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What has been released?

On 27 February 2024, the ASX Corporate Governance Council (CGC) released the draft 5th edition of the ASX Corporate Governance Principles and Recommendations (5th edition). This article outlines the key changes from the 4th edition (released in February 2019). Our impression of the consultation draft is that although some of the new requirements may appear burdensome, they will be workable in practice. 

When will it apply to listed entities?

The 5th edition is currently anticipated to be issued in early 2025, to take effect for financial years commencing on or after 1 July 2025. If this remains unchanged, it means:

  • entities with a 30 June EOFY could be expected to report against the 5th edition commencing with the financial year ended 30 June 2026; and 
  • entities with a 31 December EOFY could be expected to report against the 5th edition commencing with the financial year ended 31 December 2026. 

As with previous editions, we expect early adoption will be encouraged by stakeholders. 

Submissions on the consultation draft can be made by 6 May 2024 and submissions may be via online questionnaire or by uploading a document. The consultation draft and other resources are available on the ASX website.

What are the key changes?

Consistent with Australian and overseas trends, updates to the 5th edition show a shift towards: 

  • recognising the importance of a company’s relationship with its stakeholders; 
  • focussing on Board capabilities needed to safeguard the future oversight of the business; and
  • the importance of diversity on the Board and throughout the workforce.

Significant proposed changes are summarised below. 

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So what?

Focus on stakeholders

Under proposed Recommendation 3.3, a listed entity should have regard to the interests of the entity’s key stakeholders, including having processes for the entity to engage with them and to report material issues to the board. The concept of ‘stakeholders’ has also been incorporated into the commentary of other Recommendations, for example, in relation to the role of the Board. The updated commentary now prompts entities to reflect of the relevance of stakeholders to the design and effectiveness of governance structures and practices.

The engagement with stakeholders thematic also feeds into new commentary around AGMs, including ‘investor expectation’ that hybrid meetings should be utilised for large listed entities, and that specific engagement should be undertaken in response to any significant ‘against’ vote at a shareholder meeting. 

All companies will need to consider who their key stakeholders are, and whether their stakeholder engagement and Board reporting processes are appropriate and can be adequately described and disclosed. 

For many entities, stakeholder perspectives will already form part of decision-making processes and information on stakeholder issues or engagement will be provided to the Board in existing reporting. For others, an uplift in reporting may be required. 

While not binding, the commentary changes around AGMs will increase pressure for hybrid meetings and engagement around protest votes. 

Board skills matrix

Proposed Recommendation 2.2 will require a listed entity to disclose a board skills matrix with the skills currently on the board and the mix of skills it is looking to achieve in its membership. Proposed commentary to this Recommendation suggests that better practice would be to report skills by reference to individual directors. Entities may still exclude commercially sensitive information from the matrix.

Among large ASX listed companies, there has already been a shift towards greater disclosure (e.g. disclosing how each skill, experience or area of expertise is defined) however market practice does vary. Some companies are providing even greater levels of transparency, but we have yet to see a practice emerge where skills are reported by reference to individual directors and we do not expect that many companies will take up this ‘best practice’ tip in the near term. 

Where we do expect to see change is in relation to the robustness of the process used to capture and assess the baseline level of expertise on the board, noting that current market practice is predominantly reliant on director self-assessment. This is already an area receiving increasing scrutiny from investors and proxy advisors. 

The 5th edition does not prescribe a format for the matrix, meaning that variation in transparency and disclosure between entities is likely to continue. 

Process for assessing directors’ skills

Proposed Recommendation 2.2 has also been updated to require a listed entity to disclose its process for how it assesses that the relevant skills and experience are held by its directors. According to the proposed commentary, best practice is explaining the entity’s assessment methodology: what it means when it refers to a particular skill in its board skills matrix, as well as the criteria a director must meet to be considered to have that skill.

Measurable objectives

Proposed Recommendation 2.3 requires a listed entity to disclose a measurable object and timeframe for achieving gender diversity in the composition of its board. It also requires disclosure of any other relevant diversity characteristics that the Board is considering (e.g. age, ethnicity). The reference to ‘timeframe’ is new, as is the requirement to disclose any other relevant diversity characteristics.

