Corporate Governance Principles and Recommendations 2nd Edition ASX Corporate Governance Council Disclaimer Although Council members and their related bodies corporate (“Council”) have made every effort to ensure the accuracy of the information as at the date of publication, the Council does not give any warranty or representation as to the accuracy, reliability or completeness of the information. To the extent permitted by law, the Council and their respective employees, officers and contractors shall not be liable for any loss or damage arising in any way, including by way of negligence, from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information. © Copyright 2007 ASX Corporate Governance Council. Association of Superannuation Funds of Australia Ltd, ACN 002 786 290, Australian Council of Superannuation Investors, Australian Financial Markets Association Limited ACN 119 827 904, Australian Institute of Company Directors ACN 008 484 197, Australian Institute of Superannuation Trustees ACN 123 284 275, Australasian Investor Relations Association Limited ACN 095 554 153, Australian Shareholders’ Association Limited ACN 000 625 669, ASX Limited ABN 98 008 624 691 trading as Australian Securities Exchange, Business Council of Australia ACN 008 483 216, Chartered Secretaries Australia Ltd ACN 008 615 950, CPA Australia Ltd ACN 008 392 452, Financial Services Institute of Australasia ACN 066 027 389, Group of 100 Inc, The Institute of Actuaries of Australia ACN 000 423 656, The Institute of Chartered Accountants in Australia ARBN 084 642 571,The Institute of Internal Auditors - Australia ACN 001 797 557, Investment and Financial Services Association Limited ACN 080 744 163, Law Council of Australia Limited ACN 005 260 622, National Institute of Accountants ACN 004 130 643, Property Council of Australia Limited ACN 008 474 422, Securities & Derivatives Industry Association Limited ACN 089 767 706. All rights reserved 2007. ISBN 1 875262 42 3 Contents Foreword 2 Corporate governance in Australia 3 Disclosure of corporate governance practices 5 The Corporate Governance Principles and Recommendations 10 Principle 1: Lay solid foundations for management and oversight 13 Principle 2: Structure the board to add value 16 Principle 3: Promote ethical and responsible decision-making 21 Principle 4: Safeguard integrity in financial reporting 25 Principle 5: Make timely and balanced disclosure 28 1 Principle 6: Respect the rights of shareholders 30 Principle 7: Recognise and manage risk 32 Principle 8: Remunerate fairly and responsibly 35 Glossary 38 List of references to further guidance 40 Comparative table of changes to the Principles and Recommendations 42 Foreword A decade ago, the term ‘corporate governance’ Ultimately, it is for the market to pass was barely heard. Today, like climate change judgement on the corporate governance and private equity, corporate governance is practices of Australian companies, not the a staple of everyday business language and Council or ASX. The guidance provided by the capital markets are better for it. Principles and Recommendations since 2003, with the cooperative goodwill of listed entities, The ASX Corporate Governance Council was has contributed to a high standard of corporate formed in August 2002 and has been chaired governance practice in Australia without the by the Australian Securities Exchange (ASX) since agency costs of ‘black letter’ law common in its inception. The Council is a remarkably diverse other markets. body, bringing together 21 business, investment and shareholder groups. Its ongoing mission is Corporate governance is a dynamic force that to ensure that the principles-based framework it keeps evolving. Council’s challenge is to ensure developed for corporate governance continues that the Principles and Recommendations to be a practical guide for listed companies, their remain relevant to the Australian business investors and the wider Australian community. and investment communities. The revised The Council’s diverse range of voices is one of its Principles and Recommendations are part of strengths. Its striving for consensus is consistent that process. They reflect the contributions of with maintaining balance in regulatory and more than 100 public submissions and will take reporting affairs. effect from 1 January 2008. This document marks the first revision of the This document cannot be the final word. It Council’s corporate governance Principles and is offered as guidance and will be reviewed Recommendations since they were issued again. Nor is it the only word. Good corporate in March 2003. This is testimony to the governance practice is not restricted to 2 durability of Australia’s flexible, principles-based adopting the Council’s Recommendations. The approach to corporate governance. While arrangements of many entities differ from the some other major jurisdictions are unwinding Recommendations but amount equally to good their governance frameworks because of practice. What matters is disclosing those unworkability, Australia has been able to arrangements and explaining the governance refresh its approach rather than undertake practices considered appropriate to an a rewrite. individual company’s circumstance. Support for Australia’s approach is reflected We are all – the Council, ASX and Australian in the continued high level of reporting against market participants generally – in the business the Council’s Principles and Recommendations of preserving stakeholder confidence. That by the more than 2,000 entities listed on is the thread that runs through each of the ASX. Overall reporting levels of corporate Principles and Recommendations contained governance practice – the aggregate of in this document. The wording may change, adoption of recommended practices and of as necessary, from time to time, but that “if not, why not” reporting – have risen in underlining theme will remain. each of the three years the Principles and Recommendations have been in operation prior to this revision. This is good news for investors. Eric Mayne The more transparent listed entities are Chair, ASX Corporate Governance Council about their corporate governance practices, August 2007 the better placed investors will be to make informed investment decisions. Corporate governance in Australia What is corporate governance? The fundamentals Corporate governance is “the framework of Fundamental to any corporate governance rules, relationships, systems and processes structure is establishing the roles of the board within and by which authority is exercised and and senior executives – Principle 1, with a controlled in corporations”. It encompasses the balance of skills, experience and independence mechanisms by which companies, and those on the board appropriate to the nature and in control, are held to account.1 Corporate extent of company operations – Principle 2. governance influences how the objectives There is a basic need for integrity among of the company are set and achieved, how those who can influence a company’s strategy risk is monitored and assessed, and how and financial performance, together with performance is optimised. responsible and ethical decision-making which takes into account not only legal obligations but Effective corporate governance structures also the interests of stakeholders – Principle 3. encourage companies to create value, through entrepreneurialism, innovation, development Meeting the information needs of a modern and exploration, and provide accountability investment community is also paramount in and control systems commensurate with the terms of accountability and attracting capital. risks involved. Presenting a company’s financial and non- financial position requires processes that The evolving nature of corporate safeguard, both internally and externally, the governance integrity of company reporting – Principle 4, and provide a timely and balanced picture of all Corporate governance practices will evolve material matters – Principle 5. The rights of in the light of the changing circumstances company owners, that is shareholders, need to of a company and must be tailored to meet those circumstances. Corporate governance be clearly recognised and upheld – Principle 6. 3 practices must also evolve in the context of Every business decision has an element of developments both in Australia and overseas. uncertainty and carries a risk that can be managed through effective oversight and There is no single model of good corporate internal control – Principle 7. Rewards are also governance. This document articulates eight needed to attract the skills required to achieve core principles (the Principles). Each Principle the performance expected by shareholders – is explained in detail, with commentary about Principle 8. implementation in the form of Recommendations (the Recommendations). Each Principle is of equal importance. The ASX Corporate Governance Council’s Recommendations are not mandatory and cannot, in themselves, prevent corporate failure or poor corporate decision-making. They are intended to provide a reference point for companies about their corporate governance structures and practices. 1 Justice Owen in the HIH Royal Commission, The Failure of HIH Insurance Volume 1: A Corporate Collapse and Its Lessons, Commonwealth of Australia, April 2003 at page xxxiii and Justice Owen, Corporate Governance – Level upon Layer, Speech to the 13th Commonwealth Law Conference 2003, Melbourne 13-17 April 2003 at page 2. Why is it important to Australia? Corporate governance structures and practices continue to be important in determining the cost of capital in a global capital market. Australian companies must be equipped to compete globally and to maintain and promote investor confidence both in Australia and overseas. In an examination of our corporate governance practices, Australia starts from a position of strength. However, it is important to periodically review those practices to ensure they continue to reflect local and international developments and promote high standards of transparency about the corporate governance practices of listed entities. The ASX Corporate Governance Council As a central reference point for companies to understand stakeholder expectations and to promote and maintain investor confidence, ASX convened the ASX Corporate Governance Council in August 2002. Its purpose was and remains to develop Principles and Recommendations which reflect international good practice. The ASX Corporate Governance Council includes representatives of: • Association of Superannuation Funds of Australia Ltd • Australasian Investor Relations Association • Australian Council of Superannuation Investors • Australian Financial Markets Association • Australian Institute of Company Directors • Australian Institute of Superannuation Trustees • Australian Securities Exchange • Australian Shareholders’ Association • Business Council of Australia • Chartered Secretaries Australia 4 • CPA Australia Ltd • Financial Services Institute of Australasia • Group of 100 • Institute of Actuaries of Australia • The Institute of Chartered Accountants in Australia • Institute of Internal Auditors Australia • Investment and Financial Services Association • Law Council of Australia • National Institute of Accountants • Property Council of Australia • Securities & Derivatives Industry Association Disclosure of corporate governance practices (following the “if not, why not” approach) How to approach the Disclosure requirements Recommendations Under ASX Listing Rule 4.10.3, companies The Recommendations are not prescriptions, are required to provide a statement in their they are guidelines, designed to produce an annual report disclosing the extent to which outcome that is effective and of high quality they have followed the Recommendations in the and integrity. This document does not require reporting period. Where companies have not a “one size fits all” approach to corporate followed all the Recommendations, they must governance. Instead, it states suggestions identify the Recommendations that have not for practices designed to optimise corporate been followed and give reasons for not following performance and accountability in the interests them. Annual reporting does not diminish the of shareholders and the broader economy. If a company’s obligation to provide disclosure company considers that a Recommendation is under ASX Listing Rule 3.1. inappropriate to its particular circumstances, It is only where a Recommendation is not it has the flexibility not to adopt it – a flexibility followed or where a disclosure requirement tempered by the requirement to explain why – is specifically identified that a disclosure the “if not, why not” approach.2 obligation is triggered. Each Recommendation The ASX Corporate Governance Council is clearly identified as a disclosure obligation encourages companies to use the guidance and the disclosure obligation is contained provided by this document as a focus for in the Guide to reporting at the end of each re-examining their corporate governance Principle. The Commentary that follows each practices and to determine whether and to Recommendation does not form part of the what extent the company may benefit from Recommendation and does not trigger a a change in approach, having regard to the disclosure obligation. It is provided to assist company’s particular circumstances. companies to understand the reasoning for the 5 Recommendation, highlight factors which may There is little value in a checklist approach be relevant to consider, and make suggestions to corporate governance that does not as to how to implement the Recommendation. focus on the particular needs, strengths and weaknesses of the company. The ASX The Guide to reporting which follows each Corporate Governance Council recognises