10 October 2013
Practice Group(s):
Capital Markets
Proposed Amendments to the Corporate
Governance Principles
By Adam Levine and Philip Murray
Higher Standards, More Flexibility, Increased Disclosure
In August last year, the Australian Securities Exchange (ASX) Corporate Governance Council
(Council) undertook a review of the Corporate Governance Principles and Recommendations
(Recommendations) in response to the corporate governance failures that emerged in the aftermath of
the Global Financial Crisis (GFC).
The result of that review is the draft third edition of the Recommendations, which was recently
released, along with a consultation paper explaining the amendments. The ASX has also released its
own consultation paper regarding proposed amendments to the ASX Listing Rules (Listing Rules) and
to Guidance Note 9.
Several broad themes can be identified from the ASX's proposed Listing Rules amendments:
 a greater emphasis has been placed on the importance of maintaining structural mechanisms to
identify risks – including social and environmental risks
 the standards promulgated in the Recommendations are, in some respects, higher, while at the
same time, there is more flexibility in both meeting and reporting against the Recommendations
 on reflection of the global nature of the crisis which sparked this review, the Council is striving to
align Australia's corporate governance principles with international norms.
What Does This Mean for Listed Entities?
The key changes the Council has put forward for consultation include:
 a new Recommendation that listed entities establish a separate risk committee tasked with
identifying and monitoring risks, including social and environmental risks
 tightening the factors to consider when evaluating whether a director is independent or not
 allowing smaller listed entities to adopt alternative options in respect of certain Recommendations
where the aims of the Recommendation can legitimately be met at a lower cost of compliance
 numerous practices elevated to full Recommendations after previously only being suggested in the
commentary.
Key changes incorporated in the proposed amendments to the Listing Rules include a new Appendix
4G, detailing the location of reporting related to the Recommendations and a requirement to disclose
the on-market purchase of securities by or on behalf of employees or directors.
The Recommendations and Listing Rules have not yet been finalised; interested stakeholders now
have the opportunity to make submissions to the Council regarding the proposed amendments. K&L
Proposed Amendments to the Corporate Governance
Principles
Gates can assist in assessing the impact the proposals could have on your company and in preparing
submissions to the Council.
The Recommendations and Listing Rules proposed amendments are discussed further below.
Higher Standards
The Council is proposing to increase the corporate governance obligations of entities in the following
areas.
Area
Proposed amendments
Risk management
In the wake of what it perceives were the corporate governance failures of the
GFC, the Council has proposed new Recommendations concerning the risk
management procedures of listed entities.
The new Recommendations are that listed entities:
 establish a risk committee
 conduct risk management reviews at board level at least annually
 institute internal audit procedures, or otherwise provide for the evaluation
and continual improvement of its risk management processes
 disclose whether and how the listed entity has taken into account
economic, environmental and social sustainability risks.
These Recommendations are, according to the Council, designed to
encourage an enterprise-wide approach to risk management, and accord with
international developments in this space.
The Council has indicated that the inclusion of a Recommendation relating to
environmental and social sustainability risks is not intended to encourage
particular environmental or social policies, but rather is aimed at mitigating
against the investment risks that may follow from the failure to adequately
identify and manage relevant social or environmental issues.
Independent
directors
The Council is proposing to include additional factors to consider when
evaluating whether or not a director is "independent". The Council is
proposing to:
 expand references to "material supplier or customer" of the listed entity to
encompass any such relationships within the previous three years, rather
than solely at the time of appointment
 include close family ties with any person who falls within one of the other
factors as an indicator of non-independence
 include service on the board for more than nine years as an indicator of
non-independence.
The Council has indicated that this last point, in particular, is in keeping with
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Proposed Amendments to the Corporate Governance
Principles
Area
Proposed amendments
international practice which has developed in recent years. This proposal
could mean listed entities will be required to weigh the benefits of experience
and loyalty against independence.
Entities incorporated
outside Australia
Recognising that not all listed entities are incorporated in Australia (and are
therefore not subject to the Corporations Act), the Council is proposing to
issue new Recommendations which effectively require foreign incorporated
entities to conform to certain practices required under the Corporations Act.
For example, the Council is proposing Recommendations that:
 the board of a listed entity should receive a declaration from its CEO and
CFO that its financial records have been properly maintained and that its
statements are compliant before approving the listed entity's financial
statement
 a listed entity should ensure its auditor is available at its annual general
meeting to answer questions.
