What does good governance look like? – Corporate governance

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The ASX Corporate Governance Council recently published an overview of listed companies’ responses to the fourth edition of the Corporate Governance Principles and Recommendations1. The review, conducted by KPMG2highlights examples of “good governance” and “good reporting” and identifies areas where companies are struggling.

The review reviewed a large sample of reports from calendar year 2021 and focused on recommendations that were new or significantly changed since the third edition.

This article highlights the key elements of the report and suggests actions based on them.

Principle 1: Establish a solid foundation of management and control – Recommendation 1.2 (Appropriate controls of directors and senior management)

The review noted that most entities did some of the 5 recommended checks (work experience, education, criminal record, personal references, bankruptcy history), but it was less common to do all of the checks.




Our recommendations for the boards:

When considering recruiting new directors or senior managers:


  • plan ahead to undertake these checks so that they are not ignored in the name of “locking in” a promising candidate; and

  • be transparent about its control process: it manages the expectations of candidates but also the expectations of shareholders who propose a potential director for consideration by the board.

Principle 3: Instill a culture of legal, ethical and responsible action – statement of values, code of conduct, whistleblower policy, anti-corruption and anti-corruption policy

Principle 3 was perhaps most profoundly changed in the fourth edition. After the Hayne Royal Commission’s focus on how poor culture impairs compliance, the focus is much more on the interplay between governance practices and organizational values.

The review highlighted the importance of not only naming company values, but also:

  • explain how they align with legal and ethical behavior; and

  • given how these values ​​support the company in achieving its goals.

The Principles have recommended a code of conduct for some time. Recommendation 3.2(b) recommends that a listed entity “ensuring that the board or board committee is informed of any material breaches of this codeIt may be tempting to simply include in the Code that “misconduct must be reported” to the Board or a designated committee. However, the Board or Committee should:

  • ensure that, if there are breaches of the Code, they are reported (for example, through whistleblower channels); and

  • consider how to independently validate this, for example, through anonymous surveys of staff to determine whether they have identified and reported ethical issues, and what has happened as a result.

Recommending a whistleblower policy was new to the 4e Edition, roughly coinciding with amendments to the Corporations Act making whistleblower policies mandatory for all public companies. The review identified examples of good practice as follows:

  • link the whistleblower policy to the statement of values,

  • give specific examples of the types of matters that could be reported under the policy; and

  • ensure that employees are trained in the operation of the policy.

With respect to codes of conduct, recommendation 3.3(b) states that the registered entity should ensure that the board or board committee is informed of any material incident reported under the whistleblower policy.

Recommendation 3.4 also introduced for the first time the concept of an anti-bribery and corruption policy. Good practice reports included the identification of specific bribery and corruption relevant to the particular entity (for example, by virtue of the countries in which it operated or the particular sectors or types of transactions in which she usually engages).




Our recommendations for the Boards:
  • Determine if your current values ​​statement is truly distinctive and encourages behaviors that will support the company’s strategic and sustainable growth;

  • Ensure that code violations are effectively reported;

  • Ensure that you receive material incident reports communicated through whistleblower channels;

  • Make sure your employees understand the types of ethics and compliance issues most likely to arise in your business context

  • Ensure employees receive hands-on training on ethical behavior and how to report violations.

Principle 4: Maintain the integrity of corporate reporting

New Recommendation 4.3 is that a listed entity disclose the process for verifying the integrity of periodic corporate reports that are not audited or reviewed by the external auditor. The report gives a number of examples of informative descriptions of these processes, including:

  • aspects of reports prepared by or under the supervision of subject matter experts, distinguishing, for example, between financial and non-financial narratives;

  • processes to ensure that material statements are reviewed to ensure that they are accurate and that if the author did not have direct knowledge of the matter in question, there was evidence at hand support;

  • the process of preparing drafts, final management review by the CEO and CFO and review by the appropriate board committee and finally the board itself.




Our recommendation for audit/board committees:
  • Review this section of the report, which contains a number of useful examples;

  • consider whether the process for reviewing unaudited reports could be improved to reduce the risk of inaccurate reporting and to make a better quality report available to investors

Principle 5: Make timely and balanced disclosure

Principle 5 deals with how companies comply with continuous disclosure obligations. There are new recommendations that:

  • the entity ensures that the full board receives copies of all material market announcements promptly after they are issued; and

  • any new and substantial investor or analyst presentation is published on the ASX market announcement platform prior to the presentation (in fact, this was already standard practice).

The review of governance reports in this area highlights as “examples of best practice” companies that ensure the full board reviews material market announcements before they are released so that the board has opportunity to critique the ad. This must be balanced against the imperative that material matters be disclosed quickly to the market (the need for board approval is no excuse for slow disclosure).




Our recommendations :
  • Make sure your continuous disclosure policy outlines who will lead the preparation of announcements and seek approval from the full board or appointed board members, as appropriate;

  • streamline your process by working on draft announcements alongside negotiating deals or preparing general announcements ahead of milestones such as the release of clinical trial results

Principle 7: Recognize and manage risks

Recommendation 7.2, which has for some time recommended that the board or a committee of the board review the entity’s risk management framework at least annually, has been expanded to recommend that the annual review consider whether the entity operates with due regard to the risk appetite established by the table.




Examples of good risk disclosure:
  • describe the process and steps taken to review the entity’s risk framework;

  • explain how risk appetite issues relate to delegations of authority




Recommendation:
  • Determine whether your board has considered its risk appetite and communicated it clearly to the organization, and whether the analysis or communication needs to be revised.

What should companies do?

Companies with a June 30 year-end can use the reporting process to determine if governance practices or policies need to be updated. Although entities generally state that they will review their policies annually, this does not always happen.

Boards should consider the effectiveness of their compliance monitoring and risk management processes. Companies can also prepare for more effective governance reviews by allocating different topics (eg, risk management, diversity, shareholder engagement) into board and committee calendars for the coming year.

If you have any questions about the report or your own governance policies and practices, please contact the author of this article or the Piper Alderman partner company with whom you normally deal.

Footnotes

1https://www2.asx.com.au/content/dam/asx/about/corporate-governance-council/cgc-principles-and-recommendations-fourth-edn.pdf

2https://www2.asx.com.au/content/dam/asx/about/corporate-governance-council/900581601aarc-2022-asx-report-1-principles-final.pdf

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

Helen D. Jessen