that Principle sets out what and where disclosure the range in size and diversity of companies is is required. In some cases the company is significant and that smaller companies from required to set out the relevant disclosure in the outset may face particular issues in a separate corporate governance statement following all Recommendations. Performance in its annual report. Where the Corporations and effectiveness can be compromised by Act requires particular information to be material change that is not managed sensibly. included in the directors’ report, the company Where a company is considering widespread has the discretion to include a cross-reference structural changes in order to follow the to the relevant information in the corporate Principles and Recommendations, the company governance section of the annual report rather is encouraged to prioritise its needs and to than duplicating the information. set and disclose practical goals against an indicative timeframe for meeting them. 2 An exception regarding audit committees applies to companies comprising the S&P All Ordinaries Index. The ASX Listing Rules mandate the establishment of audit committees by those companies and require that the composition, operation and responsibility of the audit committee of companies in the top 300 of that Index comply with the Council’s Recommendations. Top 300 companies is a reference made in Listing Rule 12.7 to the Top 300 companies listed in the S&P All Ordinaries Index at the beginning of the company’s financial year. In an Exposure Draft released in June 2007, ASX has released a proposal to amend Listing Rule 12.7 to refer to companies in the “S&P/ ASX 300 Index”. See the Exposure Draft of changes at www.asx.com.au/about/regulatory_policy_unit/index.htm. The proposed amendments are likely to come into effect at the end of 2007. For more general information, there are The ASX Corporate Governance Council requirements to make information publicly supports companies seeking to meet the ‘spirit’ available, ideally on the company website. of the Principles through whatever means they This information should be clearly presented in believe are most appropriate to their business. a separate corporate governance information section of the website. The corporate Nothing in the Principles and Recommendations governance statement in the annual report precludes a company from following an should contain references or links or instructions alternative practice to that set out in a particular to navigate the website to enable shareholders Recommendation, provided it explains its to gain access to this information readily. approach. This explanation of the alternative approach is the essence of “if not, why not” reporting. The ASX Corporate Governance The “If not, why not” approach Council considers that a well-reasoned “if not, Respondents to the ASX Corporate Governance why not” explanation from a company is a valid Council’s consultation on the changes to the response to a particular Recommendation. Principles expressed strong support for the “if not, why not” approach but also expressed Effective “if not, why not” reporting practices a desire for the ASX Corporate Governance involve: Council to provide more explanation about this • identifying the Recommendations the approach to reporting. company has not followed The ASX Corporate Governance Council • explaining why the company has not followed considers that the Principles and the relevant Recommendation Recommendations represent a distillation • explaining how its practices accord with of practices that can assist companies to the ‘spirit’ of the relevant Principle, that implement a robust corporate governance the company understands the relevant framework. However, the ASX Corporate issues and has considered the impact of Governance Council also acknowledges and its alternative approach. endorses the finding of the first Implementation Review Group’s Report that: The ASX Corporate Governance Council 6 considers the “if not, why not” reporting platform “…there is no typical organisation and no offers Australian companies a robust and flexible single readily identifiable model for corporate structure for governance disclosure and balances governance... At different times and stages in the genuine governance interests of public a company’s life, some governance structures capital markets. The ASX Corporate Governance may be better for the generation of wealth for Council encourages companies to make use of investors than others... the “if not, why not” approach, and other market participants to support this approach. It [is] important to distinguish between the purpose of the …Principles and the purpose of the Recommendations. The Principles embody the broad concepts which underpin effective corporate governance. They encapsulate ‘common sense’ ideas with broad relevance. By contrast, the Recommendations given for each Principle suggest one framework for implementing the Principles within an organisation. Disclosure of a company’s corporate governance practice, rather than conformity with a particular model is central to the ASX Corporate Governance Council’s approach.” 3 3 Implementation Review Group Report, released 31 March 2004 page 1ff. What is the disclosure period? What entities are affected? The change in the reporting requirement The Recommendations are directed at applies to the company’s first financial year companies and other types of listed entities. commencing on or after 1 January 2008. Where appropriate, the term “company” is Accordingly, where a company’s financial year used in the Principles and Recommendations begins on 1 January, disclosure will be required to encompass any listed entity, including in relation to the financial year 1 January 2008 listed managed investment schemes (trusts), – 31 December 2008 and will be made in listed stapled entities, and listed foreign the annual report published in 2009. Where entities. Also where appropriate, references a company’s financial year begins on 1 July, to “shareholders” and “investors” will include disclosure will be required in relation to the references to unitholders of unit trusts. financial year 1 July 2008 – 30 June 2009 Specific application of the Principles and and will be made in the annual report published Recommendations for trusts and externally in 2009. managed entities has been highlighted. The ASX Corporate Governance Council The ASX Corporate Governance Council encourages companies to make an early acknowledges that there are historical and transition to the revised Principles and legal reasons for the current governance Recommendations and companies are practices of these listed collective investment requested to consider reporting by reference entities. They are, however, an increasingly to the Principles and Recommendations in their popular investment choice for retail investors. corporate reporting for the 2007– 2008 year. The ASX Corporate Governance Council considers it important that listed collective ASX Corporate Governance Council investment vehicles follow the spirit of the website Principles, particularly in relation to the issues of independence and remuneration, and provide The ASX has dedicated a section of its website explanations in relation to their governance to assist companies with regard to these structures. This policy ensures that investors Principles and Recommendations. The site receive sufficient information to understand the contains links to useful reference material and governance processes of these vehicles and to 7 websites of ASX Corporate Governance Council form their own opinion as to their suitability. members. It is located at www.asx.com.au/ corporategovernance. Audit committees There are specific requirements for companies within the S&P All Ordinaries Index in relation to audit committees. Listing Rule 12.7 requires a company in the S&P All Ordinaries Index at the beginning of its financial year to have an audit committee during that year. If the company was in the top 300 of that Index at the beginning of its financial year, it must follow the Recommendations of the ASX Corporate Governance Council on the composition, operation and responsibility of the audit committee.4 These are set out in Principle 4. 4 See note 2. Companies not subject to the Improving corporate governance Corporations Act and the Accounting disclosures Standards As part of the review of the first edition of the As a result of the ASX Corporate Governance Principles and Recommendations, the ASX Council’s review of the first edition of the Corporate Governance Council considered Principles and Recommendations, three whether there were ways in which companies Recommendations have been removed from could improve their disclosures of corporate the revised Principles because their content governance information. The ASX Corporate is now largely reflected in the Corporations Governance Council commissioned a User Act and the Accounting Standards.5 The ASX Survey of professional and private investors in Corporate Governance Council considers that late 2005 which was released in March 2006. the vast majority of listed companies will benefit The need for greater clarity when providing from removing duplications and overlap between corporate governance information was one the Principles and Recommendations and the of the key findings of that Survey. Other Corporations Act and the Accounting Standards. suggestions in the User Survey for improving corporate governance information included: The ASX Corporate Governance Council has • existing information could be clearer and therefore amended Principles 6 and 8 to make more concise it clear that where a listed company is not • existing information could be more accessible required to comply with sections 250RA and 300A of the Corporations Act or AASB 124 • more details about boards – board Related Party Disclosures it should consider experience; independence and affiliations; the range of means by which it might achieve commitments; share trading; committees the same ends. The company should include including composition; policies and review a statement in its annual report disclosing the processes extent to which it has achieved the aims of the • clarity of information concerning remuneration relevant provisions during the reporting period of directors and senior executives and give reasons for not doing so. • a summary statement of whether companies 8 Principle 7 also makes it clear that where a are following the ASX Corporate Governance Council’s Principles and Recommendations listed company is not subject to section 295A or providing “if not, why not” reporting.6 of the Corporations Act it should consider the range of means by which it can achieve the same ends and include in its annual report a statement disclosing the extent to which it has achieved the aims of the provisions of the section and provide reasons for not doing so. The ASX Corporate Governance Council encourages these entities to follow the ‘spirit’ of the Principles and Recommendations and provide these disclosures. 5 The relevant sections of the Corporations Act are Section 295A, 250RA and 300A and AASB 124 Related Party Disclosures. Section 250RA [Auditor required to attend listed company’ AGM] of the Corporations Act makes it an offence for the lead auditor not to attend a listed company’s AGM, or arrange to be represented by a suitably qualified member of the audit team who is in a position to answer questions about the audit. Section 295A [Declaration in relation to listed entity’s financial statements by chief executive officer and chief financial officer] in Part 2M – Financial Reporting of the Corporations Act. The directors’ declaration under s295(4) can now only be made once the directors have received a declaration from the CEO and CFO, or equivalents that: (a) the financial records have been properly maintained, (b) the financial statements comply with accounting standards and (c) the financial statements and notes give a true and fair view. Section 300A [Annual Directors’ Report – Specific information to be provided by listed companies] – particularly Disclosure of remuneration policy and details and AASB 124 Related Party Disclosures. 6 See the Survey at www.asx.com.au/supervision/pdf/asx_corporate_governance_summary_march06. As part of its responsibilities for monitoring Monitoring implementation and change compliance with Listing Rule 4.10.3 ASX has The ASX Corporate Governance Council is undertaken three annual reviews of companies’ committed to a continuing review of these corporate governance disclosures. The ASX Principles and Recommendations to ensure review of corporate governance disclosures that they remain relevant, take account of local in 2006 annual reports made the following and international developments, and continue suggestions for ways in which companies could to reflect international best practice. improve their corporate governance disclosures: Companies and investors are encouraged to • c  ompanies should be encouraged to improve provide feedback about the implementation and their compliance with Listing Rule 4.10.3 impact of these Recommendations to the ASX by simplifying their corporate governance Corporate Governance Council directly or to statements. This could be achieved one of its member bodies. by dealing with the Recommendations consecutively on a Recommendation-by- As with the first edition of the Principles, the Recommendation basis. Some reports ASX Corporate Governance Council will formally provided information in this format either in continue to review the impact of these Principles narrative or tabular form and Recommendations following collation and examination of disclosures made in annual • clear cross-references to the location of reports and consideration of feedback received. information not included in the corporate governance statement but located elsewhere Acknowledgements in the annual report or websites were also useful.7 The ASX Corporate Governance Council’s Principles and Recommendations have The ASX Corporate Governance Council benefited from the invaluable contributions encourages companies to consider these made by a number of industry associations, suggestions when reporting. corporate governance experts and listed companies and their directors. The ASX Corporate Governance Council is most grateful for their input, and for invaluable editorial 9 contributions and assistance. 