ASX releases third edition of Corporate Governance Principles and Recommendations

Articles Written by Cameron Jorss, Caren Klavsen

The ASX Corporate Governance Council (Council) has released the third edition of the Corporate Governance Principles and Recommendations (Principles and Recommendations) in conjunction with a number of governance-related amendments to the ASX Listing Rules.

When will the changes take effect?

The Principles and Recommendations will take effect for a listed entity's first full financial year commencing on or after 1 July 2014. This means that entities with a 30 June or 31 December balance date will need to measure their corporate governance practices against the Principles and Recommendations in respect of the financial period ending 30 June 2015 or 31 December 2015 respectively.

The ASX Listing Rule amendments are intended to commence on 1 July 2014, subject to receipt of the necessary regulatory approvals under the Corporations Act. Annual reporting-related amendments will apply in relation to financial periods ending on or after 30 June 2015 (although entities may choose to adopt these rules in respect of earlier financial periods1).

What hasn't changed?

The Principles and Recommendations retain the same "if not, why not" approach to disclosure as the previous editions. They also retain the same hierarchy - core principles with supporting recommendations and commentary providing additional guidance.

What has changed?

The Principles and Recommendations maintain the eight core principles, albeit with some drafting changes.

A number of structural changes to the Principles and Recommendations have been made to introduce nine new recommendations.

In many cases, these new recommendations are not entirely 'new' as a number of them are already captured in the commentary of the second edition. However, by elevating items to 'recommendations' listed entities will now need to disclose the extent of their compliance with these recommendations in their annual report or corporate governance statement.

Other changes to the Principles and Recommendations include:

  • Diversity reporting: a new requirement to disclose how the entity defines a "senior executive" for the purposes of calculating the proportions of men and women in senior executive positions, and if the entity is a "relevant employer" under the Workplace Gender Equality Act (i.e. a non-public sector employer with 100 or more employees in Australia), to disclose the entity's most recent "Gender Equality Indicators" published under that Act.
  • Independence of directors: the list of factors for assessing independence of a director has been expanded to include:
    • a material business relationship (e.g. as a supplier or customer) with the entity within the last three years;
    • close family ties with any person who is not considered independent under the Principles and Recommendations; and
    • a period of office that may compromise the director's independence (the commentary says that the board should regularly assess whether a director who has held office for more than 10 years is independent).

Changes to ASX Listing Rules

In conjunction with the release of the Principles and Recommendations, there are a number of governance-related amendments to the ASX Listing Rules. These changes were initially proposed by ASX on 16 August 2013. On 21 February 2014, ASX released a supplementary consultation paper seeking limited further input on the governance related amendments and proposing a number of additional non-governance related ASX Listing Rule amendments. On 6 May 2014, ASX issued a response to the supplementary consultation paper (Supplementary Consultation Response) along with the final version of its governance-related Listing Rule amendments (Final Amendments). The Final Amendments are intended to commence on 1 July 2014, subject to receipt of the necessary regulatory approvals under the Corporations Act. 

The amendments will require a listed entity to prepare a corporate governance statement disclosing the extent to which it has followed the Principles and Recommendations (Corporate Governance Statement). This requirement provides that if a recommendation is not followed for any part of the reporting period, the entity must state its reasons for not following the recommendation and what (if any) alternative governance practices it adopted in lieu of the recommendation during that reporting period.

In addition, the Final Amendments include a note that the Corporate Governance Statement may incorporate material by reference (for example, on an entity's website or in another part of the annual report) provided that material is freely available and the statement clearly indicates where interested parties can read or obtain that material. 

In its annual report the company must either include its Corporate Governance Statement or include the URL where the Corporate Governance Statement can be found (a copy must still be provided to ASX when the annual report is lodged with ASX). In addition, when a company lodges its annual report it must give the ASX a completed Appendix 4G. The Appendix 4G will act as a checklist for relevant corporate governance disclosures and will direct investors to where corporate governance disclosures can be found. 

An entity will also be required to disclose in its annual report, as a one-off annual disclosure covering the whole of the reporting period, all on-market purchases of securities under an employee incentive scheme. The Final Amendments also include a new note in the definition of "employee incentive scheme" confirming that the fact that an employee incentive scheme may also provide for the participation of consultants and contractors, as well as employees and non-executive directors, does not prevent it from being an employee incentive scheme for the purpose of the Listing Rules.

In the Supplementary Consultation Response, ASX has also indicated that it intends reviewing Appendices 3X, 3Y and 3Z in the near future to make them clearer.

The Final Amendments include a change to the definition of 'associates' being that a related party is taken to be an associate of the director or officer unless the contrary is established. This amendment was initially proposed in ASX's supplementary consultation paper.

A note to the definition states that one way that it may be established that a related party of a director or officer is not their associate is for the director, officer or related party in question to give a statutory declaration or some other form of certification to the entity to that effect.  We expect this will be the subject to ASX exercising its usual discretions as to whether the evidence is acceptable.

Next steps

Listed entities should:

  • consider their existing corporate governance practices and prepare to comply with (or where necessary, disclose against), the Principles and Recommendations for full reporting periods commencing on or after 1 July 2014;
  • familiarise themselves with the new listing rule requirements to prepare a Corporate Governance Statement; and
  • familiarise themselves with the Appendix 4G that is required to be prepared and lodged for full financial reporting periods commencing on or after 1 July 2014.

1 If an entity wishes to adopt the changes in Listing Rules 4.7 and 4.10.3 early, it must adopt both rules and report against the third edition of the ASX Corporate Governance Council Corporate Governance Principles & Recommendations.  ASX states they are designed to operate as a package.

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