Governance principles working well
This article appeared in the May 2012 edition of the Listed @ ASX newsletter.
ASX’s Kevin Lewis comments on the ASX Corporate Governance Council Principles and Recommendations, including possible revisions that could be made in the next financial year.
The ASX Corporate Governance Council, now in its 10th year, plays an important role in promoting good governance in Australia. Its Principles and Recommendations provide guidelines on the adoption and disclosure of governance practices intended to promote investor confidence and help ASX-listed entities meet stakeholder expectations around governance.
The Council brings together 21 business, shareholder and industry groups with an interest in promoting good governance in Australia, including ASX Group, each offering valuable insights and expertise on governance issues from the perspective of their particular stakeholders. Its primary work has been the development of the Corporate Governance Principles and Recommendations, the current version of which (the ASX Corporate Governance Principles and Recommendations with 2010 Amendments (PDF 1.32MB)) came into effect in January 2011.
Listed@ASX asked Kevin Lewis, ASX Chief Compliance Officer and Group Executive, about the role of the Council and its Principles, and possible enhancements. Kevin has executive responsibility within ASX for the Council.
Listed@ASX: Kevin, ASX established the Council 10 years ago in 2002. What do you see as the Council’s main achievements over the past decade?
Kevin Lewis: Its main achievement has been to help lift substantially the standard of corporate practices applied by ASX-listed entities and the quality of their disclosures around those practices. The Principles have become something of a benchmark for governance practices in Australia. Other industries have embraced aspects of the Principles in their own governance guidelines, and some larger not-for-profit entities have adopted them as well.
The Principles’ role in encouraging gender diversity on boards of ASX-listed entities has also been an important achievement.
Listed@ASX: How is the ASX Corporate Governance Council itself structured?
Kevin Lewis: It is comprised of representatives nominated by the 21 member organisations. The Council acts as an advisory council to ASX on corporate governance matters. ASX is the convener of the Council, nominates its chair, and provides executive and financial support.
Listed@ASX: Who chairs the Council?
Kevin Lewis: ASX Group announced the appointment of Alan Cameron, AO, as the Council’s new chairman in November 2011. His credentials for the role are impeccable. Alan chairs the board of ASX Compliance, is a leading expert on corporate governance matters, a director of listed and not-for-profit entities, and the former chairman of the Australian Securities and Investments Commission.
Listed@ASX: How would you rate the Principles against the standards applicable in other countries?
Kevin Lewis: I believe the Principles are world-class. They served Australia well during and after the global financial crisis. Obviously, however, they must be kept under review to ensure that they remain at the forefront as governance practices and standards evolve globally.
Listed@ASX: Under the “if not, why not” principle, ASX-listed entities are required under the ASX Listing Rules to explain which Principles have not been adopted, and why. What is the main benefit of this approach?
Kevin Lewis: It allows ASX-listed entities, large or small, to tailor their governance practices to suit their individual circumstance, provided they explain to the market why they are doing so if they choose to adopt practices different to those recommended in the Principles.
Entities listed on ASX range from huge companies such BHP Billiton, with a market capitalisation of more than $100 billion, to micro-cap junior explorers with limited resources. It would be impractical to have one set of prescriptive governance rules that apply equally to all ASX-listed entities, given this wide divergence in size and circumstances.
The “if not, why not” approach provides flexibility for ASX-listed entities on how they structure their governance arrangements, at the same time as ensuring that investors receive the information they need about those arrangements to ensure they can make informed investment decisions.
Listed@ASX: The Council consults with investors and governance stakeholders about the Principles’ effectiveness. What was the main feedback from the latest consultation in 2011?
Kevin Lewis: The overwhelming feedback was that the Principles are working well and do not need major change. In particular, the Council consulted on the question of whether there should be a second set of less onerous Principles for smaller listed entities, however respondents clearly wanted one set of high quality corporate governance principles to apply across the board to all ASX-listed entities.
Listed@ASX: Where can the Principles improve, in your view?
Kevin Lewis: Some aspects of the commentary in the Principles could possibly be simplified or clarified. Also, the Principles currently expect considerable disclosures to go into a listed entity’s annual report, but there is a view that annual reports are becoming too long and reader unfriendly. A fair amount of the material in corporate governance statements does not change each year. There may be room for more of that information to be disclosed on a listed entity’s website rather than in its annual report, without affecting the quality of disclosures on governance practices.
Listed@ASX: What are some of the more contentious aspects of the Principles?
Kevin Lewis: There has been some public debate about whether the Principles should be expanded to embrace the notion of “integrated reporting”, including the reporting of environmental and social issues, as well as more traditional governance issues. I cannot pre-empt what the Council will do in this regard but I would expect it to proceed cautiously on these issues until there is some degree of international consensus around what should be included in an integrated report.
Listed@ASX: What can we expect next from the Council?
Kevin Lewis: The Council has operated on a relatively informal basis since its inception. The new chair of the Council, Alan Cameron, has indicated that he would like to formalise the constitution of the Council and have it adopt a written charter. Beyond that, in the short term, I would expect the Council to continue to monitor emerging governance issues and trends in Australia and globally, and to consider whether the Principles need to evolve in response.
Listed@ASX: When is the next review of the ASX Corporate Governance Principles likely?
Kevin Lewis: The next review is likely to begin in 2012-13. Given the feedback we received in our consultation in 2011, I would not envisage major changes being made, although that is a matter for the Council. There may be scope to make the commentary in the Principles simpler and clearer, and introduce other refinements of the type I have mentioned previously.
Listed@ASX: ASX released earlier this year a revised version of ASX Listing Rules Guidance Note 9 Disclosure of Corporate Governance Practices. How significant is that Guidance Note?
Kevin Lewis: It is very significant and something ASX-listed entities should be aware of and read carefully. The Guidance Note helps listed entities identify and comply with their reporting obligations under Listing Rule 4.10.3, the rule that embodies the “if not, why not” reporting requirement. It gives a substantial amount of guidance on ASX’s expectations around the disclosures that listed entities should be making under that rule and ASX’s processes around monitoring and enforcing compliance with the rule.
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