ASX Corporate Governance Principles and Recommendations

Are you ready to prepare your company's financial statements? Do you know what changes have been made to the Corporate Governance Principles and Recommendations?


In March 2014 the ASX Corporate Governance Council released a third edition of their Corporate Governance Principles and Recommendations (“the principles”).

The application date is 1 July 2014, therefore will be relevant to financial statements for the year ending 30 June 2015; or for December periods, the year ending 31 December 2015, but is available for early adoption.

The purpose of the principles is to enable entities listed on the ASX to achieve good governance outcomes and to assist such entities to meet their investors’ expectations.

Corporate Governance, however, is not a ‘one size fits all’ model and as such is not mandatory or prescriptive, but acts as a guide. The Board of Directors is charged with determining which practices a listed entity should adopt.

If the Directors consider a principle as recommended by the Council not to be appropriate to the entity or its circumstances, then it must explain the reasons why that is the case. This is known as the ‘if not, why not’ approach and should include an explanation as to what alternative practices are in place in lieu of those in the Council’s recommendations.

The principles are applicable to all ASX listed entities, regardless of their legal form or country of origin.

What is new in the third edition?

We have summarised some of the major changes below. These are applicable from 1 July 2014; and must be addressed in all listed entities’ 30 June 2015 financial statements. The list below is not exhaustive, but is indicative of what we consider to be the more significant changes.

In addition to the below, it is also important to note that the new principles have removed some of the disclosure suggestions and examples to ensure there is more flexibility for smaller listed entities.

1. Appendix 4G – Reporting of Corporate Governance Principles

Listing rule 4.10.3 requires an ASX listed entity to publish its Corporate Governance Principles either in the Annual Report or on its website. It is this listing rule which outlines that an entity is required to disclose the extent to which they abide by the Council’s principles and recommendations and thus encapsulates the ‘if not, why not’ rule.

Appx 4G is a new edition to the listing rules. It is required to be lodged with the annual report as a key to where Corporate Governance disclosures can be found, either in the financial statements; or on the website.

2. Risk Management

The new principles and recommendations appear more prescriptive and detailed in the area of the Board’s responsibilities with regards to Risk Management. The Board’s responsibilities include ensuring an appropriate risk management framework is in place and setting the risk appetite within which the Board expects management to operate. It further elaborates on the Board’s responsibilities in this regard.

The new principles recommend that the board of a listed entity should have a committee to oversee risk. It then lists the responsibilities and characteristics that would be expected of a risk committee.

The 2010 edition recommended Board oversight of risk management, however the 2014 edition goes further to specifically recommend that the Board establish a separate committee with an independent chair and a majority of independent directors to oversee and direct risk management.

The committee’s role is to make recommendations to the board in relation to 3 prescribed areas:
• the adequacy of the entity’s processes for managing risk
• any incident involving fraud or other break down of internal controls;
• the entity’s insurance program having regard to the entity’s business and insurable risks

If a Board decides that they are able continue overseeing the entity's risk management framework, then so be it, but if they do “the entity should disclose in its annual report or on its website that fact that it does not have a risk committee and explain the process it employs for overseeing the entity’s risk management framework”

3. Corporate Governance

The revised principles on corporate governance require board level review at least once a year of the effectiveness (soundness) of the entity’s risk management framework and must disclose that the review has taken place.

No longer is it suitable for a Board to be aware that the entity has a risk management framework. The Board is recommended to review the existing framework at least once a year for effectiveness (soundness).

Further to this, Boards should disclose insights from the review. Were changes made to the framework as a result? What business risks are prevalent that could affect financial performance?

The Board can charge the responsibility of the review to say the risk management committee. What is important to note is that the Board needs to ensure that the review is completed by an appropriately skilled person. If the Board believes that necessary skills to conduct such a review are not prevalent, then consideration should be made to finding an appropriate person to do so.

4. Diversity Policy

The Council recommends that an entity should have a policy which includes measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them. The new principles include a statement to refer to the Workplace Gender Equality Act.

5. Independence and Board Structure

The independence criteria for independent Directors have been amended to now also include length of service as an independence indicator.

All listed entities should also have and disclose a board ‘skills matrix’ demonstrating the skills and diversity that the board has; or is looking to achieve. Whilst this is not a new requirement, the new principles include more details on the purpose and content of such a matrix.

Whereas previously Directors’ responsibilities were expected to be communicated formally via a letter to the director, it is now recommended that these responsibilities are also publically available in a charter or other document on the company’s website or in the annual report. There is also a new recommendation expanding on the role of the company secretary of a listed entity.

6. Corporate and Financial Reporting

There is a new recommendation for listed entities to ensure that the external auditor attends the AGM and is available for questioning regarding matters relevant to the audit.

Listed entities should also design and implement an investor relations program to facilitate effective communication.

The revised principles note a defined move from reliance on the annual CEO/CFO signoff to confirm robustness of the risk management and internal control framework to the appointment of an internal audit function to cover risk management and internal controls more specifically.

A listed entity should disclose:
• if it has an internal audit function, how the function is structured and what role it performs; or
• if it does not have an internal audit function, the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal controls processes.

Whilst this change does not mandate internal audit, for the first time, it requires organisations to disclose whether they have an internal audit function and if not, explain why.

In doing so, the Council is raising the expectation that entities will have an effective internal audit function.

7. Remuneration Policies

Remuneration policies for executive directors and other senior executives should now also include summary of policies and practices regarding deferral of performance based remuneration and the reduction, cancellation or clawback of performance based remuneration in the event of serious misconduct; or a material misstatement in the financial statements.

The new principles also expand on the requirements around disclosure of equity settled remuneration plans and any hedging by participants of such a scheme.

How can ShineWing Australia Help?

Our Risk Management and Corporate Governance experts can help identify appropriate policies for the Entity that assists the Board in meeting its strategic objectives; whilst complying with ASX listing rules and the ASX Corporate Governance Council’s principles and recommendations.

With a large client base of ASX listed clients, our Assurance Division has the expertise to review your Corporate Governance statement and provide feedback or identify areas for improvement.