Culture shock: ASX Corporate Governance Principles and Recommendations – 4th edition

The ASX Corporate Governance Council (the Council) published the finalised fourth edition of the ASX Corporate Governance Principles and Recommendations on 27 February 2019 (Fourth Edition). The most commented on change from the consultation draft, released in May 2018 (Consultation Draft), is the removal of the phrase “social license to operate”, replacing it with “reputation” and “standing in the community”. 

The “social licence” language was a lightning rod and generated enormous criticism.  However, dropping the term does not represent a back-down, with the changes being more form than substance (the Council itself stating that the amendments retain the spirit of the initial draft).  This is clearly correct; the Fourth Edition is without doubt a document that reflects the temperature of these dramatic times in corporate governance.  The foreword explicitly notes that the revision of the Principles was embarked upon to address emerging issues around culture, trust and values fuelled by examples of corporate behaviour falling short of community expectations.  This absolutely comes through in the document which incorporates references to “values” and “community standing” type concepts throughout. Like Commissioner Hayne in his final report following the Financial Services Royal Commission, the Principles now explicitly link the importance of acting ethically and preserving reputation with sustaining long term shareholder value.  In line with this approach, the changes relative to the third edition are clearly aimed at meaningful substantive adherence to good corporate governance principles, as opposed to rote box-ticking.

What’s changed relative to the third edition?

The changes in the Fourth Edition can be summarised as a combination of:

  • recommendations that encourage listed entities to focus on the organisation’s culture of “acting lawfully, ethically and responsibly”, including taking account of a range of stakeholders beyond just shareholders;
  • recommendations that would require specific action, such as articulating values and adopting a whistleblower policy and an anti-bribery and corruption policy; and
  • recommendations directed at improving corporate governance practices, including board reporting on material breaches of:
    • codes of conduct;
    • whistleblower; and
    • anti-bribery and corruption policies.

The recommendations are directed at placing accountability squarely at the feet of directors, and are intended to provide boards with the information required to effectively monitor compliance.  In this light, there is a clear expectation that a board will have satisfied itself that appropriate frameworks exist for relevant information to be reported up, and that management will be challenged and held to account when required.  This all has echoes of the 2018 APRA report into CBA and the relatively new Banking Executive Accountability Regime – showing again that the Fourth Edition has been drafted to be highly responsive to the hot-button issues in Australian corporate governance over the last few years.

If there was any remaining doubt, Boards are now clearly expected to take action to “set the tone from the top”.

What’s changed in the Fourth Edition relative to its Consultation Draft?

There are several changes between the Fourth Edition and the Consultation Draft.  These changes are summarised below:

  • All but one of the 9 new recommendations in the Consultation Draft have been adopted in the Fourth Edition.  The recommendation that has fallen away is recommendation 8.4, which dealt with approval for, and disclosure of, agreements for the provision of consultancy services by directors, senior executives or related parties;
  • All of the changes concerning culture and values relative to the third edition of the Principles and Recommendations have been retained, but with some drafting changes to reflect feedback received during consultation;
  • The commentary proposed in the Consultation Draft has been shortened.  It has also been clarified that the commentary is guidance and not prescriptive in nature.  This seems in part due to the significant criticism received during the consultation period around the continuous creep in length and complexity in the Principles and how this compares unfavourably to comparable guidance in overseas jurisdictions (particularly the UK);
  • The effective date for the application of the Fourth Edition has been deferred to the first full financial year commencing after 1 January 2020; and
  • The recommendations which applied to a small subset of foreign incorporated or other listed entities have been hived off into a separate section 9 entitled “Additional recommendations that apply only in certain cases”.

What does the Fourth Edition seek to achieve?

The Fourth Edition retains the structure and flexibility of the “if not, why not” disclosure framework of previous versions.  The disclosure framework requires ASX listed entities to comply with the Principles and Recommendations, or explain why they don’t comply[1].

