The fourth edition of the ASX Corporate Governance Principles and Recommendations for listed entities has prompted intense debate. Here are the views of senior directors.
Under Listing Rule 4.10.3, ASX-listed entities are required to benchmark their corporate governance practices against the Council’s recommendations and, where they do not conform, to disclose that fact and the reasons why. The “if not, why not” rule effectively encourages entities to adopt the Council’s recommended practices, but does not force them to do so. It provides the flexibility for the entity to adopt alternative corporate governance practices, if its board considers those to be more suitable to its particular circumstances, subject to the requirement for the board to explain its reasons for adopting alternative practices.
Among the concerns is that the proposed expansion of the number of recommendations from 29 to 38, with expanded commentary, adds unnecessary prescription and detail to the revised edition. The AICD argues the fourth edition draft of the Principles has gone too far towards prescription, which will encourage “check-box” compliance and an overly risk-averse approach to decision-making on boards.
The Council is reviewing feedback from 100 submissions on its proposed amendments and is expected to meet late in the year to finalise the amended guidelines. The ASX Corporate Governance Council is an independent body. The ASX is represented on the Council, but the Council operates independently of the ASX, which has no power of approval or veto over its recommendations.
For the AICD’s submission and commentary on each of the ASX Corporate Governance Principles and Recommendations click here (aicd.com.au/asx-principles)
Law firm Herbert Smith Freehills reviewed submissions from key governance bodies and proxy advisors, summarising the main themes and views.
Many submissions have expressed concern that the proposed amendments add unnecessary prescription and detail to the ASX Principles. Some submissions expressed concern that the increased detail (particularly the more prescriptive nature of the commentary) could lead to an increase in listed entities making “boilerplate disclosure” against the ASX Principles, or using the guidelines in a “check box” manner without having proper regard to the actual governance processes of the listed entity.
Overlap with existing law
Some submissions shared the view that some of the proposed changes overlap or potentially conflict with existing statutory or common law concepts of directors’ duties or in some cases, simply restate the law. It was noted this would potentially confuse the issue of whether directors owe a duty to “stakeholders” broadly. This concern was noted particularly in respect of the new concept of “social licence to operate” included in Principle 3.
Retain the “if not, why not” disclosure model
Generally, submissions expressed support for maintaining the “if not, why not” model, noting this provided listed entities of varying size and market capitalisation the flexibility to determine that a particular recommendation is not suitable for them (and provide reasons for not following the recommendation).
Some submissions recommended that the fourth edition could include further explanation of the “if not, why not” model, particularly to provide guidance around what acceptable disclosure would look like.
Potentially burdensome on smaller listed entities
Some submissions commented it would result in significant costs and impose an unreasonable administrative burden for smaller listed entities to fully comply with the revised recommendations. This concern was raised in relation to the following recommendations: about validation of corporate reports; to implement an anti-bribery and corruption policy; that all voting at security holder meetings be conducted on a poll; and that the board seek independent advice on related party transactions.
“Social licence to operate” and “socially responsible manner”
The draft proposes to change Principle 3 from “A listed entity should act ethically and responsibly” to “A listed entity should instil and continuously reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”.
The majority of submissions reviewed expressed concern that the proposed amendments were overly vague and unclear, particularly in respect of the concepts of “social licence to operate” and acting in a “socially responsible manner”.
Many submissions expressed a further concern that the proposed amendments overlap or conflict with existing directors’ duties. Others welcomed the proposed changes, noting effective engagement with all stakeholders is critical to the success of a listed entity. These were supportive of the approach of the Consultation Draft, noting, in particular, that it was critical to include such changes to address the declining trust in corporations and major institutions.
Substantial changes are proposed to Recommendation 1.5, including that an S&P/ASX 300 entity adopt a measurable objective of having at least 30 per cent of directors of each gender on its board. There is guidance in the commentary that boards of listed entities should have regard to other types of diversity in addition to gender. Submissions were broadly supportive, however many were concerned the commentary appeared to express an intention that diversity disclosure should be broader than gender, while the text of the recommendation refers only to gender diversity. There were mixed responses to the overall “tone” of the proposed changes, with some submissions stating the commentary is overly granular, and others suggesting the commentary was too vague.
Disclosure of process to validate annual report
A proposed new Recommendation 4.4 provides that a listed entity should have and disclose its process to validate that its annual directors’ report and any other corporate reports released to the market are accurate, balanced and understandable and provide investors with appropriate information to make informed investment decisions. There was broad agreement that there was a significant lack of clarity as to what process of validation would meet the standard. Some submissions suggested that the existing legal and regulatory regime in relation to corporate reporting is sufficient.
Be careful about committees
Directors need to decide what guidance they need and put that governance in place, writes Diane Smith-Gander FAICD.
David Murray FAICD, chair of AMP, has challenged directors of large enterprises to think more deeply about how scarce board time is spent. Murray, former CEO of the Commonwealth Bank, has not served as a non-executive director on the board of a large market cap company before. He is, however, well qualified to have an opinion, given his chairmanship of the Future Fund and leadership of the 2014 Financial System Inquiry.
Murray’s challenges have called into question how companies are setting the line of responsibility and accountability between board and management — in particular, the role that board committees play. Some have interpreted these challenges as a call to restrict the role of committees and reduce their number, if not throw them out entirely. I would interpret them as a call for boards to think more carefully about these matters.
In the UK, the Financial Reporting Council (FRC) has a stated mission “to promote transparency and integrity in business”. It largely executes this mission through its role as the Competent Authority for audit in the UK — setting, monitoring and enforcing auditing and ethical standards. The FRC also sets the UK’s corporate governance and stewardship codes.