7 See Analysis of Corporate Governance Practice Disclosure in 2006 Annual Reports at www.asx.com.au/ supervision/governance/monitoring_compliance.htm. The Corporate Governance Principles and Recommendations Principle 1 – Lay solid foundations for management and oversight Companies should establish and disclose the respective roles and responsibilities of board and management. • Recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions. • Box 1.1 Content of a director’s letter upon appointment • Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives. • Recommendation 1.3: Companies should provide the information indicated in the Guide to reporting on Principle 1. Principle 2 – Structure the board to add value Companies should have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. • Recommendation 2.1: A majority of the board should be independent directors. • Box 2.1: Relationships affecting independent status • Recommendation 2.2: The chair should be an independent director. • Recommendation 2.3: The roles of chair and chief executive officer should not be exercised by the same individual. • Recommendation 2.4: The board should establish a nomination committee. 10 • Recommendation 2.5: Companies should disclose the process for evaluating the performance of the board, its committees and individual directors. • Recommendation 2.6: Companies should provide the information indicated in the Guide to reporting on Principle 2. Principle 3 – Promote ethical and responsible decision-making Companies should actively promote ethical and responsible decision-making. • Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code as to: • the practices necessary to maintain confidence in the company’s integrity • the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders • the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. • Box 3.1: Suggestions for the content of a code of conduct • Recommendation 3.2: Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy. • Box 3.2: Suggestions for the content of a trading policy • Recommendation 3.3: Companies should provide the information indicated in the Guide to reporting on Principle 3. Principle 4 – Safeguard integrity in financial reporting Companies should have a structure to independently verify and safeguard the integrity of their financial reporting. • Recommendation 4.1: The board should establish an audit committee. • Recommendation 4.2: The audit committee should be structured so that it: • consists only of non-executive directors • consists of a majority of independent directors • is chaired by an independent chair, who is not chair of the board • has at least three members. • Recommendation 4.3: The audit committee should have a formal charter. • Recommendation 4.4: Companies should provide the information indicated in the Guide to reporting on Principle 4. Principle 5 – Make timely and balanced disclosure Companies should promote timely and balanced disclosure of all material matters concerning the company. • Recommendation 5.1: Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. • Box 5.1: Continuous disclosure policies 11 • Recommendation 5.2: Companies should provide the information indicated in the Guide to reporting on Principle 5. Principle 6 – Respect the rights of shareholders Companies should respect the rights of shareholders and facilitate the effective exercise of those rights. • Recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. • Box 6.1: Using electronic communications effectively • Recommendation 6.2: Companies should provide the information indicated in the Guide to reporting on Principle 6. Principle 7 – Recognise and manage risk Companies should establish a sound system of risk oversight and management and internal control. • Recommendation 7.1: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. • Recommendation 7.2: The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks. • Recommendation 7.3: The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. • Recommendation 7.4: Companies should provide the information indicated in the Guide to reporting on Principle 7. Principle 8 – Remunerate fairly and responsibly Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear. • Recommendation 8.1: The board should establish a remuneration committee. • Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives. • Box 8.1: Guidelines for executive remuneration packages 12 • Box 8.2: Guidelines for non-executive director remuneration • Recommendation 8.3: Companies should provide the information indicated in the Guide to reporting on Principle 8. Principle 1: Lay solid foundations for management and oversight Companies should establish and disclose the respective roles and responsibilities of board and management. The company’s framework should be designed to: That understanding can be further enhanced if the disclosure includes an explanation of the • enable the board to provide strategic balance of responsibility between the chair, the guidance for the company and effective lead independent director, if any, and the chief oversight of management executive officer, or equivalent. • clarify the respective roles and The division of responsibility may vary with the responsibilities of board members and evolution of the company. Regular review of the senior executives in order to facilitate board balance of responsibilities may be appropriate and senior executives’ accountability to both to ensure that the division of functions remains the company and its shareholders8 appropriate to the needs of the company. • ensure a balance of authority so that no Responsibilities of the board single individual has unfettered powers. Usually the board will be responsible for: Recommendation 1.1: • overseeing the company, including its control Companies should establish the functions and accountability systems reserved to the board and those delegated to • appointing and removing the chief executive senior executives and disclose those functions. officer, or equivalent • where appropriate, ratifying the appointment Commentary and the removal of senior executives 13 Role of the board and management • providing input into and final approval of Boards should adopt a formal statement management’s development of corporate of matters reserved to them or a formal strategy and performance objectives board charter that details their functions and • reviewing, ratifying and monitoring systems responsibilities. There should be a formal of risk management and internal control, statement of the areas of authority delegated codes of conduct, and legal compliance to senior executives. • monitoring senior executives’ performance and implementation of strategy The nature of matters reserved to the board and delegated to senior executives will depend • ensuring appropriate resources are available on the size, complexity and ownership structure to senior executives of the company, and will be influenced by its • approving and monitoring the progress tradition and corporate culture, and by the of major capital expenditure, capital skills of directors and senior executives. management, and acquisitions and divestitures Disclosing the division of responsibility assists • approving and monitoring financial and other those affected by corporate decisions to better reporting. understand the respective accountabilities and contributions of the board and senior executives. 8 Senior executives refers to the senior management team as distinct from the board, being those who have the opportunity to materially influence the integrity, strategy and operation of the company and its financial performance. Allocation of individual responsibilities It is also appropriate that directors clearly understand corporate expectations of them. To that end, formal letters upon appointment for directors setting out the key terms and conditions relative to that appointment are useful. Suggestions for the contents of the letter are contained in Box 1.1. Box 1.1 Content of a director’s letter upon appointment Companies may find it useful to consider the following matters when drafting directors’ letters upon appointment: • term of appointment • time commitment envisaged • powers and duties of directors • any special duties or arrangements attaching to the position • circumstances in which an office of director becomes vacant • expectations regarding involvement with committee work • remuneration, including superannuation and expenses • r equirement to disclose directors’ interests and any matters which affect the director’s independence • fellow directors • trading policy governing dealings in securities (including any share qualifications) and related financial instruments by directors, including notification requirements • induction training and continuing education arrangements 14 • board policy on access to independent professional advice • indemnity and insurance arrangements • confidentiality and rights of access to corporate information • a copy of the constitution • organisational chart of management structure. Similarly, senior executives including the chief executive officer, or equivalent, and the chief financial officer, or equivalent, should have a formal job description and letter of appointment describing their term of office, duties, rights and responsibilities, and entitlements on termination. Box 8.1 (Principle 8) provides further commentary on the matter of termination entitlements. Recommendation 1.2: Application of Principle 1 in relation to Companies should disclose the process for trusts and externally managed entities evaluating the performance of senior executives. References to “board” and “directors” should be applied as references to the board and Commentary directors of the responsible entity of the trust The performance of senior executives should be and to equivalent roles in respect of other reviewed regularly against appropriate measures. externally managed entities. Induction A trust should clarify the relationship between the responsible entity and the parent company Induction procedures should be in place to where relevant, and articulate the relevant allow new senior executives to participate fully roles and responsibilities of the board and and actively in management decision-making at management of the responsible entity. the earliest opportunity. Trusts should also have regard to the To be effective, new senior executives need responsibilities of external directors and the to have a good deal of knowledge about the compliance committee under Part 5C.5 of company and the industry within which it the Corporations Act. operates. An induction program should be available to enable senior executives to gain an understanding of: • the company’s financial position, strategies, operations and risk management policies • the respective rights, duties, responsibilities and roles of the board and senior executives. Recommendation 1.3: Companies should provide the information indicated in the Guide to reporting on Principle 1. 15 Guide to reporting on Principle 1 The following material should be included in the corporate governance statement in the annual report: • a  n explanation of any departure from Recommendations 1.1, 1.2 or 1.3 • w  hether a performance evaluation for senior executives has taken place in the reporting period and whether it was in accordance with the process disclosed. A statement of matters reserved for the board, or the board charter or the statement of areas of delegated authority to senior executives should be made publicly available, ideally by posting it to the company’s website in a clearly marked corporate governance section. Principle 2: Structure the board to add value Companies should have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. An effective board is one that facilitates the Non-executive directors should consider effective discharge of the duties imposed by the benefits of conferring regularly without law on the directors and adds value in a way management present, including at scheduled that is appropriate to the particular company’s sessions.10 Their discussions can be facilitated circumstances. The board should be structured by the chair or lead independent director, if any. in such a way that it: • h  as a proper understanding of, and Independent directors competence to deal with, the current and An independent director is a non-executive emerging issues of the business director who is not a member of management • exercises independent judgement and who is free of any business or other relationship that could materially interfere with • e  ncourages enhanced performance of the – or could reasonably be perceived to materially company interfere with – the independent exercise of their • c  an effectively review and challenge the judgement. performance of management. Relationships which may affect independent Ultimately the directors are elected by the status are set out in Box 2.1. shareholders. However, the board and its delegates play an important role in the Directors considered by the board to be selection of candidates for shareholder vote. independent should be identified as such in the 16 corporate governance statement in the annual report. The board should state its reasons Recommendation 2.1: if it considers a director to be independent, A majority of the board should be independent notwithstanding the existence of relationships directors.9 listed in Box 2.1, and the corporate Commentary governance statement should disclose the existence of any such relationships. In this Independent decision-making context, it is important for the board to All directors – whether independent or not – consider materiality thresholds from the should bring an independent judgement to bear perspective of both the company and its on board decisions. directors, and to disclose these.11 To facilitate this, there should be a procedure agreed by the board for directors to have access in appropriate circumstances to independent professional advice at the company’s expense. 