17 Apr 2014

New ASX Corporate governance reporting rules

by Rod Halstead, Karen Evans-Cullen

There are new corporate governance disclosure requirements for appointing directors, committees and risk management, among other matters.

The Corporate Governance Council's new corporate governance disclosure requirements apply for the first full financial year starting on or after 1 July 2014. Here are the main points.

Directors

Entities will have to disclose whether they have undertaken “appropriate checks” before appointing a new director or nominating a new candidate for election.

Those should cover the person’s character, experience, education, criminal record and bankruptcy history. If any “material adverse information” is uncovered, the commentary suggests that that information should also be disclosed.

Before board elections (for new and continuing directors), members should be also be given “all material information” about the candidates. This includes the candidates’ qualifications and experience, and the skills that they bring to the board.

Another change relates to director independence. The current requirements include a checklist for determining whether a director is independent.

The new requirements make some changes to that list:

  • currently, the board must consider whether the director is in a material business relationship with the company – the new list extends that to relationships going back three years;
  • having close family ties with a person who is not independent has been elevated from the non-binding commentary to the effectively binding checklist; and
  • a new addition to the list is “the director … has been a director of the entity for such a period that his or her independence may have been compromised”.

The accompanying commentary says that the board should regularly assess the independence of any director who has served in that position for more than 10 years. However, it also recognises the importance of having a mix of directors, some with a longer tenure with a deep understanding of the entity and its business and some with a shorter tenure with fresh ideas and perspective. It also recognises that the chair of the board will frequently fall into the former category.

Committees

Currently, companies must disclose if they have the following committees and, if not, why not:

  • nomination committee;
  • audit committee;
  • remuneration committee.

The new reporting requirements recognise that companies can have effective alternative arrangements in place. For example, companies will report on whether they have:

  • a remuneration committee; or
  • processes that ensure the same outcome as a remuneration committee.

This will hopefully spell the end of media reports that X% of companies have failed to meet the CGC requirements simply because they have alternative arrangements to formal committees.

Risk management

At present, companies are required to have a risk management policy and control system, although the related commentary discusses the potential benefits of having a risk management committee.

The new version elevates risk management committees (or alternative arrangements) to an “if not, why not” reporting requirement. This can be “a stand-alone risk committee, a combined audit and risk committee or a combination of board committees addressing different elements of risk”. If risk management is divided between board committees, the company must disclose how the responsibility for overseeing risk has been divided between those committees. Boards will also have to report on whether they have annually reviewed risk management systems.

A more substantial change relates to internal audits. Listed entities will have to disclose:

  • if they have an internal audit function – how it is structured and what role it performs; or
  • if they do not have an internal audit function – that fact, and the processes they employ for evaluating and continually improving the effectiveness of risk management and internal control processes.

Sustainability

The new reporting requirements say:

“A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.”

They define:

  • economic sustainability as “the ability of a listed entity to continue operating at a particular level of economic production over the long term”;
  • environmental sustainability as “the ability of a listed entity to continue operating in a manner that does not compromise the health of the ecosystems in which it operates over the long term”; and
  • social sustainability as “the ability of a listed entity to continue operating in a manner that meets accepted social norms and needs over the long term”.

A company which publishes a sustainability report will be able to meet this reporting requirement by cross-referring to that report.

Day-to-day stuff

The CGC originally proposed a report on whether the secretary had “a direct reporting line to the chair”.

The final version is slightly different:

“The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board.”

This change is because “in many cases a company secretary may have a dual role (for example, they may also be the CFO or general counsel) and that, even if they are employed in a dedicated company secretarial role, they will typically have a dual reporting line as part of the management team.”

Other changes related to management include requirements:

  • to report on whether the company has an induction and professional development program for directors (previously only a suggestion in the commentary);
  • to have a written agreement with each director and senior executive, setting out the terms of their appointment (ramping up the current comment that such letters are “useful”);
  • expanding the CEO and CFO declaration about the integrity and compliance of the financial records and annual financial statements (based on Corporations Act s 295A) to require the declaration to be provided for financial statements for “a financial period” (eg. half-yearly financials).

There is also proposed new Listing Rule to allow entities to publish their corporate governance statement on their website, rather than in the paper version of their annual report.

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Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.