The Royal Commission into misconduct in the Banking, Super Annuation and Financial Services Industry has revealed just how risky a failure in internal controls and culture can be to an organisation. More importantly, it has shown that reputation and standing can be destroyed in an instant and the immense difficulty in regaining public trust after it has been lost. The findings in the Royal Commission are just the tip of the iceberg as the current public sentiment reflects the growing indignation of corporate culture on a regional and global scale.
In light of this, the release of the Fourth Edition of the Corporate Governance Principles and Recommendations (Principles) by the ASX Corporate Governance Council (Council) on 27 February 2019, provides much needed guidance for listed entities on how to effectively imbed good corporate governance principles into their organisation. Whilst aimed at listed entities, our recommendation is that any organisation regardless of size and sector implement these principles as a matter of good corporate practice.
What are the Principles?
The Principles are non-prescriptive recommendations made by the Council that revolve around eight core governance principles. The purpose of these principles is to provide guidance on the internal systems and processes that create positive governance outcomes and promote investor confidence in the market. To interpret these principles the Council has provided recommendations on how to give effect to these general principles.
How do the principles work?.
ASX-listed entities are required to benchmark their corporate governance practices against the Council’s recommendations. However, the “if not, why not” rule provided under Listing Rule 4.10.3 encourages entities to adopt the Council’s recommended practices but stops short of creating an obligation for them to do so.
This flexibility gives organisations the option to adopt alternative corporate governance principles which the board feels are better suited to its unique circumstances. In exchange for this flexibility, the board of the organisations must explain to shareholders why it has chosen not to follow the Councils recommendations.
What are the new recommendations?
The fourth edition of the principles included the following recommendations,
- Promote organisations to take a holistic view of their culture to act “ethically, lawfully and responsibly” and to take into account the considerations of all stakeholders. This can be done by articulating the values to the directors, senior executives and employees through the code of conduct.
- Insuring the whistleblowing policy and procedures work as intended by fully imbedding them into the organisations wider governance framework and that periodic monitoring of the operation of this framework occurs regularly.
- Improving corporate governance practices, including board reporting breaches of codes of conduct, whistleblowing and anti bribery and corruption policies. Encouraging an active monitoring of the entity’s culture and conduct by creating a positive obligation of directors to be aware of breaches of code of conduct and whistleblowing policies.
What are the next steps?
Despite the fact that the principles do not come into effect until the first full financial year after 1 January 2020, we recommend that organisations take a proactive approach and begin to review their current policies and procedures and benchmark them against those outlined in the Fourth Edition.
The standards of corporate governance in Australia remain high by international standards. However, in response to the changing corporate landscape in which ethical status is as crucial as financial status, these principles can illuminate the path for directors of organisations and show how to create a responsible and accountable corporate culture.
Asian Corporate Governance Association 2016 CG Watch Survey.