9 A series of relationships affecting independent status are set out in Box 2.1. 10 At times it may be appropriate for the independent directors to meet without other directors present. 11 For example, a board may decide that affiliation with a business which accounts for, say, less than X% of the company’s revenue is, as a category, immaterial for the purpose of determining independence. If the company discloses the standard it follows and makes a general statement that the relevant director meets that standard, investors are better informed about the board’s reasoning. Box 2.1: Relationships affecting independent status12 When determining the independent status of a director the board should consider whether the director: 1. is a substantial shareholder of the company or an officer of, or otherwise associated directly with, a substantial shareholder of the company13 2. is employed, or has previously been employed in an executive capacity by the company or another group member, and there has not been a period of at least three years between ceasing such employment and serving on the board 3. has within the last three years been a principal of a material professional adviser or a material consultant to the company or another group member, or an employee materially associated with the service provided 4. is a material supplier or customer of the company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer 5. has a material contractual relationship with the company or another group member other than as a director. Family ties and cross-directorships may be Where the chair is not an independent relevant in considering interests and relationships director, it may be beneficial to consider the which may affect independence, and should be appointment of a lead independent director. disclosed by directors to the board. The role of chair is demanding, requiring a Regular assessments significant time commitment. The chair’s other The board should regularly assess whether positions should not be such that they are likely 17 to hinder effective performance in the role. each non-executive director is independent. Each non-executive director should provide to the board all information that may be relevant Recommendation 2.3: to this assessment. The roles of chair and chief executive officer should not be exercised by the same individual. If a director’s independent status changes, this should be disclosed and explained in a timely Commentary manner to the market. There should be a clear division of responsibility at the head of the company. Recommendation 2.2: The chair should be an independent director. The division of responsibilities between the chair and the chief executive officer should be Commentary agreed by the board and set out in a statement of position or authority. Role of chair The chair is responsible for leadership of the The chief executive officer should not go on to board and for the efficient organisation and become chair of the same company. A former conduct of the board’s functioning. chief executive officer will not qualify as an “independent” director unless there has been a The chair should facilitate the effective period of at least three years between ceasing contribution of all directors and promote employment with the company and serving on constructive and respectful relations between the board. directors and between board and management. 12 The relationships affecting independent status in Box 2.1 are adapted from the definition of independence given by Corporate Governance, A Guide for Fund Managers and Corporations – Blue Book, Investment and Financial Services Association, 2004 at www.ifsa.com.au. 13 For this purpose a “substantial shareholder” is a person with a substantial holding as defined in section 9 of the Corporations Act. Recommendation 2.4: Selection and appointment process and The board should establish a nomination re-election of directors committee. A formal and transparent procedure for the selection, appointment and re-appointment of Commentary directors to the board helps promote investor understanding and confidence in that process. Purpose of the nomination committee A board nomination committee is an efficient Important issues to be considered as part of mechanism for examination of the selection and the process include: appointment practices of the company. • D  irector competencies – In order to be able Ultimate responsibility for these practices, to discharge its mandate effectively the board however, rests with the full board, whether or should comprise directors possessing an not a separate nomination committee exists. appropriate range of skills and expertise. The nomination committee should consider For smaller boards, the same efficiencies implementing a plan for identifying, assessing may not be derived from a formal committee and enhancing director competencies. structure. Companies without a nomination committee should have board processes in place An evaluation of the range of skills, experience which raise the issues that would otherwise be and expertise on the board is important when considered by the nomination committee. considering new candidates for nomination or appointment. Such an evaluation enables Charter identification of the particular skills that will The nomination committee should have a best increase board effectiveness. charter that clearly sets out its roles and • B  oard renewal – Board renewal is critical responsibilities, composition, structure, to performance, and directors should be membership requirements and the procedures conscious of the duration of each director’s for inviting non-committee members to attend tenure in succession planning. meetings. 18 The nomination committee should consider The terms of reference of the nomination whether succession plans are in place to committee should allow it to have access to maintain an appropriate balance of skills, adequate internal and external resources, experience and expertise on the board. including access to advice from external consultants or specialists. • C  omposition and commitment of the board – The board should be of a size and composition Composition of nomination committee that is conducive to making appropriate The nomination committee should be decisions. The board should be large enough structured so that it: to incorporate a variety of perspectives and • consists of a majority of independent skills, and to represent the best interests directors of the company as a whole rather than of individual shareholders or interest groups. It • is chaired by an independent director should not, however, be so large that effective • has at least three members. decision-making is hindered. Responsibilities Individual board members should devote Responsibilities of the committee should include the necessary time to the tasks entrusted recommendations to the board about: to them. All directors should consider the number and nature of their directorships and • the necessary and desirable competencies calls on their time from other commitments. of directors • review of board succession plans In support of their candidature for • the development of a process for evaluation directorship or re-election, non-executive of the performance of the board, its directors should provide the nomination committees and directors committee with details of other commitments and an indication of time involved. Prior • the appointment and re-election of directors. to appointment or being submitted for re-election non-executive directors should Commentary specifically acknowledge to the company that The performance of the board should be they will have sufficient time to meet what is reviewed regularly against appropriate expected of them. measures.  he nomination committee should regularly T Induction and education review the time required from a non-executive director, and whether directors are meeting Induction procedures should be in place to that requirement. Non-executive directors allow new directors to participate fully and should inform the chair and the chair of the actively in board decision-making at the earliest nomination committee before accepting any opportunity. new appointments as directors. To be effective, new directors need to have • E  lection of directors – The names of a good deal of knowledge about the company candidates submitted for election as directors and the industry within which it operates. An should be accompanied by the following induction program should be available to enable information to enable shareholders to make new directors to gain an understanding of: an informed decision on their election: • the company’s financial, strategic, –b  iographical details, including competencies operational and risk management position and qualifications and information • the rights, duties and responsibilities of the sufficient to enable an assessment of the directors independence of the candidate • the roles and responsibilities of senior – details of relationships between: executives • the candidate and the company, and • the role of board committees. • the candidate and directors of the company Directors should have access to continuing – directorships held 14 education to update and enhance their skills and knowledge. –p  articulars of other positions which involve significant time commitments Access to information 19 – the term of office currently served by any The board should be provided with the directors subject to re-election information it needs to discharge its – any other particulars required by law.15 responsibilities effectively. Non-executive directors should be appointed Senior executives should supply the board with for specific terms subject to re-election and information in a form and timeframe, and of to the ASX Listing Rule and Corporations Act a quality that enables the board to discharge provisions concerning removal of a director. its duties effectively. Directors are entitled to request additional information where they Re-appointment of directors should not be consider such information necessary to make automatic. informed decisions. Recommendation 2.5: The board and the company secretary Companies should disclose the process for The company secretary plays an important role evaluating the performance of the board, its in supporting the effectiveness of the board by committees and individual directors. monitoring that board policy and procedures are followed, and coordinating the timely completion and despatch of board agenda and briefing material. 14 These are directorships required to be disclosed by law, and any other directorships relevant to an assessment of independence. 15 The Guidelines for notices of meeting at www.asx.com.au are designed to assist communication with shareholders and contain guidance on framing resolutions for the election of directors. It is important that all directors have access to • whether a performance evaluation for the the company secretary. board, its committees and directors has taken place in the reporting period and The appointment and removal of the company whether it was in accordance with the secretary should be a matter for decision by process disclosed the board as a whole. • an explanation of any departures from The company secretary should be accountable Recommendations 2.1, 2.2, 2.3, 2.4, 2.5 to the board, through the chair, on all or 2.6. governance matters. The following material should be made publicly Recommendation 2.6: available, ideally by posting it to the company’s Companies should provide the information website in a clearly marked corporate indicated in the Guide to reporting on Principle 2. governance section: • a description of the procedure for the Guide to reporting on Principle 2 selection and appointment of new directors The following material should be included in the and the re-election of incumbent directors corporate governance statement in the annual report: • the charter of the nomination committee or a summary of the role, rights, • the skills, experience and expertise relevant responsibilities and membership to the position of director held by each requirements for that committee director in office at the date of the annual report • the board’s policy for the nomination and appointment of directors. • the names of the directors considered by the board to constitute independent Application of Principle 2 in relation to directors and the company’s materiality trusts and externally managed entities thresholds References to “board” and “directors” should 20 • the existence of any of the relationships be applied as references to the board and listed in Box 2.1 and an explanation of directors of the responsible entity of the trust why the board considers a director to be and to equivalent roles in respect of other independent, notwithstanding the existence externally managed entities. of those relationships There may be technical conflict in implementing • a statement as to whether there is a the Recommendations that a director procedure agreed by the board for