Clawback policy
In a bid to tackle concerns that senior executives should not retain bonuses
paid in circumstances where there has been a material misstatement of
financial results, the Council has proposed a Recommendation that listed
entities:
 have a "clawback" policy which sets out the circumstances in which they
may claw back performance-based remuneration from their senior
executives
 disclose that policy or a summary of it
 disclose when performance-based remuneration has or should have been
clawed back.
New
Recommendations
sourced from
commentary
The Council believes that a number of suggestions previously in the
commentary to the Recommendations should be elevated to become
Recommendations themselves, as these practices should now be considered
governance standards. Proposed Recommendations sourced from the
commentary include Recommendations that listed entities:
 have and disclose a program for the induction and education of directors
 ensure their external auditor attend the annual general meeting to answer
any questions
 provide information about themselves and their governance on their
websites
 disclose their policies to facilitate and encourage participation at security
holder meetings
 give security holders the option of communicating with listed entities by
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Proposed Amendments to the Corporate Governance
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Area
Proposed amendments
email
 disclose the structure and role of their internal audit function, or their
processes for evaluating and improving risk management.
More Flexibility
As a result of the proposed amendments to the Listing Rules and Recommendations, listed entities
will be afforded some increased flexibility in reporting against the Recommendations.
Area
Proposals amendments
Online disclosure
The ASX is proposing to amend Listing Rule 4.10.3 to enable listed entities
to make their corporate governance disclosures on their website, instead of
having that disclosure confined to the annual report.
Alternative
Recommendations
Recognising that some listed entities will legitimately adopt alternative
measures to meet the objectives of certain Recommendations than those
specified, the Council is proposing to enable those entities to report their
alternative arrangements rather having to report non-compliance. These
"alternative" Recommendations apply in relation to:
 the nomination, audit, risk and remuneration committees
 internal audit functions.
Gender diversity
reporting
The Council is proposing a Recommendation allowing listed entities which
report their "Gender Equality Indicators" under the Workplace Gender
Equality Act to use that report for their corporate governance disclosures,
rather than having to report the respective proportions of men and women on
the board, in senior executive positions and across the whole organisation.
Increased Disclosure
The proposed amendments to the Listing Rules and the Recommendations, if adopted, will mean that
listed entities are obliged to provide additional disclosure.
Area
Proposals amendments
Appendix 4G
In the ASX's view, it can be difficult and time consuming to locate
information disclosed by listed entities throughout their annual reports and on
their website. Additionally, the ASX is concerned that some corporate
governance statements are pro forma documents. Accordingly, the ASX is
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Proposed Amendments to the Corporate Governance
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Proposals amendments
proposing to require listed entities to complete and file an Appendix 4G at
the same time as its annual report.
The Appendix 4G is a 13 page form requiring listed entities to state whether
or not they comply with each Recommendation, and where the disclosure
relating to each Recommendation has been made.
Diversity
The Council is proposing a Recommendation that listed entities disclose how
"senior executive" is defined when reporting gender diversity statistics.
Director elections
The Council is proposing a new Recommendation that listed entities provide
their security holders with all material information relevant to a decision on
whether or not to elect or re-elect a director. The aim of this
Recommendation is to ensure security holders have enough information to
make an informed decision. The Council notes this measure has been adopted
internationally.
On-market
employee share
purchases
While perhaps not closely related to the corporate governance regime, the
ASX is taking this opportunity to also propose a new Listing Rule 3.19B,
which will require any on-market purchases under the terms of a scheme for
the purchase of securities by or on behalf of employees, directors, or their
related parties, to be disclosed within five business days.
Timeline
This is the consultation stage of the amendment process – these changes will not all necessarily be
included in the final version of the Recommendations and Listing Rules. Which proposals are finally
implemented will depend upon the submissions received during this consultation phase. If you will be
affected by these changes, now is the chance to have your say.
The Council has invited interested parties to provide comments on the draft Recommendations by
Friday, 15 November 2013. Parties are welcome to send the Council combined submissions dealing
with both the draft Recommendations and the proposed ASX Listing Rules and Guidance Note
changes.
It is envisaged that the final version of the Recommendations will take effect for each entity's first full
financial year commencing on or after 1 July 2014.
K&L Gates would be happy to assist you if you would like to lodge a submission.
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Proposed Amendments to the Corporate Governance
Principles
Authors:
Adam Levine
adam.levine@klgates.com
+61 8 9216 0965
Philip Murray
philip.murray@klgates.com
+61 8 9216 0970
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©2013 K&L Gates LLP. All Rights Reserved.
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