For many entities a timeline will be set for internal purposes, even where it has not previously been disclosed externally. The recommendation does not mandate Boards to consider broader diversity characteristics, but may lead to more discussion and disclosure on this topic (even if in a general sense rather than formal targets).

Board composition for entities in the S&P/ASX 300 Index

Proposed Recommendation 2.3 provides that for companies in the S&P/ASX 300 Index, the measurable objective for the Board should be to have a ‘gender balanced board’ (at least 40% women/at least 40% men/up to 20% any gender). The previous requirement was for an entity to have not less than 30% of its directors be of each gender. 

This change aligns with a broader push towards greater gender diversity on Australian boards. Some entities have already achieved this target and for others this may reflect an existing ambition. However, we expect that for a number of entities this new requirement may involve a reassessment of director recruitment and succession planning, if the measurable objective is to be achieved.

Code of Conduct breaches

Proposed Recommendation 3.2 requires a listed entity to disclose (on a de-identified basis) the outcomes during the last reporting period of actions taken by the entity in response to material breaches of the code of conduct.

Related commentary also sets an expectation that material breaches of the code of conduct, whistleblowing incidents and breaches of the anti-bribery and corruption policy should be promptly reported to the board. If initial reporting is to a Board committee, there should be escalation of issues to the board, where appropriate. 

Disclosure here will need to take into account obligations under applicable laws, a key example being the confidentiality requirements under the whistleblower regime. The ability to de-identify cases will assist with this, but care will still be required. 

Clawback

Proposed Recommendation 8.3 would require a listed entity to:

  • have remuneration structures that can clawback or otherwise limit performance-based remuneration outcomes of its senior executives after award, payment or vesting; and
  • disclose (on a de-identified basis) the use of those provisions during the reporting period.

It is common for the performance based-remuneration of senior executives to be subject to clawback or forfeiture provisions. As above, disclosure here will need to be managed carefully to avoid any breaches of privacy and other laws. Companies may choose to include this information in the Remuneration Report and include a cross reference to that disclosure.

Appointment and tenure of auditor

Proposed Recommendation 4.3 would require a listed entity to disclose:

  • the tenure of the audit firm and audit engagement partner as at the end of the reporting period; and
  • when the appointment of the external auditor was last comprehensively reviewed and the outcomes from that review.

 

Although this is a new disclosure requirement, we expect most entities will have this information easily to hand. 

Material risks

Proposed Recommendation 7.4 would require a listed entity to disclose its material risks (including its material environmental, social and governance risks). The related commentary flags that entities are not required to report against each of these categories separately and that this Recommendation could be satisfied through disclosures in the OFR in its Directors’ Report.

New commentary emphasises that the Board should consider crisis management and business continuity processes, including ‘simulation exercises’.

This is similar to the previous requirement to disclose whether an entity has any material exposure to environmental or social risks. Further, we expect that many companies will be able to cross-refer to relevant disclosures in their OFR and sustainability report.

Paving the path for climate disclosures

A number of minor changes throughout the 5th edition appear designed to align with incoming climate and sustainability reporting requirements. For example: 

  • in relation to audit practices, new references to ‘other assurance engagements’ to pick up non-financial reporting engagements;
  • commentary to Recommendation 4.2 (Verification of corporate reports) now states that ‘ultimately, directors must form their own views on the adequacy of each of an entity’s periodic corporate reports’; and
  • new commentary to Principle 5 emphasises that disclosure should be accurate, complete and not misleading, and ‘particular care should be taken in areas where practice is still developing’.

The CGC hasn’t looked to duplicate or add new layers to climate or sustainability reporting requirements. Instead, these changes anticipate the increasing prominence of climate and sustainability reporting in Australia (and globally) and make it inseparable from sound corporate governance. 

 


Key contacts

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Lauren Selby

Partner, Sydney

Lauren Selby
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Bianca Marcocci

Senior Associate, Sydney

Bianca Marcocci

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