directors be independent and that the chair be an to take independent professional advice at independent director or a lead independent the expense of the company director, where the manager or responsible entity is a wholly-owned subsidiary of a • the period of office held by each director in parent company such as a fund manager office at the date of the annual report and all the directors are employees of the parent. This should be discussed and clarified • the names of members of the nomination in any explanation of departure from the committee and their attendance at meetings Recommendations included in the corporate of the committee, or where a company does governance statement in the annual report. not have a nomination committee, how the functions of a nomination committee are carried out Principle 3: Promote ethical and responsible decision-making Companies should actively promote ethical and responsible decision-making. To make ethical and responsible decisions, Commentary companies should not only comply with their Purpose of a code of conduct legal obligations, but should also consider the reasonable expectations of their stakeholders Good corporate governance ultimately requires including: shareholders, employees, customers, people of integrity. Personal integrity cannot be suppliers, creditors, consumers and the regulated. However, investor confidence can broader community in which they operate. be enhanced if the company clearly articulates It is a matter for the board to consider and acceptable practices for directors, senior assess what is appropriate in each company’s executives and employees. circumstances. It is important for companies to The board has a responsibility to set the demonstrate their commitment to appropriate ethical tone and standards of the company. corporate practices and decision making. Senior executives have a responsibility to Companies should: implement practices consistent with those standards. Company codes of conduct which • clarify the standards of ethical behaviour state the values and policies of the company required of the board, senior executives and can assist the board and senior executives in all employees and encourage the observance this task and complement the company’s risk of those standards management practices. • comply with their legal obligations and have Application of a code of conduct regard to the reasonable expectations of Companies should formulate policies on 21 their stakeholders appropriate behaviour of directors, senior • publish the policy concerning the issue of executives and employees. Companies should board and employee trading in company encourage the integration of these policies into securities and in associated products, company-wide management practices. A code including products which operate to limit the of conduct supported by appropriate training economic risk of those securities. and monitoring of compliance with the code are effective ways to guide the behaviour of Recommendation 3.1: directors, senior executives and employees and demonstrate the commitment of the company Companies should establish a code of conduct to ethical practices. Companies should ensure and disclose the code or a summary of the that training on the code of conduct is updated code as to: on a regular basis. • the practices necessary to maintain Companies should consider making advisers, confidence in the company’s integrity consultants and contractors aware of the • the practices necessary to take into account company’s expectations as set out in the code their legal obligations and the reasonable of conduct. expectations of their stakeholders • the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. It is not necessary for companies to establish a separate code for directors and senior executives. Depending on the nature and size of the company’s operations, the code of conduct for directors and senior executives may stand alone or be part of the corporate code of conduct. Suggestions for the content of a code of conduct are set out in Box 3.1. Box 3.1: Suggestions for the content of a code of conduct Companies may find it useful to consider the following matters when formulating a code of conduct: 1. Give a clear commitment by the board and senior executives to the code of conduct. This is often linked to statements about the aspirations or objectives of the company, its core values, and its views about the expectations of shareholders, employees, customers, suppliers, creditors, consumers and the broader community. 2. Detail the company’s responsibilities to shareholders and the financial community generally. This might include reference to the company’s commitment to delivering shareholder value and how it will do this, and the company’s approach to accounting policies and practices, and disclosure. 3. Specify the company’s responsibilities to shareholders, employees, customers, suppliers, creditors, consumers and the broader community. This might include reference to standards of product quality or service, commitments to fair value, fair dealing and fair trading, and the safety of goods produced. 4. Describe the company’s approach to the community. This might include environmental protection policies, support for community activities, and donation or sponsorship policies. 5. Articulate the company’s responsibilities to the individual. This might include the company’s privacy policy, and its policy on the use of privileged or confidential information. 6. Outline the company’s employment practices. This might include reference to occupational health and safety, employment opportunity practices, special entitlements above the statutory minimum, employee security trading policies, training and further education support policies, practices on drug and alcohol usage and policies on outside employment. 22 7. Describe the company’s approach to business courtesies, bribes, facilitation payments, inducements and commissions. This might include how the company regulates the giving and accepting of business courtesies and facilitation payments, and prevents the offering and acceptance of bribes, inducements and commissions and the misuse of company assets and resources. 8. State the measures the company follows to promote active compliance with legislation wherever it operates. This might include stating whether the company’s policy is to comply with Australian or local legal requirements regarding employment practices, responsibilities to the community and responsibilities to the individual, particularly if the host country follows materially different standards than those prescribed by Australian law or international protocols. 9. Specify how the company handles actual or potential conflicts of interest. This might include reference to how the company manages situations where the interest of a private individual interferes or appears to interfere with the interests of the company as a whole, and how the company prevents directors, senior executives and employees from taking improper advantage of property, information or position, or opportunities arising from these, for personal gain or to compete with the company. 10. Identify measures the company follows to encourage the reporting of unlawful or unethical behaviour and to actively promote ethical behaviour. This might include reference to how the company protects those, such as whistleblowers, who report violations in good faith, and its processes for dealing with such reports.16 11. Describe the means by which the company monitors and ensures compliance with its code. 16 For guidance on the provision of a whistleblowing service, see Australian Standard on Whistleblowing Protection Programs for Entities (AS 8004). Recommendation 3.2: concerning the company, and any other Companies should establish a policy concerning member of staff who is likely to be in the trading in company securities by directors, possession of inside information. senior executives and employees, and disclose “Inside information” means information the policy or a summary of that policy. concerning a company’s financial position, strategy or operations and any other Commentary information which a reasonable person might Public confidence in the company can be consider, if it were made public, would be likely eroded if there is insufficient understanding to have a material impact on a decision to buy about the company’s policies governing trading or sell a company’s securities.18 by “potential insiders”. The law prohibits insider trading, and the Corporations Act and the ASX Where companies establish a trading policy, Listing Rules require disclosure of any trading they should also introduce appropriate undertaken by directors or their related entities compliance standards and procedures to in the company’s securities.17 ensure that the policy is properly implemented. There should also be an internal review For the purpose of this policy a “potential mechanism to assess compliance and insider” is a person likely to possess inside effectiveness. This review may involve an information and includes the directors, the internal audit function. chief executive officer, or equivalent, the chief financial officer, or equivalent, staff members Suggestions for the content of a trading policy who are involved in material transactions are set out in Box 3.2. Box 3.2: Suggestions for the content of a trading policy Companies may find it useful to consider the following matters when formulating a trading policy: 1. Clearly identify the directors, officers, employees or group of employees who are restricted from trading (“designated officers”).19 2. Identify and raise awareness about the prohibitions under the law and the requirements of the policy. This should include an awareness that it is inappropriate for the designated 23 officer to procure others to trade when the designated officer is precluded from trading, and an awareness of the need to enforce confidentiality against external advisers. 3. Require designated officers to provide notification to an appropriate senior member of the company, for example, in the case of directors, to the chair, of intended trading, including entering into transactions or arrangements which operate to limit the economic risk of their security holdings in the company. No prior notification is needed for participation in dividend reinvestment plans and other corporate actions open to all shareholders.20 4. Require subsequent confirmation of the trading that has occurred. 5. Identify whether trading windows or black-outs are used and if so, details of their application. 6. Specify whether there is any discretion to permit trading by designated officers in specific circumstances, for example, financial hardship, details of such circumstances, and the basis upon which discretion is applied. 7. Specify whether the company prohibits designated officers from trading in financial products issued or created over the company’s securities by third parties, or trading in associated products. 8. Specify that the company prohibits designated officers from entering into transactions in associated products which operate to limit the economic risk of security holdings in the company over unvested entitlements. 9. Specify whether the policy applies to the securities of other companies of which the designated officer has inside knowledge because of their position in the company. 17 See ASX Listing Rule 3.19A regarding disclosure by the company of directors’ notifiable interests within five business days. Companies should note that as at July 2007 the Goverment proposes amending section 205G of the Corporations Act regarding disclosure by directors of their notifiable interests. The proposed amendment would reduce the timeframe for disclosure from 14 days to two days. There is also a proposal to remove the Listing Rule. 18 Companies should be aware of the relevant provisions of the Corprations Act. 19 Anyone coming into possession of inside information has obligations to comply with the law relating to insider trading. 20 The recommended disclosure is of the designated officer’s effective exposure under their security holdings as a result of these transactions or arrangements. Where a company makes any representations Application of Principle 3 in relation to about the alignment of a director’s or senior trusts and externally managed entities executive’s interests, the company should take References to “directors” and “employees” of into account the extent to which that director a company should be applied as references or senior executive has an economic interest in to directors and employees of the responsible the relevant securities.21 entity, and the relevant trading is in securities of the trust and to equivalent roles in respect of Recommendation 3.3: other externally managed entities. The trading Companies should provide the information policy should refer to the securities or units of indicated in the Guide to reporting on Principle 3. the listed entity. Guide to reporting on Principle 3 An explanation of any departure from Recommendations 3.1, 3.2 or 3.3 should be included in the corporate governance statement in the annual report. The following material should be made publicly available, ideally by posting it to the company’s website in a clearly marked corporate governance section: • any applicable code of conduct or a summary • the trading policy or a summary. 