New Draft ASX Principles and Recommendations

The ASX Corporate Governance Council has released the third edition of its Principles and Recommendations in draft form.

New ASX Corporate Governance Principles and Recommendations

The last major review of the Principles and Recommendations was conducted in 2007 with the release of the second edition. Amendments were also made to the second edition in 2010.  

The Council believes it is appropriate to update the principles, incorporating the lessons learned from the GFC, which had drawn attention to a number of governance issues.

Despite questions on the effectiveness of self-regulation, the Council believes the issues raised by the GFC can be addressed by the “if not, why not” framework of the Principles and Recommendations.

The Council has made some changes to improve readability, but has also made some additions to the Principles and Recommendations, including creating recommendations out of commentary in the former edition.

Changes to the Principles and Recommendations

Director Background Checks – Recommendation 1.2

Organisations should conduct “appropriate checks” before appointing a Director or putting them forward for election. The Council believed these checks would already be occurring since most organisations would be using search firms to locate potential candidates and these firms normally undertake checks as a matter of procedure. Organisations should also provide security holders all the material information relevant to decide whether to elect a Director.

Written agreements – Recommendation 1.3

A listed entity should have a written agreement with each Director and  Senior executive setting out the terms of their appointment.

Company Secretary Reporting Structure – Recommendation 1.4

The Company Secretary should report directly to the Chair of the Board.

Gender  equality – Recommendation 1.5

Since non-public sector employers with more than 100 employees are now required by the Workplace Gender Equality Act 2012 to report annually on six Gender Equality Indicators, the Council has stated that organisations can choose to disclose their Gender Equality Indicator scores rather than the respective proportions of men and women on the Board, in senior executive positions and across the whole organisation. Organisations choosing to disclose the latter should disclose how they defined senior executive. 

Director Independence – Recommendation 2.1

The Council has expanded its explanatory box on the defining characteristics of an independent Director.  New examples and clarifications of when independence might be compromised are:

  • If the Director has served over nine years on the Board;
  • Family ties are now specifically mentioned;
  • The Council has clarified that Directors considering past relationships with material suppliers and customers of the entity or its related entities should look back three years. 

The Council noted that the UK, Singapore, South African and Hong Kong codes have all now been amended to recommend that there should be a review of independence for Directors who have served more than nine years. It also noted that if a Director has a relationship or attribute outlined in the explanation box, it does not automatically mean they are not independent, but does require the Board to consider the matter.

Nomination Committees– Recommendation 2.4

The Council has recommended that nomination committees have at least three members, a majority of whom are independent and the Chair of which is independent. It noted that the recommended composition is in line with the UK, Singapore and Hong Kong, while Canada and the NYSE rules required that the nomination committee be made up entirely of independent Directors.

The Council also added a clause to all recommendations about committees to recognise that some listed entities may legitimately decide not to have certain committees. The clause enables such organisations to abide by the Principles and Recommendations if they state they do not have a committee and disclose the processes employed to address the committee’s focus.

Director Induction– Recommendation 2.6

The Council has recommended that listed entities have a program for inducting new Directors and providing professional development throughout their role. They should then disclose the main features of that program.

Auditor AGM attendance – Recommendation 4.3

The Council has added a recommendation requiring the external auditor of listed entities to attend their AGM in order to answer security holder questions about the audit.

Provision of Governance Information – Recommendation 6.1

The Council has introduced a recommendation that listed entities should provide information about themselves and their governance to investors on their website. The intention is to include details in the commentary about what exactly should be recorded on the website.

Genuine Two-Way Communication and electronic communication – Recommendation 6.2 and 6.4

To avoid boilerplate communications, the Council has replaced a recommendation calling for listed entities to “design a communications policy for promoting effective communications with shareholders” with a recommendation that listed entities “design and implement an investor relations program to facilitate effective two way communication with investors”. It has also added a recommendation that entities give security holders the option to send and receive communications with the company electronically.

Creation of a Risk Committee– Recommendation  7.1

The Council has recommended that listed entities form a risk committee (or a combined audit/risk committee) that has:

  • at least three members;
  • a majority of independent Directors; and
  • independent Chair.

They should disclose

  • the committee charter;
  • committee members; and
  • the number of times the committee met throughout a reporting period and individual attendances of the members at the meetings.

Board oversight of risk – Recommendation 7.2

The Council has intensified a previous recommendation that required the management to report to the Board on the effectiveness of the entity’s risk management systems with a recommendation that the Board itself review the risk management framework at least annually.

Internal Audit– Recommendation 7.3

The Council has recommended that organisations should disclose how their internal audit function is structured and what role it performs. If they do not have an internal audit function, they should disclose the processes they employ for evaluating risk management.

Economic, Environmental and Social Sustainability risks – Recommendation 7.4

The Council has introduced a broad requirement to disclose whether and if so how it has regard to such risks.

Clawback – Recommendation 8.3

The Council introduced a recommendation that organisations have and disclose a clawback policy and disclose at the end of each reporting period whether performance derived remuneration has been clawed back. If remuneration should have been clawed back but was not, an explanation should be provided.