Corporate Governance Framework in Australia

The Australian Securities Exchange (ASX) Corporate Governance Council was formed in August 2002 and has been chaired by the ASX Group (ASX) since its inception. ASX Group is a market operator, clearing house and oversees compliance with its operating rules, promotes standards of corporate governance among Australia’s listed companies and helps to educate retail investors. The Council is a remarkably diverse body, bringing together business, investment and shareholder groups. Its ongoing mission is to ensure that the principles-based framework it developed for corporate governance continues to be a practical guide for listed companies, their investors and the wider Australian community.

The ASX Corporate Governance Council’s Recommendations are not mandatory and cannot, in themselves, prevent corporate failure or poor corporate decision-making. They are intended to provide a reference point for companies about their corporate governance structures and practices. The Recommendations are not prescriptions, they are guidelines, designed to produce an outcome that is effective and of high quality and integrity.

The Corporate Governance Principles and Recommendations as laid down by the ASX Corporate Governance Council are:

Principle 1 Lay solid foundations for management and oversight: Companies should establish and disclose the respective roles and responsibilities of Board and Management.

Recommendation:

• Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions.
• Companies should disclose the process for evaluating the performance of senior executives.
• Companies should provide the information indicated in the Guide to reporting on Principle 1.

Principle 2 Structuring of Board:– Structure the board to add value Companies should have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

Recommendation:

• A majority of the board should be independent directors.
• The chair should be an independent director.
• The roles of chair and chief executive officer should not be exercised by the same individual.
• The board should establish a nomination committee.
• Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.

Principle 3 – Promote ethical and responsible decision-making Companies should actively promote ethical and responsible decision-making.

Recommendation:

• • Companies should establish a code of conduct and disclose the code or a summary of the code as to

• Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity for the board to assess annually both the objectives and progress in achieving them.
• Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the board in accordance with the diversity policy and progress towards achieving them.
• Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board.

Principle 4 – Safeguard integrity in financial reporting Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.

Recommendation:

• The board should establish an audit committee.
• The audit committee should be structured so that it
  – consists only of non-executive directors
  – consists of a majority of independent directors
  – is chaired by an independent chair, who is not chair of the board
  – has at least three members.
• The audit committee should have a formal charter.

Principle 5 – Make timely and balanced disclosure: Companies should promote timely and balanced disclosure of all material matters concerning the company.

Recommendation:

• Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.

Principle 6 – Respect the rights of shareholders Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.

Recommendation:

Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.

Principle 7- Recognise and manage risk Companies should establish a sound system of risk oversight and management and internal control.

Recommendation

• Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.
• The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks.
• The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act 2001is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

Principle 8- Remunerate fairly and responsibly Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear.

Recommendation

• The remuneration committee should be structured so that it:
  -consists of a majority of independent directors
  -is chaired by an independent chair
  -has at least three members.
• Companies should clearly distinguish the structure of non-executive directors’ remuneration              from that of executive directors and senior executives.

The ASX Corporate Governance Council considers that a well-reasoned “if not, why not” explanation from a company is a valid response to a particular Recommendation. Effective “if not, why not”reporting practices involve:

• identifying the Recommendations the company has not followed
• explaining why the company has not followed the relevant Recommendation
• explaining how its practices accord with the ‘spirit’ of the relevant Principle,that the company understands the relevant issues and has considered the impact of its alternative approach.

Conclusion:

The ASX Corporate Governance Council considers the “if not, why not” reporting platform offers Australian companies a robust and flexible structure for governance disclosure and balances the genuine governance interests of public capital. The Council also considers that the Principles and Recommendations represent a distillation of practices that can assist companies to implement a robust Corporate Governance Framework in Australia.