24 21 This will prevent the company making misleading representations about alignment of interests. Principle 4: Safeguard integrity in financial reporting Companies should have a structure to independently verify and safeguard the integrity of their financial reporting. This requires companies to put in place a Importance of the audit committee structure of review and authorisation designed The existence of an independent audit to ensure the truthful and factual presentation committee is recognised internationally as of the company’s financial position. The an important feature of good corporate structure would include, for example: governance. • review and consideration of the financial statements by the audit committee ASX Listing Rule 12.7 requires that an entity included in the S&P All Ordinaries Index • a process to ensure the independence at the beginning of its financial year have an and competence of the company’s external audit committee during that year. If an entity is auditors. in the top 300 of that Index it must follow the Such a structure does not diminish the ultimate Recommendations below on the composition, responsibility of the board to ensure the operation and responsibilities of the audit integrity of the company’s financial reporting. committee.23 Recommendation 4.1: Recommendation 4.2: The board should establish an audit committee. The audit committee should be structured so that it: Commentary • consists only of non-executive directors Purpose of the audit committee • consists of a majority of independent 25 directors24 A board audit committee is an efficient mechanism for focusing on issues relevant to • is chaired by an independent chair, who the integrity of the company’s financial reporting. is not chair of the board • has at least three members. Ultimate responsibility for the integrity of a company’s financial reporting rests with the Commentary full board, whether or not a separate audit committee exists.22 Composition of the audit committee The audit committee should be of sufficient For smaller boards, the same efficiencies size, independence and technical expertise to may not be derived from a formal committee discharge its mandate effectively. structure. Companies without an audit committee should have board processes in place Importance of independence which raise the issues that would otherwise The ability of the audit committee to exercise be considered by the audit committee. If independent judgement is vital. International there is no audit committee, it is particularly practice is moving towards an audit committee important that companies disclose how their comprised of only independent directors.25 alternative approach assures the integrity of the financial statements of the company and the independence of the external auditor, and why an audit committee is not considered appropriate. 22 It is desirable that all members of the board be financially literate. 23 See note 2. 24 For further guidance on the concept of an independent director, refer to Box 2.1 and to Recommendation 2.1. 25 For example, IFSA adopts this position, see Corporate Governance, A Guide for Fund Managers and Corporations – Blue Book, Investment and Financial Services Association, 2004 at www.ifsa.com.au. Technical expertise Reporting The audit committee should include members The audit committee should report to the who are all financially literate (that is, be able board. The report should contain all to read and understand financial statements); matters relevant to the committee’s role at least one member should have relevant and responsibilities, including: qualifications and experience (that is, should be a qualified accountant or other finance • assessment of whether external reporting professional with experience of financial and is consistent with committee members’ accounting matters); and some members information and knowledge and is adequate should have an understanding of the industry for shareholder needs in which the entity operates. • assessment of the management processes supporting external reporting Recommendation 4.3: The audit committee should have a formal • procedures for the selection and charter. appointment of the external auditor and for the rotation of external audit engagement Commentary partners Charter • recommendations for the appointment or, The charter should clearly set out the if necessary, the removal of the external audit committee’s role and responsibilities, auditor composition, structure and membership • assessment of the performance and requirements and the procedures for inviting independence of the external auditors. non-committee members to attend meetings. Where the external auditor provides non- The audit committee should be given the audit services, the report should state necessary power and resources to meet its whether the audit committee is satisfied charter. This will include rights of access to that provision of those services has not management, rights to seek explanations and compromised the auditor’s independence 26 additional information and access to auditors, • assessment of the performance and internal and external, without management objectivity of the internal audit function present. • the results of the committee’s review of Responsibilities risk management and internal control The audit committee should review the systems. Principle 7 provides further integrity of the company’s financial reporting guidance on this matter and oversee the independence of the external auditors. • recommendations for the appointment or, if necessary, the dismissal of the head of Meetings internal audit . The audit committee should meet often enough to undertake its role effectively. The audit committee should keep minutes of its meetings and these should ordinarily be included in the papers for the next full board meeting after each audit committee meeting. Recommendation 4.4: Application of Principle 4 in relation to Companies should provide the information trusts and externally managed entities indicated in the Guide to reporting on Principle 4. References to “board” and “directors” should be applied as references to the board and Guide to reporting on Principle 4 directors of the responsible entity of the trust The following material should be included in and to equivalent roles in respect of other the corporate governance statement in the externally managed entities. annual report: It is recognised that for a trust to convene • the names and qualifications of those an audit committee as required by the appointed to the audit committee and their Recommendations, and to convene a attendance at meetings of the committee, compliance committee as may be required or, where a company does not have an by the law, may create an overlap and an audit committee, how the functions of an administrative burden – the two committees audit committee are carried out will serve substantively similar purposes. Trusts that are required under the law to convene a • the number of meetings of the audit compliance committee may wish to consider committee using the compliance committee to also serve the function of the audit committee, with any • explanation of any departures from necessary adaptations in accordance with the Recommendations 4.1, 4.2, 4.3 or 4.4. Recommendations. The following material should be made publicly available, ideally by posting it to the company’s website in a clearly marked corporate governance section: • the audit committee charter • information on procedures for the selection and appointment of the external auditor, and 27 for the rotation of external audit engagement partners. Principle 5: Make timely and balanced disclosure Companies should promote timely and balanced disclosure of all material matters concerning the company. Companies should put in place mechanisms Commentary designed to ensure compliance with the ASX There should be vetting and authorisation Listing Rule requirements such that: processes designed to ensure that company announcements: • all investors have equal and timely access to material information concerning the • are made in a timely manner company – including its financial position, • are factual performance, ownership and governance • do not omit material information • company announcements are factual and • are expressed in a clear and objective presented in a clear and balanced way. manner that allows investors to assess “Balance” requires disclosure of both positive the impact of the information when making and negative information. investment decisions. Suggestions for the content of these policies Recommendation 5.1: are set out in Box 5.1. Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a 28 summary of those policies. Box 5.1: Continuous disclosure policies Companies may find it useful to consider the following matters when formulating continuous disclosure policies : • the type of information that needs to be disclosed • internal notification and decision-making concerning the disclosure obligation • the roles and responsibilities of directors, officers and employees of the company in the disclosure context; in particular, who has primary responsibility for ensuring that the company complies with its disclosure obligations and who is primarily responsible for deciding what information will be disclosed • promoting understanding of compliance • monitoring compliance • measures for seeking to avoid the emergence of a false market in the company’s securities • safeguarding confidentiality of corporate information to avoid premature disclosure • media contact and comment • external communications such as analyst briefings and responses to shareholder questions. Commentary on financial results Recommendation 5.2: Companies should include commentary on their Companies should provide the information financial results to enhance the clarity and indicated in the Guide to reporting on Principle 5. balance of reporting. This commentary should include information needed by an investor to Guide to reporting on Principle 5 make an informed assessment of the entity’s An explanation of any departures from activities and results. Recommendations 5.1 or 5.2 should ASX Listing Rule 4.10.17 requires a company’s be included in the corporate governance annual report to include a review of operations statement in the annual report. and activities. Although not specifying the The policies or a summary of those policies contents of that report, the rule endorses the designed to guide compliance with Listing Group of 100 publication, Guide to Review of Rule disclosure requirements should be made Operations and Financial Condition, which is publicly available, ideally by posting them to reproduced in ASX Guidance Note 10 – Review the company’s website in a clearly marked of Operations and Activities. corporate governance section. Eliminating surprise Shareholders’ concerns about executive payments are often exacerbated by a lack of information concerning core entitlements when they are agreed. This can be alleviated if, for example, the nature of the termination entitlements of the chief executive officer, or equivalent, is disclosed to the market at the 29 time they are agreed as well as at the time the actual payment is settled.26 26 Companies should note that entering into employment agreements with senior executives, or obligations under those agreements falling due, may trigger a continuous disclosure obligation under Listing Rule 3.1. See Companies Update 1 May 2003 Continuous Disclosure and Chief Executive Officer Remuneration at www.asx.com.au. Principle 6: Respect the rights of shareholders Companies should respect the rights of shareholders and facilitate the effective exercise of those rights. Companies should empower their Meetings shareholders by: Companies should consider how to use general • communicating effectively with them meetings effectively to communicate with • giving them ready access to balanced shareholders and allow reasonable opportunity and understandable information about the for informed shareholder participation. company and corporate proposals The ASX Corporate Governance Council has • making it easy for them to participate in developed guidelines for improving shareholder general meetings. participation through the design and content of notices and through the conduct of the meeting Recommendation 6.1: itself.27 Companies should design a communications policy for promoting effective communication Communication with beneficial owners with shareholders and encouraging their Companies may wish to consider allowing participation at general meetings and disclose beneficial owners to choose to receive their policy or a summary of that policy. shareholder materials directly, for example, by electronic means. Commentary Publishing the company’s policy on shareholder Website communication will help investors understand All companies should have a website and are 30 how to obtain access to relevant information encouraged to communicate with shareholders about the company and its corporate proposals. via electronic methods. If a company does not have a website it must make relevant Electronic communication information available to shareholders by other Companies should consider how best to means, for example, a company may provide take advantage wherever practicable of new the information on request by email, facsimile technologies that provide: or post. • opportunities for more effective communications with shareholders • improved access for shareholders unable to be physically present at meetings. See Box 6.1 for suggestions on how to improve shareholder participation and enhance market awareness through electronic means. 