

Review how you define ‘senior executive’ as there is enhanced commentary around this terms. Also review the meaning of ‘measurable objectives’ and test whether your Diversity Policy sets meaningful and measurable objectives.

  • Risk

The 3rd edition substantially enhances the recommendations on risk (recommendations 7.1 – 7.4).

–       Do you have an internal audit function?

–       If you don’t have an internal audit function or an audit committee, what other measures have you taken to monitor and minimize risk?

–       Do you have a risk committee or committees that oversee risk?

–       Do the members of your risk committee between them have the “necessary technical knowledge” as well as a sufficient understanding of the industry in which the entity operates to be able to discharge the committee’s mandate effectively?

Review the enhanced risk recommendations to consider whether you need to upgrade any corporate governance practices in this area and then record it in your governance statement.

Your risk management framework and review process needs to be articulated – ensure that at least an annual review is scheduled in the board calendar.  Evidence of this review taking place needs to be disclosed in the annual report or on your company website.

  • The 3rd edition notes the importance of disclosure of sustainability risks

 A new recommendation 7.4 concerning sustainability risks is included in the 3rd edition.  The inclusion of this recommendation recognises that the disclosure of sustainability risks is increasing in importance to assist investors to make longer-term investment decisions.

Does your entity have any material exposure to economic, environmental and social sustainability risks?  And if so, how are these risks managed?

  • Board Skills Matrix

The 3rd edition places an emphasis on having (and disclosing) a board skill matrix instead of the previous requirement to have a statement as to the mix of skills and diversity.  ‘Matrix’ implies specificity around the disclosure of skills, not motherhood statements.  The matrix can reflect the Board’s current mix of skills and diversity or the mix of skills and diversity that the board is looking to achieve.

This matrix will need to be drafted and approved by the Remuneration & Nomination Committee.

  • Written Director Contracts

Recommendation 1.3 states that we should have written agreements with each director and senior executive setting out the terms of their appointment.

Review this to ensure the director’s have written agreements in place.

  • The Company Secretary – Reporting and Role

The 3rd edition places a reference to the secretary being “accountable directly to the board, through the chair, on all matters to do with the proper function of the board”.  The role of the company secretary is also expanded in the commentary to recommendation 1.4.

Check your Board Charter to ensure that the role and and reporting lines of the Company Secretary is in line with this recommendation.

  • Rights of Shareholders

The 3rd edition places greater emphasis on respecting the rights of shareholders by recommending that the investor relations program be communicated and that there are policies and processes in place to facilitate and encourage participation at meetings of shareholders.

Investor relations program to be prepared and communicated.

Check that you have a generic email address for shareholders to communicate with you and ensure someone is monitoring it daily.  Also confirm with your registry that the option exists for your shareholders to receive communications from you on an electronic basis.

  • Governance Statement

Under the 3rd edition, this needs to be formally approved by the Board and dated.

Include this in your annual board calendar.

  • Increased Flexibility

Once change that will provide greater flexibility for particularly smaller listed entities (although this term is deliberately not used in the recommendations themselves), is that entities have the option to adopt and disclose alternative governance practices instead of having nomination, audit, risk and remuneration committees and an internal audit function.

This flexibility is reflected in the commentary of each of the recommendations dealing with the committee’s and functions listed above.

Associated Changes to Listing Rules

In conjunction with the 3rd edition, the ASX has foreshadowed governance-related amendments to the Listing Rules (see separate update on these changes).

  • Governance Statement Disclosure

Companies will have the option to include the Governance Statement in their Annual Report or include the URL of the page on its website where the corporate governance statement can be found.

In addition, when an entity lodges its annual report with the ASX they must also complete an Appendix 4G which contains a key to where the various corporate governance disclosures for the entity can be found.  If the entity has decided to put its corporate governance statement on the website instead of in their annual report, they must include a copy of the statement when lodging the 4G.

 What should you be doing?

  • These changes take effect for entities on or after 1 July 2014 – so entities with a 30 June or 31 December balance date will be expected to first measure their governance practices against the recommendations in the 3rd edition, for the financial year ending 30 June 2015 and 31 December 2015, respectively.
  • However, there are a number of steps that you will need to implement beforehand to be compliant by this date.
  • Boardworx will be undertaking a review of each of its client’s practices against the 3rd edition recommendations and providing a report to the Board on its findings.
  • Revised Corporate Governance Statements will also then be drafted.
  • Tasks will be included on Annual Board Calendar’s to ensure compliance with the new recommendations are considered, captured in minutes and actioned where required.
  • If you need assistance with this transition, please do not hesitate to contact us.


Appendix – New Recommendations

Recommendation 1.2:  A listed entity should:

(a)           undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and

(b)           provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director.

Recommendation 1.3:  A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment.

Recommendation 1.4:  The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper function of the board.

Recommendation 2.6:  A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively.

Recommendation 4.3:  A listed entity that has an AGM should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit.

Recommendation 6.1:  A listed entity should provide information about itself and its governance to investors via its website.

Recommendation 6.4:  A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically.

Recommendation 7.3:  A listed entity should disclose:

(a)           if it has an internal audit function, how the function is structured and what role it performs; or

(b)           if it does not have an internal audit function, the processes it employees for evaluating and continually improving the effectiveness of its risk management and internal control processes.

Recommendation 7.4:  a listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages those risks.