Values, culture and social responsibility required to rebuild trust

A new era of corporate governance reporting is on its way. One that will drive significant change to address assessed inadequacies in corporate and governance reporting in recent years.

 

The 4th Edition of the ASX Corporate Governance Principles

In his annual letter to company CEOs last year, BlackRock CEO Larry Fink wrote: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

How pertinent were Larry Fink’s observations at the start of 2018 in the context of the outcomes of the Financial Services Royal Commission and other recent enquiries in Australia. 

Complementing those sentiments, the recently released 4th Edition of the ASX Corporate Governance Principles and Recommendations (CGPRs) is clearly aimed at addressing governance issues around corporate culture and values, ethics, board responsibilities and effectiveness, diversity, executive remuneration, risk management and risk appetite, and climate change.

This latest edition was released in February 2019 and is applicable for an entity’s first full financial year commencing on or after 1 January 2020, although earlier adoption is encouraged. 

While the CGPRs are not mandatory, the “if not, why not” approach still remains. If an entity doesn’t adopt a recommendation, it must explain why it has not adopted the recommendation.

The Corporate Governance Council continues to encourage listed entities to give robust and informative explanations of their frameworks and to explain their policies and practices in relation to each recommendation rather than merely taking a legalistic approach to their CG disclosures.

What’s new in the 4th Edition

There are seven new recommendations in the 4th Edition that apply to listed entities taking the total to 35 recommendations across eight core Principles along with three more recommendations that apply to a small subset of companies.  

In addition, several principles and recommendations have been revised to reflect the ASX Corporate Governance Council’s desire to address emerging governance issues around culture, values and trust.

These include:

  • A substantially redrafted Principle 3 that places stronger emphasis on culture – “instil and continually reinforce a culture … of acting lawfully, ethically and responsibly” – supported by the new recommendations relating to full disclosure of values (3.1), whistle-blower policy (3.3), and an anti-bribery and corruption policy (3.4)
  • Revised recommendations to disclose policies in full rather than in summary form, including diversity (1.5), code of conduct (3.2) and continuous disclosure (5.1) 
  • Any material breaches of policies and actions taken in response to breaches are to be reported to the board (3.2), especially as these may be an early indicator of problem
  • Revised and additional recommendations and commentary to improve board effectiveness including:
    – defining the entity’s purpose approving the statement of values and code of conduct to underpin the desired culture
    – overseeing management’s implementation of the entity’s strategic objectives and instillment of values
    – ensuring that the entity has an appropriate risk management framework for both financial and non-financial risks1
    – ensuring that an appropriate framework exists for relevant information to be reported by management to the board
    – challenging management and holding it to account
    – ensuring that remuneration policies are aligned with the entity’s purpose, values, strategic objectives and risk appetite2
  • Expansion of the diversity recommendation (1.5) to set measurable gender diversity objectives regarding the composition of senior executives and the general workforce and so entities in the S&P/ASX300 Index can set a target of having no less than 30 per cent of directors from each gender.

In terms of corporate reporting there are two particular revisions worth noting:

  1. The new recommendation 4.3, says that a listed entity should disclose its process to verify the integrity of any periodic corporate report3 it releases to the market that is not audited or reviewed by an external auditor
  2. new definitions of ‘environmental risks’ and ‘social risks’ relating to recommendation 7.4 capture a broad range of risks for ESG disclosure and reporting. If entities believe they don’t have material exposure to environmental or social risks they should “consider carefully their basis for that belief and to benchmark their disclosure … against those made by their peers.” For assessment of material exposure to climate change risk, the commentary encourages entities to refer to the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and consider making disclosures recommended by the TCFD. 

Not sure where to start with all these changes to Corporate Governance reporting? Then read the Designate ‘to do’ list in our article Prepare now for the 4th Edition  or please get in touch with andrew@designate.com.au

 

1 Author emphasis added.
2 Note also that the commentary attached to recommendation 8.2 states that discretion should be retained to prevent performance-based remuneration from rewarding conduct that is contrary to the entity’s values or risk appetite, while commentary for recommendation 8.1 now states that remuneration is a key ‘driver of culture’, and directly links remuneration to an entity’s reputation and standing in the community. 
3 Periodic corporate report is defined as annual directors’ report, annual and half-yearly financial statements, quarterly activity report, quarterly cash flow report, integrated report, sustainability report, or similar periodic report prepared for the benefit of investors.