27 Guidelines for improving shareholder participation through the design and content of notices and the conduct of the meeting itself are at www.asx.com.au. They are guidelines only and not reporting requirements. Box 6.1: Using electronic communications effectively Companies should use their websites to complement the official release of material information to the market. This will enable broader access to company information by investors and stakeholders. Measures companies may consider include: • placing all relevant announcements made to the market, and related information (for example, information provided to analysts or media during briefings), on the company website after they have been released to ASX • webcasting or teleconferencing analyst or media briefings and general meetings, or posting a transcript or summary of the transcript to the website • placing the full text of notices of meeting and explanatory material on the website – see Guideline 12 in the Guidelines for notices of meeting at www.asx.com.au • providing information about the last three years’ press releases or announcements plus at least three years of financial data on the website • providing information updates to investors by email. Recommendation 6.2: meetings, although they may do so. Trusts Companies should provide the information should consider the range of means by which indicated in the Guide to reporting on Principle 6. they may achieve the same ends, including the possibility of convening general meetings. Guide to reporting on Principle 6 Listed entities that are not required to comply 31 An explanation of any departure from with section 250RA of the Corporations Recommendations 6.1 or 6.2 should Act should consider the range of means by be included in the corporate governance which they may achieve the same ends.28 statement in the annual report. This applies not only to trusts and externally managed entities but also to entities such as The company should describe how it will foreign incorporated entities. Any such entity communicate with its shareholders publicly, should include in its annual report a statement ideally by posting this information on the disclosing the extent to which it has achieved company’s website in a clearly marked the aims of the provisions of section 250RA corporate governance section. during the reporting period and give reasons for not doing so. Application of Principle 6 in relation to trusts and externally managed entities The annual general meeting is the central forum by which companies can effectively communicate with shareholders, provide them with access to information about the company and corporate proposals, and enable their participation in decision-making. The Corporations Act does not, however, require trusts to hold annual general 28 Section 250RA [Auditor required to attend listed company’ AGM] of the Corporations Act makes it an offence for the lead auditor not to attend a listed company’s AGM, or arrange to be represented by a suitably qualified member of the audit team who is in a position to answer questions about the audit. Principle 7: Recognise and manage risk Companies should establish a sound system of risk oversight and management and internal control.29 Risk management is the culture, processes Commentary and structures that are directed towards taking Each company will need to determine the material advantage of potential opportunities while business risks it faces. When establishing and managing potential adverse effects.30 implementing its approach to risk management a company should consider all material business Risk management should be designed to: risks. These risks may include but are not limited • identify, assess, monitor and manage risk to: operational, environmental, sustainability, • identify material changes to the company’s compliance, strategic, ethical conduct, reputation risk profile.31 or brand, technological, product or service quality, human capital, financial reporting and Risk management can enhance the market-related risks.33 environment for identifying and capitalising on opportunities to create value and protect The board is responsible for reviewing established value. the company’s policies on risk oversight and management and satisfying itself that The company should address risks that management has developed and implemented a could have a material impact on its business sound system of risk management and internal (material business risks), as identified by the control.34 company’s risk management system. The board should regularly review and approve the risk Risk management policies 32 management and oversight policies. Risk management policies should reflect the company’s risk profile and should clearly Recommendation 7.1: describe all elements of the risk management Companies should establish policies for and internal control system and any internal the oversight and management of material audit function. business risks and disclose a summary of those policies.32 29 For the purposes of Principle 7 a reference to a “company” will also include references to a “subsidiary” and an “associate” as defined in AASB 128 Investments in Associates. 30 There is a range of guidance available on risk management. Frameworks for risk management include the Australian/ New Zealand Standard for Risk Management – ANZ 4360 at www.standards.org.au and COSO Enterprise Risk Management – Integrated Framework, published by the Committee of Sponsoring Organisations of the Treadway Commission at www.coso.org. 31 Companies should be aware of their obligations under section 299A of the Corporations Act [Annual directors’ report – Additional requirement for listed public companies]. 32 The ASX Corporate Governance Council has issued Supplementary Guidance to Principle 7 which is at www.asx.com.au. 33 Financial reporting risk is the risk of a material error in the financial statements. 34 There is a range of guidance available on internal control. Frameworks for internal control include the COSO Internal Control Integrated Framework at www.coso.org. Additional guidance is available through the Institute of Chartered Accountants in England and Wales – Internal Control, Guidance for Directors on the Combined Code at ww.icaew.co.uk and Australian/New Zealand Standard for Compliance – ANZ 3806 at www.standards.org.au. When developing risk management policies As part of its oversight for the risk the company should take into account its legal management and internal control system, the obligations.35 A company should also consider board should review the effectiveness of the the reasonable expectations of its stakeholders. implementation of that system at least annually. Stakeholders can include: shareholders, The board retains responsibility for assessing employees, customers, suppliers, creditors, the effectiveness of the company’s systems for consumers and the broader community in management of material business risks. It may which the company operates. be appropriate in the company’s circumstances for the board to make additional enquiries Failure to consider the reasonable expectations and to request assurances regarding the of stakeholders can threaten a company’s management of material business risks. reputation and the success of its business operations. Effective risk management involves Internal audit function considering factors which bear upon the An internal audit function will generally carry company’s continued good standing with its out the analysis and independent appraisal stakeholders. of the adequacy and effectiveness of the A company’s risk management policies should company’s risk management and internal clearly describe the roles and accountabilities control system. A company should therefore of the board, audit committee, or other consider having an internal audit function.36 appropriate board committee, management An alternative mechanism may be used to and any internal audit function. achieve the same outcome depending on the company’s size and complexity and the types of Recommendation 7.2: risk involved. The board should require management to The internal audit function should be 33 design and implement the risk management independent of the external auditor. The internal and internal control system to manage the audit function and the audit committee should company’s material business risks and report have direct access to each other and should to it on whether those risks are being managed have all necessary access to management and effectively. The board should disclose that the right to seek information and explanations. management has reported to it as to the effectiveness of the company’s management Risk management committee of its material business risks. A board committee is an efficient mechanism for focusing the company on appropriate Commentary risk oversight, risk management and internal Risk management and internal control control. The appropriate committee may be system the audit committee, a risk management Internal controls are an important element of committee or another relevant committee. risk management. Management should design, Ultimate responsibility for risk oversight and implement and review the company’s risk risk management rests with the full board, management and internal control system. whether or not a separate risk management committee exists. 35 Legal obligations include but are not limited to requirements dealing with trade practices and fair dealing laws, environmental law, privacy law, employment law, occupational health and safety and equal employment and opportunity laws. 36 Guidance on the internal audit function is found in the Technical Information and Guidance section at www.iia.org.au. For smaller boards, the same efficiencies Recommendation 7.4: may not be derived from a formal committee Companies should provide the information structure. Companies without a risk indicated in the Guide to reporting on Principle 7. management committee should have board processes in place which raise the issues Guide to reporting on Principle 7 that would otherwise be considered by a risk management committee. The following material should be included in the corporate governance statement in the annual report: Recommendation 7.3: The board should disclose whether it has • explanation of any departures from received assurance from the chief executive Recommendations 7.1, 7.2 7.3 or 7.4 officer (or equivalent) and the chief financial officer (or equivalent) that the declaration • whether the board has received the report provided in accordance with section 295A of from management under Recommendation 7.2 the Corporations Act is founded on a sound • whether the board has received assurance system of risk management and internal from the chief executive officer (or control and that the system is operating equivalent) and the chief financial officer (or effectively in all material respects in relation equivalent) under Recommendation 7.3. to financial reporting risks. The following material should be made publicly Commentary available, ideally by posting it to the company’s Unlike Recommendation 7.2, this website in a clearly marked corporate Recommendation only addresses financial governance section: reporting risks directly because the Corporations Act requires a declaration in • a summary of the company’s policies on relation to a listed entity’s financial statements risk oversight and management of material by the chief executive officer and/or the business risks. chief financial officer.37 34 The integrity of the company’s financial reporting Application of Principle 7 in relation to trusts and externally managed entities depends upon the existence of a sound References to “board” and “directors” should system of risk oversight and management and be applied as references to the board and internal control. The requirement to provide directors of the responsible entity of the trust this assurance encourages management and to equivalent roles in respect of other accountability in this area. externally managed entities. The assurance under this Recommendation forms part of the process by which the board determines the effectiveness of its risk management and internal control systems in relation to financial reporting risks.38 37 Section 295A [Declaration in relation to listed entity’s financial statements by chief executive officer and chief financial officer] in Part 2M – Financial Reporting of the Corporations Act. The directors’ declaration under s295(4) can now only be made once the directors have received a declaration from the CEO and CFO, or equivalents that: (a) the financial records have been properly maintained, (b) the financial statements comply with accounting standards and (c) the financial statements and notes give a true and fair view. Any company not required to comply with section 295A of the Corporations Act should consider the range of means by which it may achieve the same ends and should include in its annual report a statement disclosing the extent to which it has achieved the aims of the provisions of section 295A during the reporting period and provide reasons for not doing so. 38 The G100 has published guidance to assist companies to meet their obligations under Principle 7 in Principle 7 – Guide to Compliance with ASX Principle 7 – Recognise and Manage Risk at www.groupof100.com.au. Principle 8: Remunerate fairly and responsibly Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear. The awarding of remuneration is a key area of The terms of reference of the remuneration focus for investors. When setting the level and committee should allow it to have access to structure of remuneration, a company needs to adequate internal and external resources, balance its desire to attract and retain senior including access to advice from external executives and directors against its interest consultants or specialists. in not paying excessive remuneration. It is important that there be a clear relationship Composition of remuneration committee between performance and remuneration, The remuneration committee should be and that the policy underlying executive structured so that it: remuneration be understood by investors.39 • consists of a majority of independent directors • is chaired by an independent director Recommendation 8.1: • has at least three members. The board should establish a remuneration committee. Responsibilities of the remuneration committee Commentary The responsibilities of the remuneration Purpose of the remuneration committee committee should include a review of and A board remuneration committee is an efficient recommendation to the board on: mechanism for focusing the company on 35 • the company’s remuneration, recruitment, appropriate remuneration policies. retention and termination policies and procedures for senior executives Ultimate responsibility for a company’s remuneration policy rests with the full board, • senior executives’ remuneration and incentives whether or not a separate remuneration • superannuation arrangements committee exists. • the remuneration framework for directors.40 For smaller boards, the same efficiencies Remuneration policy may not be derived from a formal committee structure. Companies without a remuneration The company should design its remuneration committee should have board processes in place policy in such a way that it: which raise the issues that would otherwise be • motivates senior executives to pursue the long- considered by the remuneration committee. term growth and success of the company • demonstrates a clear relationship between Charter senior executives’ performance and The remuneration committee should have remuneration. a charter that clearly sets out its role and responsibilities, composition, structure and The remuneration committee may seek input membership requirements and the procedures from individuals on remuneration policies, for non-committee members to attend meetings. but no individual should be directly involved in deciding their own remuneration. 