The ASX Corporate Governance Council (Council) released the consultation draft for a proposed fifth edition of the ASX Corporate Governance Principles and Recommendations (Fifth Edition) on 27 February 2024. Submissions on the draft closed on 6 May 2024.
The Fifth Edition aims to give consideration to evolving investor and community expectations on a range of issues, including corporate conduct, culture, risk management, stakeholder relationships, reporting and remuneration. A comprehensive summary of the proposed changes to the Fifth Edition was published in our March edition of OnBoard available here. The Council is targeting release of the final version in early 2025, with the expectation the Fifth Edition will take effect for an entity’s first full financial year commencing on or after 1 July 2025.
This article summarises what we’ve been hearing about the proposed changes, and what’s been getting attention. For those that followed the consultation closely, you will be unsurprised to learn that there hasn’t been nearly as much ‘noise’ this time around as compared to the consultation on the first draft of the fourth edition. This suggests to us that the Fifth Edition may not move far before it’s finalised.
What are people saying?
While the Council has not yet publicly released all the submissions it received, based on those publicly available so far, the feedback is generally supportive of the role of the Council and the Principles and Recommendations (Recommendations).
With companies facing significant domestic and global developments in governance, stakeholders agree that refreshing and updating the Recommendations now makes sense, so that they better reflect the current view of corporate governance best practice.
Notwithstanding that, general concerns have been raised in relation to:
- The Recommendations becoming overly prescriptive and less principles-based: Stakeholder submissions contend that the Recommendations are becoming overly detailed and moving further away from the principles-based model that underpins them. Stakeholders have observed that over time, the Recommendations have become increasingly prescriptive, which can unintentionally create a ‘tick the box’ mindset instead of encouraging boards to exercise their best judgement. Stakeholders are therefore calling on the Council to highlight the ‘if not, why not’ foundations, reinforcing the principles-based model that allows entities to adopt specific governance practices appropriate to their specific circumstances.
- The perceived lack of differentiation between the Recommendations and commentary: Stakeholder submissions have also raised concerns that entities are increasingly expected to ‘comply’ with the commentary and examples, rather than just the Recommendations. Stakeholders say users of corporate reporting are treating the Council’s commentary as if it were a Recommendation. That is, subject to the ‘if not, why not’ regime. Stakeholders have therefore encouraged the Council to emphasise that the commentary is supplementary or explanatory guidance, and highlight that the ‘if not, why not’ reporting model applies only to the Recommendations.
- Additional regulatory burden and compliance costs: Stakeholder submissions have also expressed concerns that the Recommendations are contributing to listed entities’ regulatory burden and associated compliance costs. Specifically, that entities with resource constraints may be deterred from listing in the future as a result. To protect against this, submissions argue the Recommendations should be sufficiently broad to withstand changes in governance trends over time, rather than being reactive to the ‘hot topics’ of the day.
Specific concerns have also been raised in relation to:
- Disclosure of processes for assessing whether skills and experience are held by directors: Proposed Recommendation 2.2(b) and its related commentary, which provides that better practice is to include information on the skills of individual directors, has divided stakeholders. Certain submissions have expressed support for the proposed changes, highlighting the importance of director skills and experience being disclosed to give investors valuable insight into a board’s ability, or inability, to govern the entity effectively. Other submissions expressed concerns about the increased disclosure, noting that it undermines the concept of a board having collective responsibility, and may expose individual directors to liability where they are nominated as quasi-experts in a certain area.
- Board diversity: Additional disclosures relating to gender diversity proposed in Recommendation 2.3 have been met with widespread support by the majority of stakeholder submissions publicly released to date. Many indicate that ‘gender balanced boards’ (i.e. at least 40% women / at least 40% men / up to 20% any gender) are already in place for many entities. However some stakeholders have noted that, given the practical challenges for smaller boards to meet this target, the ‘if not, why not’ nature of disclosure should be acknowledged in the commentary.
Interestingly, Recommendation 2.3(c) which proposes that boards disclose any other relevant diversity characteristics they are considering for board membership, has been met with mixed feedback. Some submissions support such disclosure, while others express concerns that such a recommendation would put pressure on boards to seek directors based on diversity characteristics, resulting in diversity being treated as a ‘tick the box’ exercise. Furthermore, several stakeholders expressed their concerns that if directors don’t want to disclose their personal characteristics, they should not be compelled to.
- Disclosure of conduct breaches: While most submissions are generally supportive of de-identified disclosures of conduct breaches, stakeholders referred to the need to address considerations relating to privacy and confidentiality.
- Interests of key stakeholders: Some submissions are supportive of the need for entities to have regard to the interests of their key stakeholders, while others disapprove of the Council’s attempt to reframe the scope of a directors’ duty to act in the best interests of the corporation.
- Material risks disclosure: Most submissions support the proposal for entities to identify and disclose its material risks, but warn against the potential for the Recommendations to create overlap or inconsistency with statutory requirements.
What’s next?
The proposed Fifth Edition changes have been described as representing an ‘evolution’ rather than wholesale change – which is a sentiment we agree with. Many of the proposed changes in the consultation draft reflect best practices already adopted by a significant portion of entities and requirements imposed by certain regulators in specific sectors and should not require entities to make drastic changes to their corporate governance practices.
With submissions having closed on 6 May 2024, the Council will consider the feedback as it finalises the Fifth Edition.
While the Fifth Edition is currently proposed to come into force on 1 July 2025, the Council may listen to the strong feedback that the commencement date should be pushed back until 1 January 2026. This would give listed entities more time to prepare and properly implement any necessary governance changes in light of their increasing regulatory requirements in other areas, such as the impending mandatory climate-related financial disclosures regime. Of course, entities may choose to begin reporting earlier if they wish.