As highlighted above, the drafting to the revised Principle 3, which deals with responsible and ethical behaviour, has been tweaked by removing the phrase “social licence to operate” which was proposed in the Consultation Draft and replacing it with “reputation” and “standing in the community”.  The reason for this is that the Council felt the replacement terms were more likely “to be better understood and more consistently applied”.  That said, the essence of the changes to Principle 3 remains the same; entities can no longer only consider their commercial imperatives (including maximising shareholder value), but must also incorporate the society and environment within which they operate into their plans.  This is a significant development from the Third Edition and is very timely given the expectations around long term stakeholder impact demanded by the final report of the Hayne Royal Commission.

When will the proposed changes be effective?

The Fourth Edition will be effective for listed entities’ first full financial year commencing after January 2020.  For example, entities with 31 December 2018 balance dates must report against the Fourth Edition for the financial year beginning 1 January 2020 and ending 31 December 2020.

What should I focus on?

The following table sets out a summary of the key changes in the Fourth Edition relative to the third edition.  The summary is organised in the order of the Principles and sets out the changes to the relevant recommendations. Where the text of a Principle has changed, the final version of that Principle is set out. Finally, it ends by covering the new section 9 containing the recommendations that only apply to a small subset of listed entities, mostly on the basis of foreign incorporation.

Principle 1: Lay solid foundations for management and oversight

“A listed entity should clearly delineate the respective roles and responsibilities of its board and management and regularly review their performance.”



Additional board requirements – new responsibilities, background checks and review processes

Requirements for listed entities to:

  • have and disclose a board charter, including additional responsibility to define the entity’s purpose, approving a statement of values and code of conduct to underpin culture, overseeing management in instilling the entity’s values and ensuring that the remuneration framework is aligned with the entity’s purpose, values, strategic objectives and risk appetite  – recommendation 1.1;
  • undertake background checks on senior executives (not just board members) before engaging them – recommendation 1.2;
  • institute annual review processes for the board and management (including considering the currency of a director’s expertise, and whether performance has been impacted by a directors’ other commitments (this is often a hot issue at AGMs)) - recommendations 1.6 and 1.7.

Emphasis on diversity

Substantial changes to the “Diversity” recommendation 1.5, including:

  • a requirement to disclose measureable objectives for that period (emphasis added) to achieve gender diversity. Requiring disclosure for the specific period will mean entities can’t get away with setting ambiguous goals for an indeterminate future;

  • raising the concept of the achievement of gender participation indicators as a relevant consideration for remunerations KPIs;
  • the obligation to disclose the diversity policy; and
  • requiring entities in the S&P/ASX 300 to have the objective of at least 30% of each gender represented in their boards within a specified period.

The Council also expresses a view that there is value in other types of diversity (age, ethnicity, background) in avoiding groupthink, however, there is no specific guidance or commentary on this front. 

Changes relative to Consultation Draft

  • Commentary now explicitly envisages the appointment of professional services firms to provide company secretarial support and personnel – recommendation 1.3.
  • Commentary has been simplified to remove certain content to avoid the impression of a prescriptive approach to compliance – recommendation 1.4 and 1.5.



Principle 2: Structure the board to be effective and add value

“The board of a listed entity should be of an appropriate size and collectively have the skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value.”

Principle 2 recognises the importance of the board having directors with “knowledge of the entity and the industry in which it operates”.  Also the famous directors’ duties decision in ASIC v Healey & Ors [2011] FCA 717 (the Centro decision around signing off on accounts) gets a mention – reminding directors that while different levels of expertise are to be expected, all directors of listed companies in Australia need to have a base level understanding of the accounting issues facing their company.




A board should rule a director not to be independent if falling within certain examples unless clear that the interest, position, affiliation or relationship is not material and will not interfere with independent judgment

Refinements to recommendation 2.3 relating to the test for director independence, including:

  • a focus on “personal relationships” as opposed to “family relationships”; and

  • scrutiny of directors with performance based remuneration.

