The ASX Corporate Governance Council (Council) released an updated version of its Corporate Governance Principles and Recommendations (2nd edition) (Principles) on 30 June 2010 with significant changes, including changes to the treatment of gender diversity, remuneration, trading policies and communication with shareholders. The Principles provide the framework for corporate governance for ASX listed entities.
The amendments to the Principles take into account recommendations from three recent inquiries instigated by the Federal Government:
The key areas of amendment to the Principles are outlined below.
The Diversity Report sought to specifically increase the gender diversity of boards. It concluded that ‘focus on a more robust and open approach to board appointments, and initiatives to encourage the development of women in executive management, are the most effective ways to foster a governance culture that embraces diversity in the composition of corporate boards’.
In the context of the Diversity Report, and after reviewing other research and international practice on the issue of diversity (including a report from Goldman Sachs JBWere and initiatives in developed countries such as Norway, France, Spain and the US), the Council has introduced three new recommendations which require listed entities to:
In addition to the above changes, the Council extended its guidance commentary on the Principles to encourage:
The Council also suggested that a company’s annual corporate governance statement should include a statement concerning the mix of skills and diversity which the board of directors is looking to achieve in its membership.
The Remuneration Report recommended a raft of corporate governance measures aimed at reducing conflicts of interest, improving board accountability and the integrity of board determinations, and enhancing board engagement with shareholders.
As a consequence of the Remuneration Report, the Principles have been amended to include an ‘if not why not’ recommendation that a remuneration committee should be structured so that it is comprised of a majority of independent directors, is chaired by an independent director, and has at least three members (Recommendation 8.2).
The new commentary on the Principles provides that companies should, where possible, limit the use of executive directors on the remuneration committee to address the potential for, or the perception of, a conflict of interest. In addition, senior executives should not be involved directly in deciding their own remuneration.
The Council has amended the commentary on its recommendation that companies develop and disclose a communication policy to promote effective communication with shareholders (Recommendation 6.1) to provide that:
The Market Integrity Report addressed the effect of a number of market practices on the integrity of the Australian financial market, including directors entering into margin loans, trading by company directors in blackout periods, spreading false or misleading information and corporate briefing to analysts.
In response to the report, the ASX concluded, in relation to blackout trading, that it would be beneficial to address minimum requirements under the ASX Listing Rules relating to the adoption and disclosure of trading policies that provide for restrictions on trading by directors and other key personnel during sensitive periods in order to address the potential for insider trading.
The Council has been supportive of this approach and as a result has deleted Recommendation 3.2 (regarding the establishment of a securities trading policy) on the basis that there is no need for overlap between the Principles and the ASX Listing Rules. The deletion will not however occur until the introduction of the amendments to the ASX Listing Rules, which will be effective from 1 January 2011.
When the changes apply
The changes to the reporting requirements will apply to the financial years of listed entities ending on or after 1 January 2011. Accordingly, where an entity's financial year begins on 1 July 2011, disclosure will be required in relation to the financial year ending 30 June 2012. However, the Council considers that, in the case of its recommendations on diversity, listed entities with a balance date of 30 June 2010 should be able to establish a diversity policy and report against the new recommendations in respect of the year ended 30 June 2011. Accordingly, the Council is encouraging a prompt transition to the changes.
Given the significant amendments to the Principles, companies should begin to consider, design and implement effective corporate governance policies, including their diversity policy, and establish measurable objectives sooner rather than later.
Where a listed company considers that a particular recommendation(s) is not appropriate to its circumstances, it has the option not to adopt the recommendation, provided an explanation is disclosed in its annual report (i.e. on an ‘if not why not’ basis).
Lavan Legal has closely examined the changes to the Principles, and our Company Secretarial team can assist you with developing a diversity policy and managing the new reporting requirements.
If you would like assistance in this regard or further advice on how the amended Principles apply to you and your company, please contact either Tony Chong, Partner, on (08) 9288 6843 or email@example.com or Ben Wotherspoon, Solicitor, on (08) 9288 6891 or firstname.lastname@example.org.