Justice Owen in the HIH Royal Commission report Volume 1 defines corporate governance as:
“the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. …[It] embraces not only the models or systems themselves but also the practices by which that exercise and control of authority is in fact effected.”
In this context, the Australian Securities Exchange (ASX) Corporate Governance Council considers good corporate governance as promoting investor confidence, which is a key mechanism by which entities compete for capital on the ASX.
The ASX Listing Rule 4.10.3 requires an entity that is included in the official list as an ASX Listing to include in its annual report a corporate governance statement. The corporate governance statement must disclose how closely the entity has followed the recommendations set by the ASX Corporate Governance Council during the reporting period. If the entity has not followed a recommendation for any part of the reporting period, its corporate governance statement must separately identify that recommendation and period, and explain its reasons for not following the recommendation and what (if any) alternative governance practices it adopted in lieu.
It is recognised that different organisations and entity types may need to need to function under different governance practices based on aspects such as sector, size, maturity, complexity, history and culture. This diversity is the reason why the ASX governance principles and recommendations are not mandatory for listed entities and do not seek to prescribe corporate governance practises.
Although these ASX governance principles and recommendations are designed for the regulation of listed entities, they are also widely used as a general key benchmark of good corporate governance across many non-listed organisational types.
The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations are non-prescriptive, flexible and fundamentally anchored in an ‘if not, why not’ disclosure approach. Which principles and recommendations a listed entity – and indeed any entity unrelated to the ASX – wishes to adopt is a matter for its governing body. This governing body, typically a board of directors, is tasked with the duty and responsibility for managing the organisation with due care and diligence. This requires that there be appropriate governance measures in place.
The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations are structured as eight core principles, with each principle including a statement, recommendations and commentary:
Principle 8: Remunerate fairly and responsibly. This includes paying sufficiently to attract and retain high quality directors, and design remuneration structures to attract, retain and motivate high quality senior executives, and to align their interests with creating value and the organisation’s values and risk appetite.
There are 35 specific governance recommendations attached to these eight governance core principles (plus three extra recommendations that only apply in certain instances), with explanatory commentary, advice for modification and a glossary explaining key terms.
The ASX Corporate Governance Council actively encourages entities to helpfully explain their corporate governance arrangements. It recommends that organisational governance disclosures should explain how practices are being implemented. For example, where a recommendation calls for a particular policy to be in place, it is important to supplement the disclosure that a policy exists with what actions have been put in place to promote compliance, whether there have been any material breaches of the policy and how these breaches where managed. It is equally important, where a recommendation calls for a matter to be reviewed, to disclose any material insights gained and governance changes made as a result.
The latest 4e edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations is currently in effect, impacting the first full financial year commencing on or after 1 January 2020.