AICD submission on Draft 5th Edition of ASX Corporate Governance Principles & Recommendations

The AICD has supported the Principles since their inception, including as a member of the former ASX Corporate Governance Council. We commended the Advisory Group on the substantial work undertaken to produce the consultation draft, and the ASX for regaining momentum on improvement to the 4th Edition following the dissolution of the former Council process.

We recognise the critical role that the Principles play in supporting Australia’s reputation for high standards of corporate governance. It is essential that they serve to maintain the attractiveness of listing on the ASX, and take into account both Australia’s global competitiveness for capital and the essential role of sound governance in fostering market confidence.

The AICD’s response was informed by extensive consultation with experienced ASX listed company directors, listed entities, experts and stakeholders.

Overall, we strongly supported the consultation draft’s focus on moving the dial from a prescriptive, compliance approach to principles-based guidance.

Our key points were:

• Reinforcing the ‘if not, why not’ model: We strongly welcomed the draft’s retention and reinforcement of the “if not, why not” reporting model. We welcomed efforts to more clearly distinguish between principles, recommendations and explanatory material, and to reduce prescription in areas where boards are best placed to exercise judgement based on the circumstances of their entity. We also supported the removal of unnecessary duplication with existing legislation and regulation.

• Board skills: We supported a focus on the board’s assessment of the collective skills, knowledge and experience needed at the board-level, with disclosure of the outcome of an assessment, rather than the current recommended disclosure of a board skills matrix. The proposal aligns with a principles-based approach by focusing on governance outcomes rather than prescribed mechanisms, while encouraging a holistic and forward-looking assessment of the board's collective capabilities. We recommended a minor amendment to focus disclosure on the outcome of the board's assessment and the approach adopted, rather than the assessment process itself.

• Board diversity: We broadly supported the framing of board diversity. The AICD has long advocated for improved gender diversity on boards – endorsing the inclusion in the 4th Edition of a specific measurable objective for board gender diversity of not less than 30% of directors of each gender. To build on the significant progress achieved over recent years, we encouraged the Advisory Group to consider recommending a more ambitious board gender diversity target in the 5^th Edition. The AICD would support the 5^th Edition adopting a measurable objective for ASX 300 company board composition of at least 40% women and at least 40% men, within a time period specified by the entity, consistent with the ‘40/40/20’ approach. The AICD supported the express recognition in the explanatory material that entities may face practical constraints in achieving this target (due to board size or specific circumstances) at particular points in time. The AICD also supported board diversity being a priority in the Advisory Group’s forward program.

• Culture and stakeholder engagement: We supported the emphasis in Principle 3 that organisational culture and stakeholder governance are now core elements of contemporary governance practice. However, we recommended a small number of refinements to ensure that disclosures remain focused on substantive governance outcomes and board judgement, rather than process-driven or compliance-oriented reporting.

• Remuneration: The AICD supported the substance of the proposed changes to Principle 8, including new recommendations on the adjustment of performance-based executive remuneration and the remuneration of non-executive directors. We made targeted suggestions to accommodate existing market practices which facilitate director share ownership. It is critical that the principles for non-executive director remuneration and alignment with shareholders are sufficiently flexible to allow companies to compensate directors in a manner that allows them to attract and retain suitably qualified directors. We also recommended that the principles in relation to non-executive director remuneration are considered as part of the Advisory Group’s forward program of work, noting that the ability of listed entities to attract and retain suitably qualified directors (from overseas and Australia and the public and private markets) is increasingly important in a complex governance environment.

• Risk management: We supported the change in recommendation 7.4 from a focus on specific categories of environmental and social risks to a broader requirement to disclose (unless unreasonably prejudicial) an entity's material risks, and how those risks are managed. This reflects the principles-based nature of the framework and appropriately recognises that the material risks facing listed entities will vary depending on their unique circumstances.