In July, the FRC released the 2018 UK Corporate Governance Code, which “puts the relationships between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy”. These principles are backed up by a longer document, Guidance on Board Effectiveness, which illuminates the principles.
It is peppered with sensible questions for boards to ask about their effectiveness, and my immediate reaction was that setting out to contribute to long-term sustainable growth shows a much worthier vision than many regulators. Stepping past restricting and regulating specific conduct defined as inappropriate makes for much harder guidance to follow. But the effort required to respond to guidance of this nature will result in more thought and better outcomes.
Three things reinforced my attraction to the guidance:
- Its primary purpose is to stimulate board thinking
- The guidance makes it clear it is for boards to decide on the governance arrangements most appropriate to their company circumstances
- It is clearly stated the guidance is neither mandatory nor prescriptive.
So are committees needed at all? My belief is they are needed to allow deeper focus on risk areas. But given that risks differ, you wouldn’t expect to see all companies have exactly the same committee structures. Do committees need a charter with a clear scope of responsibilities? Of course they do, but that charter needs to evolve and refresh at least annually, given the pace of change in today’s digitally disrupted world.
So has the intervention of the Hayne Royal Commission and the APRA independent report on the CBA into the thinking of boards prompted change in board committees? Is it driving the committees helter skelter unthinkingly to grasp for a more management-esque role? There may be the potential for some boards to react and stray into the territory of management. That outcome will only occur if a board is unthinking or has descended into lazy thinking.
As Stephen Walmsley of KPMG succinctly told a committee I serve on, what’s needed is a better understanding of secondary information sources that illuminate and help confirm the assurances management give the board. The board must think about the design of that information. It needs to be targeted — not a laundry list of anything directors can think of that might tangentially be additive to the topic. If the information requested is not already collected by management there must be a very strong justification for demanding it. Equally, boards must not shy away from imposing their information needs. As an aside, if management then don’t start using the new information immediately it may indicate the board has asked for the wrong information.
This is an obvious place for advanced analytics to assist the board. Directors need to advocate the business case for advanced analytics in governance. It is much easier to make the business case where analytics support revenue growth or promote efficiency from, say, automating repetitive finance compliance tasks. If this thinking on committee role clarity and secondary information is done well, boards will start to refresh their director slate on a shorter cycle and diversity of all sorts will increase.
Tamim Saleh, who leads McKinsey’s global effort in advanced analytics, talks of a female director in her early 30s sitting on the board of a well-known global company. She’s not there because she is a young digital native. She’s there because she has successfully started and exited two business in a relevant space; not because of her demographics, but because of her experience — and, I’m sure, her foundational skills and ability to work as part of that board team.
It’s time for all boards to put on the thinking cap and do a bit of design work with management on role and structure, and on the data to support that. Otherwise, Australian boards may find more regulation and guidance is layered on top of what is already well enough.
Diane Smith-Gander FAICD is a non-executive director and immediate past president of Chief Executive Women, and a non-executive director of AGL Energy and Wesfarmers.
What Directors Say
David Murray FAICD, Chair AMP
“If you look at what has happened in the financial services sector, what is happening at the Royal Commission and with the APRA report into CBA, the corporate governance guidelines haven’t worked. Directors are being encouraged to work directly with executives on complex matters, which draws them too closely into management. They’re faced with regulatory requirements, which include committee structures, which mean they’re increasingly dealing with more information from management, which is less and less valuable. It is reflective of weaker governance, not stronger governance. It doesn’t work. Regulators are holding the boards accountable for compliance rather than the executives.”
Graham Bradley AM FAICD, Chair GrainCorp, HSBC Australia, EnergyAustralia
“A feature of the third edition, which in my view contributed to its success, was its brevity, clarity and succinctness. By and large, it avoided using vague and subjective terms. The proposed 4th Edition revisions stray from this drafting principle. Without material changes, this would detract from the respect that the guidelines rightly enjoy among practising directors, here and abroad. The proposed draft is now excessively long.”
Diane Smith-Gander FAICD, Non-executive director AGL Energy, Wesfarmers
“So are committees needed at all? My belief is they are needed to allow deeper focus on risk areas. But certainly, given risks differ, you wouldn’t expect to see all companies have exactly the same committee structures. Do committees need a charter with a clear scope of responsibilities? Of course they do, but that charter needs to evolve and refresh at least annually, given the pace of change in today’s digitally disrupted world.”
Peter Warne FAICD, Chair Macquarie Group
“AMP and CBA did not get into trouble because their directors were too involved in the business. They [the proposed ASX Corporate Governance Recommendations] should define more clearly what ‘social licence to operate’ means, which is about brand and reputation. And the draft is 60 pages — we should be getting back to principles. While they are guidelines, they get interpreted as black letter law when they are that long. Most of the things are pretty sensible. Shareholders are asking for sensible information.”
Tony Berg AM FAICD, Director Gresham Partners
“I am concerned that the ASX corporate governance guidelines are pushing boards into more and more detail. The more hands-on directors get, the more they become like management rather than governors on behalf of shareholders. Increasing direct responsibility for risk, social licence, reporting and remuneration means less time for strategy and performance. We are forcing boards to focus on the nitty-gritty rather than the big picture. In addition, there is little recognition that public companies are competing with private equity. The more cumbersome a public company becomes, the less competitive it will be with private equity enterprise, which is leaner, more nimble, less bureaucratic and more focused on those issues that will produce success in the medium term. No wonder there has been a huge increase in the amount of investment in private equity funds.”
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