Importantly, the commentary to recommendation 2.3 has been further clarified in relation to assessing director independence.  If any of the factors in commentary box 2.3 are present, the director should be considered not to be independent, unless it is clear that the issue is not material and won’t affect their judgement.  This will lift the bar for companies wanting to explain away any of those factors in supporting a director’s independence.

Focus not only induction for new directors but also ongoing development

Listed entities must have programs for periodically reviewing the need for existing directors to undertake professional development programs – recommendation 2.6.

Changes relative to Consultation Draft

  • Commentary has been simplified, removing specific references to how board composition and board skills matrices should be drawn up – recommendation 2.2 [1].

  • Commentary has been clarified to indicate that directors who were officers, employees or professional advisors of substantial holders should be viewed as biased in favour of that substantial holder – recommendation 2.3.

[1] The risks identified in the initial draft which would populate a board skills matrix are now referred to in recommendation 7.2


Principle 3: Instil a culture of acting lawfully, ethically and responsibly

A listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly.




Focus on an entity’s “reputation” and “standing in the community”

The board and management of listed entities must consider not just shareholders but their employees, customers, suppliers, creditors, regulators, consumers and the local communities in which they operate – recommendation 3.1. 

This is an important change – and the Council has essentially stuck to its guns.  It does mean though that debate about how this sits with shareholder primacy will rumble on.

Values to express the standards and behaviours expected from directors and all staff to be articulated across the organisation

Listed entities must articulate and disclose their values (which is separate to the code of conduct) setting out aspirational guiding principles – recommendation 3.1.

Board to be informed of material conduct breaches that call into question the corporate culture

Listed entities must disclose a code of conduct and have systems to inform the board of material breaches of codes of conduct – recommendation 3.2.

To create and disclose a whistleblower policy and an anti-bribery and corruption policy

Listed entities must create and disclose a whistleblower policy and an anti-corruption and bribery policy. Each must have reporting requirements for material incidents/breaches to the board or a subcommittee of the board – recommendations 3.3 and 3.4.

Changes relative to Consultation Draft

  • The references to the “social licence to operate” in the commentary to Principle 3 has been replaced with “reputation” and “standing in the community.”

  • Commentary has been added to clarify how the Council expects the new concepts of “reputation and “standing in the community” to be applied.  A footnote has been added to include an explicit reference to Commissioner Hayne’s comments in relation to the obligation of listed entities to pursue long term advantage.  References to “core values” have been replaced with “values” – recommendation 3.1.

  • Prescriptive guidance in relation to leadership and oversight of the board has been removed – recommendation 3.2 and 3.3.


Principle 4: Safeguard the integrity of corporate reports

A listed entity should have appropriate processes to verify the integrity of its corporate reports.



Focus on corporate reports of higher quality and integrity to inform investors

Listed entities must have and disclose a process to verify the integrity of their annual directors’ report and other unaudited reports. Investors should understand how the listed entity has satisfied itself that these reports are accurate, balanced and understandable, and provide appropriate information for investors to make informed investment decisions – recommendation 4.3.

Changes relative to Consultation Draft

Recommendation 4.4 proposed in the initial draft has been reworked into recommendation 4.3.




Principle 5: Make timely and balanced disclosure




Directors should have timely visibility of information being disclosed to the market

Boards must receive copies of all Listing Rule 3.1 announcements promptly after publication - recommendation 5.2.

All security holders should have timely access to investor or analyst presentations

New investor/analyst presentations should be published on the ASX Markets Announcements Platform ahead of the actual presentation –recommendation 5.3.

Changes relative to Consultation Draft

  • Commentary has been clarified with in relation to the content of a continuous disclosure policy to avoid the impression of a prescriptive approach to compliance – recommendation 5.1.

  • Commentary has been amended to clarify that boards should receive all material market announcements as opposed to only those under listing rule 3.1 – recommendation 5.2.
  • Recommendation 5.3 has been clarified so that the obligation to provide presentation materials to the ASX only captures presentations to substantive new investors.  The commentary clarifies subsequent presentations of the same material would not trigger the obligation to furnish the same presentation to the ASX.




