The revised Corporate Governance Principles and Recommendations

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The revisedCorporate Governance Principles and
Recommendations
11 October 2007
Eric Mayne
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The international context sources of corporate
governance principles
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GMI Country Rankings as at 25 September
Source GMI
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GMI Country Rankings as at 25 September
Source GMI
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Corporate Governance Reform in Australia
Source Clarke (2007) Reproduced with permission
Dibbs Abbot Stillman, and UTS Centre for
Corporate Governance
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Background to the Principles

• ASX Corporate Governance Council formed August
  2002 in response to concern about corporate
  collapses 21 industry and stakeholder groups.
  ASX provides Chair and Secretariat
• Mission
• To develop and deliver an industry wide,
  supportable and supported framework for corporate
  governance which could provide a practical guide
  for listed companies, their investors , the wider
  market and the Australian community
• Framework designed
• To assist listed companies enhance their
  transparency of their existing disclosures
• Encourage board and investors to consider the
  appropriateness of their practices

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Background to the Principles (contd)

• First edition released March 2003 10 Principles
  and 28 Recommendations
• Non-prescriptive, flexible if not, why not?
  market disclosure approach supported by ASX
  Listing Rules
• LR 4.10.3 each listed entity to set out in its
  annual report the extent to which it followed the
  Recommendations during the reporting period
• LR 12.7 listed entities in the SP All
  Ordinaries Index to have an audit committee. Top
  300 companies to comply with the Recommendation
  on audit committee composition
• Revised Corporate Governance Principles and
  Recommendations released August 2007

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Review of Principles

• Three month public consultation November 2006
• gt 100 submissions including 120 listed entities
• Changes designed to
• Remove regulatory overlap
• Promote understanding by merging some Principles
  and Recommendations that cover common areas
• Refine the Principles to take into account
  feedback from Council review groups and users of
  corporate governance information
• Clarify possible ambiguities and ensure
  consistent terminology throughout
• Encompass developments relating to risk management

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Key changes

• Removal of overlap with Corporations Act and
  Accounting Standards Principles 4, 6, 7 and 9
• Reduced number of Principles
• Principle 8 Executive performance evaluation ?
  Principle 1 and Board performance evaluation ?
  Principle 2
• Principle 10 Codes of conduct ? Principle 3 and
  material on link between stakeholders and risk ?
  Principle 7
• Best practice ? Good practice
• Wording for listed trusts and non-Corporations
  Act listed entities
• Further guidance and Guidelines for notices of
  meeting to be re-located
• Plain English drafting and consistent
  terminology

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Issues from submissions and Councils response

• Title ASX Corporate Governance Councils
  Corporate Governance Principles and
  Recommendations
• Support for move away from best practice and
  for review
• Effective date first financial year on or after
  1 January 2008 early adoption
• If not, why not approach strong support
  more explanation
• Small and medium-sized entities
• Independent status v. definition of
  independence
• Prescriptive language should and companies
  may find it useful to consider
• Hierarchy Principles, Recommendation, Commentary

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Issues from submissions and Councils response
(contd)

• Composition of nomination and remuneration
  committees minimum 3 members, majority of
  independents, independent chair
• Required to disclose reasons for considering a
  director independent despite existence of a
  relationship in Box 2.1
• Disclosure of summary of documents
• Hedging of options trading policies should
  prohibit hedging of unvested options and require
  disclosure of hedging of vested options to the
  company. Councils position complements current
  Government proposals
• Support for changes to Principles 4, 5 and 6

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Principle 7 Recognise and manage risk

• Key focus in submissions gt90 submissions
• Substantial redraft designed to encourage
  companies to consider the issue of risk and the
  effectiveness of their systems for risk
  management and internal control and to elevate
  their consideration of material business risks
• Discussion of types of material business risk
• Need to take into account legal obligations and
  consider reasonable expectations of
  stakeholders
• No requirement to disclose specific material
  business risks

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Remuneration issues

• Recommendation 9.4 submissions indicate that
  Recommendation was ambiguous support for all 3
  approaches in Consultation Paper
• Most recent ASX review of annual reports confirms
  ambiguity
• Recommendation 9.4 deleted and new commentary in
  Recommendation 8.2 companies may wish to
  consult shareholders about equity-based executive
  incentive plans involving the issue of new shares
  to executives, other than directors prior to
  implementing them
• Council has made submission to ASX and Treasury

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Part B Consultation Paper

• 97 submissions focussed on risk and risk
  management aspects of sustainability / corporate
  social responsibility (CR)
• Council considers it does have a role in this
  area where issues of sustainability / CR relate
  to the governance of a company pose a material
  risk to the company Principle 7 or are part of
  companies commitment to appropriate corporate
  practices and decision making Principle 3
• Variety of views about meaning of
  sustainability/CR ESG challenge for
  discussions and policy development on reporting
  and disclosure
• Clear message from submissions that concerns
  about these issues are legitimate and not new

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Part B Consultation Paper (contd)

• Companies should be encouraged to receive this
  message and it should be better reflected in
  mainstream activities risk management
  processes and reporting
• No systemic failure of corporate Australia to
  respond to these issues and no one size fits
  all solution
• Council will not introduce a specific reporting
  requirement
• No web based tool for dissemination of
  sustainability information

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Response to the Principles

• For most companies implementation of corporate
  governance regulation has been a slow process of
  formalisation and improvement rather than an
  outright transformation. Engagement with the ASX
  Principles has proved a positive process, and to
  an extent companies have tailored their corporate
  governance structures to fit the needs of the
  organisation.
• The standard of corporate governance in
  Australia appears very high. Certainly as far as
  companies are concerned this country has struck
  the right balance between self-regulation and
  black-letter law.
• Source - The Changing Roles and
  Responsibilities of Company Boards and
  Directors, UTS Centre for Corporate Governance
  and Dibbs Abbott Stillman, September 2007 at page
  7.

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Response to the Principles

• High level of corporate sector engagement with
  the review
• Reaction to the revised Principles
• Contrast US position
• Feedback sessions
• ASX reviews of disclosures