Proposed changes to the ASX Corporate Governance Principles: Stakeholder submissions and next steps

This article was written by Will Heath, Anthony Hong and Paula Mucha

On 27 July 2018, the public consultation period closed for the proposed fourth edition of the ASX Corporate Governance Council's (the "Council") Corporate Governance Principles and Recommendations ("CGPs"), which are summarised our previous note.

The Council received 100 submissions (including from King & Wood Mallesons) which was a significant increase on the 69 submissions received in relation to the third edition.

The proposed CGPs have polarised stakeholders. On one hand, a number of industry bodies and stakeholders including the Law Council of Australia and the Australian Institute of Company Directors have raised serious concerns while, on the other hand, a number of special-interest groups have strongly supported the Council's proposals.

So why all the fuss?

Stakeholders who are concerned with the proposed CGPs focused on two key themes.

First, the new CGPs adopt certain expressions such as "social licence to operate" and "socially responsible manner" which have been criticised for being unclear and inappropriate having regard to the extensive law and regulation that already governs listed entities.

Second, the expanded and prescriptive scope of the proposed CGPs in some cases duplicates and/or is inconsistent with existing Australian law. For example, the new CGPs will create a double-layering of whistleblowing governance regulation and also purport to require company directors to act in the interests of certain stakeholders, which is contrary to settled law.

Nonetheless, there were a large number of submissions – particularly from special-interest stakeholder groups – which supported the CGPs. It is unlikely the sheer number of such submissions will be ignored.

An overview of the submissions on the proposed CGPs is set out in the table below, together with a summary of our KWM submission.

What's next?

The attention and scrutiny regarding the CGPs has resulted in Elizabeth Johnstone, Chair of the Council, commenting that the proposed CGPs are not a final or fixed position and that the "social licence" issue could be addressed in different terms.

The Corporate Governance Council indicated that it will release the final revised version of the fourth edition in early 2019. It is expected the fourth edition will come into effect for the financial year commencing on or after 1 July 2019.

Further information: Overview of the submissions

The following table summarises the key comments and suggestions made by various stakeholders in relation to each principle and its associated recommendations.

Principle	Summary of submissions
1. Lay solid foundations for management and oversight A listed entity should clearly delineate the respective roles and responsibilities of its board and management and disclose how their performance is monitored and evaluated.	The submissions were strongly supportive of the changes to Recommendation 1.5 (diversity policy and measurable objectives), however, a number of stakeholders proposed specific changes to improve the scope and precision of the recommendation. A recurrent theme was that the recommendation should explicitly address all forms of diversity, not just gender diversity. In addition, several submissions suggested that entities should disclose their insights from their annual review of diversity objectives. Many submissions also explicitly highlighted their support for the amendments to recommendation 1.6 (board, committee and director evaluations). KWM supported measures to achieve greater diversity; however, we suggested that this could be achieved by expressing the diversity objectives in a more general and principled manner of tolerance, inclusion and anti-discrimination, rather than inclusion of an exhaustive list.
2. Structure the board to be effective and add value A listed entity should have a board of an appropriate size, composition, skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value.	Submissions were generally supportive of the new Recommendation 2.7 (director language fluency), and the amendments to Principle 2, Recommendation 2.2 (board skills matrix), Recommendation 2.3 (director independence) and Recommendation 2.6 (director training). KWM recommended clarifying that listed entities may cover particular Board skills listed in Recommendation 2.2 through engaging expert executives, advisers and consultants on an ad-hoc basis. It is neither efficient nor appropriate for listed entities to be obliged to recruit a full-time Board member to address an apparent specific skill gap.
3. Instil the desired culture A listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically, and in a socially responsible manner.	Significant concerns were raised by peak governance bodies against the proposed changes to principle 3. In particular, the Law Council of Australia and the Australian Institute of Company Directors have "significant concerns" about the "ambiguous" concepts of "social licence to operate" and "socially responsible manner", which are used in the commentary to Principle 3. The Law Council submitted that the regulation should be concerned with conduct, rather than culture, and that the principle conflates legal compliance, ethics and social responsibility. The Australian Institute of Company Directors (AICD) also highlighted that the commentary risks confusion about the general law and the statutory duties of directors. KWM's submission raised similar concerns to the Law Council and the AICD. We observed that the proposed commentary to Principle 3 is inconsistent with Australian law and, further, the use of concepts like "socially responsible" and "culture" are amorphous and inappropriate yardsticks by which listed entities' performance should be measure. In contrast, some interest groups argued the new Principle 3 does not go far enough. Australian Ethical and RSPCA Australia suggested that the commentary to Principle 3 should recognise that being a "good corporate citizen" could involve acting responsibly towards animals. The Australian Red Cross and RMIT University's Graduate School of Business and Law also suggest that Principle 3 should explicitly refer to international humanitarian law. Several submissions recommended that the CGPs should revert to the original wording of Principle 3. Submissions were generally supportive of the new Recommendations 3.3 (whistleblower policy) and 3.4 (anti-bribery and corruption policy), although it was noted by some stakeholders, including KWM, that these new Recommendations will duplicate legal requirements.
4. Produce reports of high quality and integrity A listed entity should have formal and rigorous processes to validate the quality and integrity of its corporate reporting.	While submissions generally expressed support for the new Recommendation 4.4 (process to validate reports); a few, including KWM, raised concerns that this recommendation may be unduly onerous particularly for smaller listed entities. We suggested that the Council to provide suggestions to clarify the recommendation.
5. Make timely and balanced disclosure A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.	There were very few submissions on the changes to this Principle's recommendations and commentary.
6. Respect the rights of security holders A listed entity should provide its security holders with appropriate information and facilities to allow them to exercise their rights as owners effectively.	Submissions were mostly supportive of the new Recommendation 6.4 (resolutions by poll), and the amendments to Recommendation 6.3 (meeting participation).
7. Recognise and manage risk A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework.	The Australian Institute of Company Directors is concerned about the incorporation of the term "social risks" in the commentary to Recommendation 7.4, for the same reasons as its concerns with Principle 3. This concern was echoed in other submissions. In contrast, Australian Ethical and RSPCA Australia suggested that the commentary to Recommendation 7.4 (exposure to environmental or social risks) should recognise that an entity's social licence to operate can be lost or seriously damaged if the entity conducts its business in a way that is not "responsible, having regard to human rights and the treatment of the environment and animals". Many submissions welcomed the acknowledgement of "carbon risk" in the commentary to Recommendation 7.4.
8. Remunerate fairly and responsibly A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and align their interests with the creation of value for security holders over the short, medium and longer term.	A number of submissions proposed that Recommendation 8.4 (consultancy agreements) be removed, on the basis that it duplicates the law.