Principle 6: Respect the rights of security holders

“A listed entity should provide its security holders with appropriate information and facilities to allow them to exercise their rights as security holders effectively.”



Active consideration to be given to the use of technology to manage shareholder participation

Listed entities must disclose how they facilitate and encourage participation at meetings of security holders – recommendation 6.3.

Voting by a show of hands is inconsistent with one vote for each security

Resolutions at meetings of security holders which are substantive should be decided by poll, rather than a show of hands – recommendation 6.4.  Both the ASX and ASIC have been concerned about this issue for some time. 

Changes relative to Consultation Draft

Recommendation 6.4 requiring resolutions to be voted on by poll has been clarified so that it only applies to those which are substantive and not procedural.


Principle 7: Recognise and manage risk




Board to monitor the adequacy of the risk management framework

Listed entities must evaluate whether they are operating with “due regard” to the risk appetite set by the board – recommendation 7.2.

Focussing board attention on environmental and social risks

  • Requirements to ensure the risk framework adequately addresses emerging risks such as conduct and digital and data risks have been added – recommendation 7.2.

  • Refinements of the disclosure obligations in relation to sustainability have also been made so that they focus on “environmental and social risks”, instead of “economic, environmental and social sustainability” risks – recommendation 7.4

Interestingly, the Council encourages entities that believe they don’t have material exposure to climate or social risks to consider the basis for that position clearly and to benchmark their disclosures against their peers.  Social risk is a concept that is defined very broadly to encompass issues that range from specific harms that are by now reasonably well understood (modern slavery and bribery for example), social catastrophes (pandemics and mass migration) all the way to simply mistreating customers and suppliers and harming the local community.  The Council also cites the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures as a reference point for considering and reporting on climate change related risks.

Changes relative to Consultation Draft

Commentary has been significantly simplified to remove the unnecessarily detailed explanation of the obligation to provide information to investors and manage risk – recommendation 7.1.

Commentary has been amended to explicitly reference various kinds of risk that appeared in recommendation 2.2 in relation to board skills matrices – recommendation 7.2.

Commentary has been amended to remove and replace the specific references to “social licence to operate” and clarify how this recommendation applies to climate risk – recommendation 7.4.

Principle 8: Remunerate fairly and responsibly

“A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite.”



Changes relative to Consultation Draft

  • Most noteworthy is the inclusion of a specific quote from the final Hayne report into aligning remuneration with culture.  Once again, this reiterates the overarching theme of creating governance structures that promote long term ethical behaviours and that do not reward behaviour that is inconsistent with values or risk appetites – recommendation 8.1.
  • Recommendation 8.4, which was concerned with agreements for consultancy or similar services with directors or senior executives, or their related parties, has not been included in the Fourth Edition.  This was on the basis that there were sufficient regulatory and legislative checks and balances dealing with conflicts and related parties.


Section 9: Additional recommendations that apply only in certain cases

This section is a new addition relative to the Consultation Draft and has been created to house recommendations that deal with ASX listed entities that are foreign incorporated or which are in another special subset of listed entities which were proposed elsewhere in the Consultation Draft.



Language abilities of directors

Listed entities should disclose the processes they use to ensure their directors who do not speak the language in which board meetings are held can understand and contribute to board meetings and discharge their obligations in relation to those meetings and documents - recommendation 9.1.

Location of board meetings

Listed entities established outside Australia should ensure that meetings of security holders are held at a reasonable place and time – recommendation 9.2.

Attendance of auditor at foreign located AGMs

A listed entity established outside Australia, and an externally managed listed entity that has an AGM, should ensure that any external auditor attends their AGM and is available to answer questions from security holders relevant to the audit – recommendation 9.3.


[1] This disclosure is by including in its annual report either a corporate governance statement or the URL of the page on its website where the statement can be found.