On 27 February, a new draft 5th Edition ASX Corporate Governance Principles & Recommendations were released for public consultation. Public consultation on the draft 5th Edition closes on 6 May 2024. The current timeline proposes a final 5th Edition be released in early 2025 and for entities to commence reporting for their financial years commencing on or after 1 July 2025.

    The ASX Corporate Governance Principles & Recommendations, first introduced in 2003, are an important component of Australia’s corporate governance framework. Applicable to ASX listed entities on an “if not, why not” basis, the principles provide flexible, industry-led guidance on what constitutes good governance. More broadly, the principles serve as a high-watermark for governance practice for all Australian organisations.

    On 27 February, the ASX Corporate Governance Council released a draft 5th Edition update to the principles for public consultation, recognising the significant change in governance practices and market expectations since the 4th edition in 2019.

    In particular, the current Consultation Draft elevates the focus on stakeholders, material risk management, board and workforce diversity as well as accountability and transparency measures for poor corporate conduct.

    The AICD is long-standing and active member of the council – a group that brings together a wide range of business, investor and industry bodies to prepare the draft Principles. The AICD has been a consistent advocate for simplifying the principles and removing duplicative and prescriptive recommendations, particularly where existing laws and regulatory requirements apply.

    The Consultation Draft has retained its existing structure, with eight core principles, 33 recommendations (down from 35 in the 4th edition) and supporting commentary. Several recommendations have been removed due to overlap with existing Australian laws.

    We take a look at the key changes proposed below.

    Key proposed changes

    Management of risk

    One of the more substantiative changes to the principles is the reframing of Recommendation 7.4 to focus on the disclosure of an entity’s “material risks”. Previously, Recommendation 7.4 focused more narrowly on disclosure of material ‘environmental’ and ‘social’ risks.

    The draft commentary notes that a “material risk” relates to a risk which is material to an entity’s prospects over the short, medium or longer term and may include environmental, social and governance risks. The reference to “governance risks” is a new addition, defined as, “potential consequences to a listed entity relating to the adequacy of its governance structures, internal processes, people or systems, including by failing to prevent inappropriate, unethical or unlawful behaviour. It may include financial risk and reputational risk”.

    This revised formulation of Recommendation 7.4 moves away from a focus on disclosure of specific and individual categories of risk. Instead, disclosure of “material risks” is intended to allow entities the discretion to consider the range of risks relevant to their operations which may, in some cases, span more than one category of risk. It also removes the distinction between financial and non-financial risk, recognising the inter-connectedness. For example, corporate culture, cyber resilience, retention and use of data, AI and workplace health and safety issues may be governance or social risks that develop into financial risks.

    The draft commentary notes that:

    • Climate or other sustainability reporting is not strictly prescribed under this recommendation, although relevant standards may assist in disclosing climate-related physical and transition risks.
    • An entity may satisfy this recommendation with a statement that includes references to disclosures in, for example, its operating and financial review in its directors’ report. Similarly, if it prepares a sustainability report or an integrated report, disclosures in those reports. This clarification is critical to address complexities presented by the Government’s proposal to mandate annual reporting on climate exposure for large entities (see AICD summary here).
    • Information may be omitted in a disclosure to the extent that it is likely to unreasonably prejudice the entity. For example, certain information that may give a competitor an advantage or impact the effectiveness of cyber risk management.

    Board and workforce diversity

    Existing recommendations for board diversity and workforce diversity and inclusion (dealt with currently at Recommendation 1.5 under the 4th Edition) are proposed to be separated across Principles 2 and 3:

    • Board gender diversity: Recommendation 2.3 proposes that S&P/ASX300 entities’ measurable objective for board gender diversity should be for a gender balanced board of at least 40 per cent women / at least 40 per cent men / up to 20 per cent any gender within a period specified by the entity. By comparison, the 4th Edition currently sets the measurable objective for board gender diversity at not less than 30 per cent of each gender.
    • Broader board diversity: Recommendation 2.3 also proposes that entities disclose if there are relevant diversity characteristics (other than gender) which the board is considering in its membership. This approach would more closely align with jurisdictions, such as the UK and US, which have listing rule requirements to disclose diversity characteristics on boards which go beyond gender.
    • Workforce diversity and inclusion: While entities currently disclose their diversity and inclusion policy and certain gender metrics under the 4th Edition, a new Recommendation 3.4 is proposed for entities to disclose the effectiveness of an entity’s diversity and inclusion practices. The draft commentary notes this might include, for example, information on the prevalence of, and measures taken to address, sex-based harassment and discrimination.

