The ASX Corporate Governance Council has issued a consultation draft of a proposed fourth edition of the ASX Corporate Governance Council’s Principles and Recommendations

Corporate values and culture, and social licence to operate

The primary change to the principles on which the Council is consulting is a substantial redraft of principle 3, currently worded as “[a] listed entity should act ethically and responsibly”. This is proposed to be re-worded as “[a] listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”.

This proposed change responds to various enquiries and reviews that have taken place since the publication of the third edition in 2014 that have highlighted governance issues arising from poor conduct or culture and a perceived lack of accountability.

The Council says that it is proposing in revised principle 3 to recognise the fundamental importance of a listed entity’s social licence to operate and the need for it to act lawfully, ethically and in a socially responsible manner in order to preserve that licence. It is also proposing to acknowledge that, in doing this, a listed entity must have regard to the views and interests of a broader range of stakeholders than just its security holders.

Revised principle 3 is proposed to be supported by three new recommendations – recommendation 3.1 (core values), 3.3 (whistleblowing policies) and 3.4 (anti-bribery and corruption policies) and by amendments to:

• the commentary to existing recommendation 1.1 (role of board and management): ‒ to add to the list of usual responsibilities of the board:
  • defining the entity’s purpose;
  • approving the entity’s statement of core values and code of conduct to underpin the desired culture within the entity;
  • overseeing management in its implementation of the entity’s business model, achievement of the entity’s strategic objectives, instilling of the entity’s values and performance generally; and
  • ensuring that the entity’s remuneration framework is aligned with the entity’s purpose, values, strategic objectives and risk appetite; and
  • to clarify that the information provided to the board by the senior executive team should not be limited to information about the financial performance of the entity, but also its compliance with material legal and regulatory requirements and any material misconduct that is inconsistent with the values or code of conduct of the entity; and
• existing recommendation 3.1 (codes of conduct) – to become recommendation 3.2 in the fourth edition – to require the board to be informed of any material breaches of a listed entity’s code of conduct by a director or senior manager and of any other material breaches of the code that call into question the culture of the organisation.

These new and amended recommendations are intended to assist a listed entity to set “the tone from the top” and to ensure that the board is provided with the information it needs to monitor the culture of the organisation.

New recommendations

The Council is also consulting on proposals to expand the number of recommendations from 29 in the third edition to 38 in the fourth edition and proposed changes to existing recommendations.

The proposals include:

• a requirement that entities in the S&P/ASX 300 set a measurable objective to have a minimum of 30% of directors of each gender on their boards by a specified date;
• that there should be annual board reviews and management reviews;
• that a listed entity should ensure that all resolutions at a meeting of security holders are decided by a poll rather than by a show of hands;
• the importance of ensuring boards have the necessary skills to address new or emerging issues including around culture, conduct risk, digital disruption, cyber-security, sustainability and climate change, that regular reviews of board skills be undertaken and that professional development programs address any skills gaps.

Timetable

The Council expects to release a final version in early 2019 and that the new Principles and Recommendations will take effect for an entity’s first full financial year commencing on or after 1 July 2019. Entities with a 30 June balance date will therefore be expected to benchmark their governance practices with the fourth edition commencing with the financial year ended 30 June 2020, while entities with a 31 December balance date will be expected to do so commencing with the financial year ended 31 December 2020.