Release of 3rd Edition Corporate Governance Principles and Recommendations

By Robert Pick
Corporate Governance Risk & Compliance

In brief

The ASX Corporate Governance Council has released the 3rd edition of its Corporate Governance Principles and Recommendations. Although the 3rd edition largely reflects the amendments proposed in the earlier consultation draft released in August 2013, a number of new amendments have been added that will have implications for listed entities' corporate governance practices. Partner Robert Pick and Senior Associate Hannah Biggins discuss these key changes.


The release of the 3rd edition of Corporate Governance Principles and Recommendations (Principles and Recommendations) follows a consultation process that began in August 2013, when the ASX Corporate Governance Council (the Council) issued a consultation draft of the Principles and Recommendations, with proposed amendments to the 2nd (then current) edition. For a discussion of certain key changes proposed in the consultation draft, see our Client Update: Proposed changes to the ASX Corporate Governance Principles and Recommendations.

The 3rd edition will apply to a listed entity's first full financial year commencing on or after 1 July 2014 (which, for entities with a 30 June year end, means the financial year ending 30 June 2015).

Changes to Recommendation 2.1 – indicators of director independence – tenure

As noted in our earlier Client Update, the consultation draft maintained the existing recommendation that a majority of the board should be independent directors (Recommendation 2.2). However, the consultation draft proposed inserting certain additional categories of interests, positions, associations or relationships that 'might cause doubts' about the independence of a director.

Based on feedback received, the Council has amended these categories (now set out in Box 2.3 of the 3rd edition). In particular, the Council has removed the requirement that the board explain why it considers a director who has served for more than nine years to be independent (despite that length of tenure). Instead, the 3rd edition now requires a more general assessment as to whether a director has served 'for such a period that his or her independence may have been compromised'. Although the prescribed time period has been removed, new commentary (non-binding) has been inserted into the 3rd edition that provides that a board should regularly assess whether a director, who has served for more than 10 years, has become too close to management to be considered independent.

Changes to Recommendation 7 – Risk Committees and sustainability risks

As reported in our earlier Client Update, in the wake of the global financial crisis, the consultation draft proposed the introduction of new and strengthened recommendations relating to risk management and associated disclosure (Principle 7). The 3rd edition has maintained this focus on risk oversight and management, with the following key changes.

Risk Committees

The Council has amended new Recommendation 7.1 to provide that, as an alternative to establishing a single committee to oversee risk (such as a dedicated risk committee or a combined audit and risk committee), a listed entity may also establish a group of committees to oversee different aspects of risk. In addition, the new commentary (non-binding) in the 3rd edition provides that the members of a risk committee should have the 'necessary technical knowledge and a sufficient understanding of the industry in which the entity operates, to be able to discharge the committee's mandate effectively'.

Sustainability risks

The Council has also amended new Recommendation 7.4 (which requires listed entities to disclose whether, and if so how, they have regard to economic, environmental and social sustainability risks), by placing a threshold on the disclosure obligation. A listed entity now only needs to disclose sustainability risks to the extent that the entity has 'material exposure' to that risk. Material exposure is defined to mean 'a real possibility that the risk in question could substantively impact the listed entity's ability to create or preserve value for security holders over the short, medium and long term'. In addition, to provide entities with further guidance, the terms 'economic sustainability', 'environmental sustainability' and 'social sustainability' have been defined in the 3rd edition.

Further, the commentary in the 3rd edition also notes that an entity that publishes a sustainability report can satisfy Recommendation 7.4 by cross-referring to that report.

Deletion of Recommendation 8.3 (claw back policy)

As reported in our earlier Client Update, the consultation draft proposed the introduction of a new Recommendation 8.3, which placed an obligation on listed entities to have in place and disclose a 'claw back' policy that sets out the circumstances in which that entity may claw back performance-based remuneration from its senior executives. Under the consultation draft, listed entities would have also been required to disclose any claw backs that have been made and, if claw backs should have been made but were not, the reasons for this.

Recommendation 8.3 has been removed from the 3rd edition. The Council has attributed the removal to the feedback received regarding the complexities associated with clawback policies. Instead, the 3rd edition includes new commentary (non-binding) in respect of Recommendation 8.2 (relating to disclosure around remuneration policies and practices), that suggests that such disclosure should include a summary of the entity's policies/practices regarding the:

  • deferral of performance-based remuneration; and
  • reduction, cancellation or clawback of performance-based remuneration in the event of serious misconduct or a material misstatement in the entity's financial statements.

Other changes

The 3rd edition also makes (among other changes) the following amendments to the consultation draft:

  • (Recommendation 1.1) removing the obligation to disclose the roles and responsibilities of the board and management in the board charter (and instead, allowing these matters to be disclosed in other documents or published on the entity's website or in its annual report);
  • (Recommendation 1.4) amending the reference to the company secretary having a 'direct reporting line to the chair', which recognises that a company secretary may have dual reporting lines (for example, if they have multiple roles within the entity);
  • (Recommendation 1.5(a)) in respect of an entity's diversity policy, allowing the required measurable objectives to be set by a committee (as an alternative to the board);
  • (Recommendation 2.5 (now Recommendation 2.2)) amending the general obligation to disclose a statement as to the 'mix of skills and diversity that the board is looking to achieve in its membership', to a more specific requirement to disclose a 'board skills matrix'. The commentary notes that the matrix can disclose this information on a collective basis, as opposed to requiring the entity to identify the presence or absence of skills among individual directors; and
  • (Recommendation 4.2) reinstating the requirement in Recommendation 7.3 of the 2nd edition of the Principles and Recommendations, which provides that, in addition to the CEO and CFO giving declarations regarding (in their opinion) the veracity of the financial records and statement, they must also certify that their opinion 'has been formed on the basis of a sound system of risk management and internal control which is operating effectively'.

ASX Listing Rules

As noted in our earlier Client Update, in conjunction with the Council's release of the consultation draft, the ASX released for consultation certain governance-related draft amendments to the ASX Listing Rules and Guidance Note 9 in August 2013.

Most of the proposed amendments were intended to complement, and give effect to, the 3rd edition of the Principles and Recommendations. ASX is intending to finalise these changes shortly (with some minor modifications resulting from the consultation process), with these changes to come into effect on 1 July 2014.

The proposed amendments released in August 2013, also included certain other governance-related changes that were intended to come into effect on 1 January 2014. These changes included the introduction of a new Listing Rule 3.19B, requiring the disclosure of on-market purchases of securities on behalf of employees or directors (or their related parties) under an employee incentive scheme on a continuous basis (ie disclosure no more than five business days after the relevant purchase). Due to the negative feedback received (including that it would create an administrative burden on entities), ASX will no longer be implementing Listing Rule 3.19B. Instead, ASX is proposing a new Listing Rule 4.10.22 that will require a listed entity to include a single disclosure in its annual report (covering the whole of the reporting period). The new disclosure obligation relates to any securities purchased on-market:

  • under the terms of an employee incentive scheme; or
  • to satisfy the entitlements of the holders of options or performance rights.

If you would like to find out more about the 3rd edition, or associated ASX Listing Rule and guidance note changes, please contact any of the persons below.