    Strengthening engagement with stakeholders and investors

    Since the release of the 4th Edition, there has been an increasing recognition of an entity’s relationships with its internal and external stakeholders. The AICD has also applied a stronger focus to stakeholder governance in recent years through contemporary guidance on a director’s best interests duty and elevating stakeholder voices to the board.

    The Consultation Draft discusses the importance of stakeholders across various Principles, including specific references to Aboriginal and Torres Strait Islander stakeholders to acknowledge their potential roles and perspectives in the Australian context.

    A new Recommendation 3.3 is proposed for entities to have regard to its key stakeholders’ interests, including having processes for the entity to engage with them and to report material issues to the board (but not publicly disclose). The draft commentary notes that an entity should consider a form of stakeholder engagement program which might include activities such as: requiring information on serious workplace incidents or customer complaints; approving and monitoring a Reconciliation Action Plan (RAP); and overseeing due diligence on stakeholder relationships.

    Engagement with investors is not however lost in the Consultation Draft. Additional commentary is proposed to support Recommendation 6.2 (for an entity’s investor relations program to facilitate effective two-way communication with investors) noting that entities should consider engagement with investors where a significant number of votes are cast against a resolution put to a general meeting and if appropriate, disclose any actions taken to understand and respond to that vote.

    Corporate purpose, conduct & culture

    Building on a significant strengthening of Principle 3 (Instil a culture of acting lawfully, ethically and responsibly) by the 4th Edition changes, a new Recommendation 3.2(c) is proposed for entities to disclose actions taken in response to material breaches of an organisation’s code of conduct (on a de-identified basis).

    The draft commentary notes that an entity may exclude disclosure of outcomes to the extent that actions are not finalised or cannot be appropriately de-identified. The commentary also notes that the board or a board committee should be promptly informed of material breaches of the code of conduct and should ensure appropriate action is taken.

    Corporate reporting, audit & assurance

    While entities are currently required to disclose their process for verifying the integrity of a periodic corporate report released to the market that is not audited or reviewed by an external auditor, research for the council indicated lower quality disclosures in respect of this existing recommendation.

    Recommendation 4.2 is proposed to be expanded to require disclosure of all periodic corporate reports, including the extent to which a report has been the subject of assurance by an external assurance practitioner.

    The draft commentary notes that an entity should have processes to ensure that the narrative and quantitative information in all of its periodic corporate reports is materially correct, balanced and provides investors with appropriate information to make informed decisions. Disclosure might discuss guiding principles and internal processes such as sign-offs being obtained from management, existence of an audit committee or the fact that an unqualified audit opinion has been issued for the relevant financial statements.

    A new Recommendation 4.3 is also proposed for entities to disclose the tenure of the auditor as at the end of the reporting period and when the engagement was last comprehensively reviewed (including outcomes from that review). The AICD has released guidance with the Australian Auditing and Assurance Standards Board (AUASB) to assist directors and audit committees take a deep dive into the independence and quality of their company audits (see Periodic Comprehensive Review of the External Auditor – Guide for Audit Committees).

    Executive & non-executive remuneration

    In recognition of the significant regulation of remuneration reporting under Australian law in recent years, a number of existing recommendations in Principle 8 are proposed to be removed and replaced with:

    • A new Recommendation 8.2 for non-executive directors to not receive performance-based remuneration or retirement benefits. The draft commentary notes that while it is generally acceptable for NEDs to receive securities as part of their remuneration to align their interests with security holders, non-executive directors should not receive variable pay.
    • A new Recommendation 8.3 for entities to:
      • Have remuneration structures which can clawback or otherwise limit performance-based remuneration outcomes of its senior executives after award, payment or vesting;
      • Disclose (on a de-identified basis) the use of clawback or similar mechanisms during the reporting period. This might include, for example, the types of matters that trigger a clawback, the number of current and former executives impacted by its use and their remuneration outcomes.

    Next steps

    The current timeline proposes a final 5th Edition be released in early 2025, and for entities to commence reporting for their financial years commencing on or after 1 July 2025.

    Public consultation on the draft 5th Edition closes on 6 May 2024. The AICD will be providing a detailed submission and would like to hear from members on these key proposals to ensure director views are adequately reflected in our response. Feedback can be provided via

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