New Corporate Governance guidelines strengthen risk management focus

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The third edition of the Corporate Governance Principles and Recommendations has been released and strengthening risk management is at the core of some of the key changes.

While the eight core principles and the 22 substantive recommendations in the second edition have largely been retained, there have been some drafting changes to clarify their intent and draw a clear link between the recommendations and principles they support.

Nine new substantive recommendations have been introduced including Recommendation 7.3: A listed entity should disclose: (a) if it has an internal audit function, how the function is structured and what roles it performs; or (b) if it does not have an internal audit function, the processes it employs for evaluating and continually improving the effectiveness of its risks and, if it does, how it manages those risks And Recommendation 7.4: A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.

The Governance Institute of Australia has called the strengthened focus on risk management “heartening”.

“The Recommendation (7.4) is worded differently from the exposure draft, with the focus now on the materiality of the risks. Importantly, this new recommendation does not mean that companies have to produce a sustainability report or similar, but they do have to provide investors with a window onto how they are managing these risks. This is central to the long-term management of risks and the impact on the value of the investment,” the Institute stated.

In a statement ASX Corporate Governance Council chairman Alan Cameron said the recommendations on risk (7.1 – 7.4) have “been substantially enhanced to reflect the lessons of the GFC”.

“The Council would encourage all listed entities to review the enhanced risk recommendations carefully and to consider whether they need to upgrade their corporate governance practices in this area.”

Other changes in the principles and recommendations include:
  • The nine-year tenure limit proposed in the exposure draft has been dropped. The Council’s has replaced this with a note that the board has to assess on a case-by-case basis whether a director has been on the board for such a period that his or her independence may have been compromised.
  • A new recommendation recognises the role of the company secretary as the chief governance adviser to the board. Recommendation 1.4: ‘The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board’.  It also includes a notice that ‘The decision to appoint or remove a company secretary should be made or approved by the board’.
  • Changes to  gender reporting obligations  with the new edition stating that a listed entity has to disclose the respective proportions of men and women on the board, in senior executive positions and across the whole organisation or can use its report on ‘Gender Equality Indicator’ under the Workplace Gender Equality Act.
This edition of the Principles and Recommendations for an entity’s first full financial year commencing on or after July 1, 2014.

To view the third edition of Corporate Governance Principles and Recommendations click here.

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