With 2020 well underway, prudent businesses will be double-checking their corporate governance principles to make sure they’re up to the task. Justice Owen, in the HIH Royal Commission, described corporate governance as “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms by which companies, and those in control, are held to account”.
Last year, the Australian Stock Exchange (ASX) updated its Corporate Governance Principles and Recommendations. This new fourth edition is an invaluable guide to good governance. It contains eight recommendations:
- Lay solid foundations for management and oversight
- Structure the board to be effective and add value
- Instil a culture of acting lawfully, ethically and responsibly
- Safeguard the integrity of corporate reports
- Make timely and balanced disclosure
- Respect the rights of security holders
- Recognise and manage risk
- Remunerate fairly and responsibly
The ASX bases these recommendations on an “if not, why not?” approach. That is, if a company declines to act on any of the principles, it must be able to explain why. The guidelines apply to all entities admitted to the ASX, but are applicable to any organization looking to improve its governance.
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.
The key here is to have a board charter that sets out the roles of board and management. Further, a listed entity should undertake due diligence when appointing a new director or senior manager (and retain relevant records of such) and clearly set out the terms of each appointment; establish and monitor a diversity policy; and regularly evaluate directors’ and senior managers’ performance.
Finally, company secretaries should be given the necessary authority, accountability and resources to perform their function effectively.
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.
Boards should establish a nomination committee (chaired by an independent director) and a board skills matrix. This should be linked with an induction program and training or professional development as required to maintain board members’ skills and knowledge.
Independent directors and their interests should be identified – and should compose the majority of the board. Notably, the chair should be an independent director (and not also the CEO).
3. Instil a culture of acting lawfully, ethically and responsibly
A listed entity should instil and continually reinforce a culture40 across the organisation of acting lawfully, ethically and responsibly.
Listed entities should “articulate and disclose” their values. This includes creating and disclosing a code of conduct and informing the board (or relevant committee) of any material breaches.
Similarly, anti-bribery, anti-corruption and whistleblower policies should be created and exercised, with incidents reported to the board (or relevant committee).
4. Safeguard the integrity of corporate reports
A listed entity should have appropriate processes to verify the integrity of its corporate reports.
The board should establish an audit committee comprising at least three members (all non-executive directors and a majority of independent directors) and chaired by an independent director. Its charter should be disclosed and regular reports submitted to the board.
Before financial statements are approved, the board should receive from the CEO and CFO declarations that the records are true and fair, comply with accounting standards and are based on effective risk management and internal controls.
Finally, any corporate reports that have not been audited or reviewed by an external auditor should be subject to an established process to verify their integrity.
5. Make timely and balanced disclosure
A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.
Listed entities should create and disclose a policy for complying with continuous disclosure obligations (under listing rule 3.1). Board members should receive copies of market announcements shortly after they’ve been made, and copies of substantive presentations should be released on the ASX Market Announcements Platform ahead of the presentation.
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.
Listed entities should use their websites to provide information about itself to investors, as part of an investor relations program that facilitates dialogue and mutual understanding. Such information should include how the entity encourages participation at security holder meetings. Substantive resolutions should be decided by a poll (not a show of hands) and security holders should have the option to communicate with the entity and its security register electronically.
7. Recognise and manage risk
A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework.
Listed entities should establish a risk committee or committees comprising at least three members (all non-executive directors and a majority of independent directors) and chaired by an independent director. Its charter should be disclosed and regular activity and attendance reports submitted to the board.
The entity’s risk management framework should be reviewed at least annually; audit functions and processes detailed; and risk exposures (and mitigation strategies) disclosed.
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.
Boards should establish remuneration committees comprising at least three members (all non-executive directors and a majority of independent directors) and chaired by an independent director.
Policies for remunerating executive and non-executive directors, and other senior executives, should be disclosed. If an equity-based scheme is in place, the entity’s policy regarding risk-limiting transactions must be disclosed.
Good governance isn’t really about practices and procedures; it’s about culture and commitment. But you can’t have one without the other; good practices lead to good culture and vice-versa.
No matter where your organization stands on the governance spectrum, time spent ensuring your systems are up to the mark is never wasted. If you’d like a hand, we’re here to help. Otherwise, it’s over to you.
- 5 Ways to Improve your Board’s Corporate Governance Practices
- Board Portals – Tools for Governance and Compliance
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