Corporate governance beyond shareholder interests

In brief

The proposed 4th edition of the ASX Corporate Governance Principles & Recommendations includes substantial changes to Principle 3 (Instil the desired culture) to focus squarely on social licence to operate, with stronger reference to stakeholders beyond shareholders, and specific recommendations on whistleblowing and anti-bribery and corruption. While the proposed amendments to Principle 3 have led to heated debate in the press, the proposal reflects the trend in Australia, and internationally, towards embedding corporate social responsibility within company culture, and of regulators' broadening expectations of companies' governance, risk and compliance practices. Partner Rachel Nicolson, Senior Associate Dora Banyasz and Associate Holly Woodcroft report.

Background

On 2 May 2018, the ASX Corporate Governance Council (the Council) released a proposed 4th edition of the ASX Corporate Governance Principles & Recommendations (the Principles) for consultation. Consultation closed on 27 July 2018, and 97 submissions were received from a broad range of stakeholders, including ASX 100 companies, ASIC, and governance bodies such as the Australian Institute of Company Directors. The submissions reflect different stakeholders' mixed views on the proposed amendments to Principle 3. If adopted, listed entities would be required to report on how they follow each recommendation, or give an 'if not, why not' explanation of the reasons for not following them. The Principles are a helpful tool for non-listed entities to use as a benchmark for their governance practices.

Key changes

The proposed 4th edition retains the same eight core principles of the current Principles, but significantly changes Principle 3 to provide that 'a listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner'. This is described as being integral to an entity's 'social licence to operate', which, it is stated, can be built and preserved through having regard to the views and interests of a broad range of stakeholders, including not only shareholders but employees, customers, suppliers, creditors, regulators, consumers, taxpayers and local communities. 'Socially responsible manner' is not defined, a point about which there has been concern in some of the submissions to the consultation.

The specific recommendations under Principle 3 include having and disclosing:

• the company's core values;
• a code of conduct;
• a whistleblower policy; and
• an anti-bribery and corruption policy.

The recommendations suggest that material breaches of the policies, or concerns raised under the policies that call into question the culture of the organisation, should be reported to the board.

The amendments to the commentary on Principle 3 also enhance references to human rights as part of investors' expectation that boards and management engage with a broader range of stakeholders and are seen to be 'good corporate citizens'. The commentary specifically refers to the Ten Principles of the UN Global Compact and to the UN Guiding Principles on Business and Human Rights.

The broader context

In some ways, the proposed amendments to Principle 3 should come as no surprise, coming after a year in which we have seen proposed amendments to the anti-bribery and whistleblowing regimes in Australia,¹ the introduction of legislation to Parliament that will see the establishment of a modern slavery reporting requirement,² the establishment of the Banking Executive Accountability Regime,³ the Banking Royal Commission,⁴ and the Australian Prudential Regulation Authority's report into the Commonwealth Bank of Australia. Each of these developments have substantially enhanced the focus on governance, risk and compliance issues for Australian corporates, and prompted companies to pay greater attention to the impact of social licence on investor confidence. Indeed, the Communique the ASX Corporate Governance Council issued in connection with the consultation for the proposed update to the Principles noted that the Council recognises the need to address emerging domestic and global corporate governance issues, and that the proposed changes are, to some extent, a response to the Banking Royal Commission.

The focus on stakeholders beyond shareholders also reflects trends overseas, including the recent UK corporate governance changes.⁵ These include requirements for certain companies to report on how directors, when carrying out their duty to promote the success of the company,⁶ have had regard to stakeholder interests, and to provide a detailed explanation of how the company has engaged with its stakeholders.

What's next?

The Council is expected to release the final version early in 2019, with entities required to benchmark governance practices against this version in their reporting on FY20.

• Following pushback in the press, the Chair of the Council has issued a statement saying that the issue of social licence 'can be addressed in different terms, such as reputation, brand and trust,'⁷ suggesting that the final update to the Principles may change in form, if not substance, depending on the weight of the submissions and the consensus of the Council's members.
• Watch this space – we will continue to keep you updated on the release of the final Principles, and other developments in governance, risk and compliance expectations.