Tony Featherstone argues that flexibility in governance judgement is still the best approach.
Australia’s corporate governance debate spends too much time on what is supposedly not working and not enough time on what is. One area that does not get the recognition it deserves is the Australian Securities Exchange (ASX) Corporate Governance Council’s Principles and Recommendations. Now in their ninth year, the Principles are a benchmark for other countries on the benefits of non-prescriptive governance and it is pleasing to see some larger not-for-profit enterprises voluntarily implement the recommendations.
That is not to say the Principles are perfect or that corporate reporting against them cannot improve. Too many companies outside the ASX 200 and smaller initial public offerings (IPOs) still pay lip-service to the Principles, in my view. Some IPOs barely mention the Principles, or bury them in their prospectus, when governance is a vital investment consideration in unknown listed companies.
I was reminded of the strength of the Principles while reading the ASX Corporate Governance Council’s 2011 review of its Principles and Recommendations. (The full review will not be available until well after companies with 30 June balance dates publish annual reports.)
As part of its review, the council held discussions with representatives of directors, management, institutional and retail shareholders, proxy advisers and others interested in corporate governance. The aim was to determine if emerging issues warranted a third edition of the Principles with new areas of guidance.
The council said: "There was continuing strong support from the coupling of principle-based recommendations with an ASX Listing Rule obliging listed companies to either adopt those recommendations or explain why they had not done so. Institutional investors and organisations representing retail investors highlighted how this ‘if not, why not’ mechanism, and the range of matters dealt with in the Principles, provided a useful trigger for constructive engagement with company representatives about governance practices. The corporate governance disclosures, particularly why a company was not adopting a particular recommendation, were also said to have provided useful insight to investors concerning the management of a company."
The "if not, why not" flexibility for companies not to adopt a recommendation and tell investors why, should be maintained, especially in areas such as risk-management reporting, where there is a bigger push from super funds globally for a more prescriptive approach to environment, social and governance (ESG) reporting. The Australian Council of Superannuation Investors’ 2011 Sustainability Reporting Practices report said more than 200 large, listed companies were yet to meaningfully report their ESG practices. However, the ASX Corporate Governance Council said in its 2011 review that with no internationally accepted framework for what constitutes an "integrated report", it would be premature to advocate that all listed companies adopt a principle-based concept of integrated reporting. The council recognised that valuable experimentation around reporting performance across a range of issues was under way in some larger, more complex organisations to which this initiative was most relevant.
It added: "It was evident from our consultations that while there is an appetite from boards and management to present meaningful information that would be valued by a company’s stakeholders – both historical information and projections of future performance – this is tempered by the strong reluctance to continue making even more comprehensive disclosures without offsetting Government action ... valuable comments were received around the need for modification of the liability regime with respect to forward-looking statements."
I agree with the Council’s concluding comments: "The flexibility of the Principles was seen to have allowed companies to respond to the changing business environment and continue to allow companies to refine their corporate governance arrangements as appropriate." Giving boards scope to use their judgement is far more sensible than more prescriptive approaches that enforce a "one-size-fits-all" governance framework.
Nevertheless, more work should be done to encourage small and micro-cap listed companies to adopt the recommendations; too many use their "size" as an excuse. And, there should be more focus on companies that do not adopt several recommendations: the "why not" part of the deal needs more scrutiny from the investment community, especially in areas such as board evaluation, disclosure of continuous disclosure policies, and risk-management reporting by smaller companies. These could be improved, says the Council in its review.
Most of all, there needs to be more recognition that the "if not, why not" approach to listed company governance is working, and should not be tinkered with lightly. Yes, the Principles should always be refined to reflect changing governance practices and market conditions. But change should be done with a cool head and consensus from a wide range of market participants, as it has been so far, not in response to misguided perceptions that Australia’s governance system always needs fixing.
Tony Featherstone is a former managing editor of BRW and Shares magazines
Note: Tony Featherstone edits the ASX Investor Update educational e-newsletter for retail investors. The views expressed are his alone.
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