39 Note the requirements relating to disclosure of remuneration policy and details in Section 300A of the Corporations Act. 40 The remuneration framework for directors is often addressed by the nomination committee rather than the remuneration committee. The remuneration committee should ensure Corporations Act companies are not generally that the board is provided with sufficient required to obtain shareholder approval for information to ensure informed decision-making. equity-based incentive plans for senior executives who are not directors. Recommendation 8.2: However, companies may find it useful to Companies should clearly distinguish the structure submit to shareholders proposed equity- of non-executive directors’ remuneration from that based incentive plans which will involve the of executive directors and senior executives. issue of new shares to senior executives prior to implementing them. This communication Commentary is directed at providing the board with a Executive directors’ and senior executives’ timely assurance that a plan is reasonable.41 remuneration packages should involve a Companies may also consider reporting balance between fixed and incentive pay, to shareholders on whether equity-based reflecting short and long-term performance remuneration payments involving the issue objectives appropriate to the company’s of new shares to senior executives are made circumstances and goals. pursuant to plans approved by shareholders. The Corporations Act requires companies Guidelines on an appropriate framework for to make detailed disclosure of executive determining executive directors’ and senior remuneration policies in their remuneration executives’ remuneration packages are reports which are subject to an advisory vote by contained in Box 8.1. shareholders. Under the Listing Rules and the Box 8.1: Guidelines for executive remuneration packages Most executive remuneration packages will involve a balance between fixed and incentive pay.42 Companies may find it useful to consider the following components in formulating packages: 1. Fixed remuneration This should be reasonable and fair, taking into account the company’s 36 legal and industrial obligations and labour market conditions, and should be relative to the scale of business. It should reflect core performance requirements and expectations. 2. Performance-based remuneration Performance-based remuneration linked to clearly specified performance targets can be an effective tool in promoting the interests of the company and shareholders. Incentive schemes should be designed around appropriate performance benchmarks that measure relative performance and provide rewards for materially improved company performance. 3. Equity-based remuneration Appropriately designed equity-based remuneration, including stock options, can be an effective form of remuneration when linked to performance objectives or hurdles. Equity-based remuneration has limitations and can contribute to ‘short-termism’ on the part of senior executives. Accordingly, it is important to design appropriate schemes. The terms of such schemes should clearly prohibit entering into transactions or arrangements which limit the economic risk of participating in unvested entitlements under these schemes.43 The exercise of any entitlements under these schemes should be timed to coincide with any trading windows under any trading policy established by the company. 4. Termination payments Termination payments, if any, for chief executive officers should be agreed in advance, including detailed provisions in case of early termination. There should be no payment for removal for misconduct. Agreements should clearly articulate performance expectations. Companies should consider the consequences of an appointment not working out, and the costs and other impacts of early termination. 41 Under Section 211 of the Corporations Act benefits that are “reasonable remuneration” are an exception to the requirement for member approval for financial benefits to related parties under Section 208 of the Act. 42 Companies should note that entering into employment agreements with senior executives, or obligations under those agreements falling due, may trigger a continuous disclosure obligation under Listing Rule 3.1. See Companies Update 1 May 2003 Continuous Disclosure and Chief Executive Officer Remuneration at www.asx.com.au. 43 Where a company makes any representations about the alignment of a senior executive’s interests, the company should take into account the extent of that senior executive’s alignment of interest based on any disclosure under the company trading policy. Box 8.2 contains guidelines for appropriate practice in non-executive director remuneration. Box 8.2: Guidelines for non-executive director remuneration Companies may find it useful to consider the following when considering non-executive director remuneration: 1. Non-executive directors should normally be remunerated by way of fees, in the form of cash, non-cash benefits, superannuation contributions or salary sacrifice into equity; they should not normally participate in schemes designed for the remuneration of executives. 2. Non-executive directors should not receive options or bonus payments. 3. Non-executive directors should not be provided with retirement benefits other than superannuation. Recommendation 8.3: • a  summary of the company’s policy on Companies should provide the information prohibiting entering into transactions indicated in the Guide to reporting on Principle 8. in associated products which limit the economic risk of participating in unvested entitlements under any equity-based Guide to reporting on Principle 8 remuneration schemes. The following material or a clear cross-reference to the location of the material should be included Application of Principle 8 in relation to in the corporate governance statement in the annual report: trusts and externally managed entities Under the Corporations Act, remuneration • the names of the members of the and indemnity for costs and expenses of the remuneration committee and their responsible entity is required to be disclosed in 37 attendance at meetings of the committee, a trust’s constitution. This may overlap to an or where a company does not have a extent with the Recommendations and should remuneration committee, how the functions be taken into account by trusts. of a remuneration committee are carried out Externally managed entities should disclose • the existence and terms of any schemes a summary of any management agreement for retirement benefits, other than terms relating to management fees or the superannuation, for non-executive directors equivalent, including performance fees, including a clear cross-reference to the location • an explanation of any departures from of this material. Recommendations 8.1, 8.2 or 8.3. Listed entities that are not required to comply The following material should be made publicly with section 300A of the Corporations Act or available, ideally by posting it to the company’s AASB 124 Related Party Disclosures should website in a clearly marked corporate consider the range of means by which they governance section: may achieve the same ends and should provide • the charter of the remuneration a clear cross-reference to the location of this committee or a summary of the role, material.44 rights, responsibilities and membership requirements for that committee 44 Section 300A [Annual Directors’ Report – Specific information to be provided by listed companies – particularly Disclosure of remuneration policy and details] and AASB 124 Related Party Disclosures. Glossary board executive director Means the directors of a company acting as Means a director who is an executive of the a board and, in the case of listed trusts and company externally managed entities, references to “boards” and “directors” are references to the financially literate boards and directors of the responsible entity Able to read and understand financial of the trust and to equivalent roles in respect statements of other externally managed entities Guide to reporting commentary Occurs at the end of each Principle and sets Means the discussion following each out the disclosure obligations of companies Recommendation which is provided for against Recommendations contained in the assistance, but does not give rise to a Principle reporting obligation “if not, why not” company Means the approach to disclosure against Means any listed entity and includes listed Recommendations required for compliance managed investment schemes (trusts), with LR 4.10.3 comprising an explanation externally managed entities, listed stapled of the extent to which an entity has followed entities and listed foreign entities. For the Recommendations or its reasons for adopting purposes of Principle 7, a reference to a an alternative corporate governance practice “company” will also include references to a to one contained in a Recommendation. Both “subsidiary” and an “associate” as defined in following a Recommendation and a statement 38 AASB 128 Investments in Associates of reasons why a Recommendation is not followed constitute valid compliance with the corporate governance statement Listing Rule The separate section of a company’s annual report containing the disclosures required independent director under LR 4.10.3 in relation to the extent Has the meaning under the Commentary in to which a company has followed the Recommendation 2.1 Recommendations. Where the Corporations Act requires particular information to be material business risks included in the directors’ report a company Means risks that could have a material impact has the discretion to include a cross-reference on a company’s business. They can include but to the relevant information in the corporate are not limited to: operational, environmental, governance statement in the annual report sustainability, compliance, strategic, ethical rather than duplicating the information conduct, reputation or brand, technological, product or service quality, human capital, financial reporting and market-related risks non-executive director Means a director who is not an executive of the company Principles Means the eight core Principles of corporate governance Recommendations Are a reference point for the implementation of the Principles, and form the basis for “if not, why not” reporting under the Guide to Reporting for each Principle senior executives Means the senior management team as distinct from the board, being those who have the opportunity to materially influence the integrity, strategy and operation of the company and its financial performance shareholders Includes unitholders of unit trusts 39 substantial shareholder For the purposes of Box 2.1, a substantial shareholder is a person with a substantial holding as defined in section 9 of the Corporations Act summary Means, in relation to any document, a description of its main provisions in sufficient detail to understand the purpose of the document List of references to further guidance Principle 1 Principle 3 A Guide to Director’s and Officer’s Liability AS 8004 Whistleblowing Protection Insurance, 1st edition, June 2001, C Smith, Programs for Entities, Standards Australia at N Milne, F Morris, Australian Institute of www.standards.com.au. Company Directors. AS 3806–2006: Compliance programs, Standards Australia at www.standards.com.au. Principle 2 Corporate Practices and Conduct, 3rd Code of Conduct for Chief Financial Officers, edition, 1995, Australian Institute of Company December 2002, Group of 100 at Directors, Australian Society of Certified www.group100.com.au. Practising Accountants, Business Council of Australia, Law Council of Australia, Institute Code of Conduct, 2005, Australian Institute of Chartered Accountants in Australia and The of Company Directors at Securities Institute of Australia. Sometimes www.companydirectors.com.au. referred to as the Bosch Committee guidelines, ASX Listing Rule 3.19A: regarding disclosure after the chair of the working group, Henry by the company of directors’ notifiable interests Bosch AO. within five business days. Corporate Governance, A Guide for Fund Managers and Corporations – Blue Book, Principle 4 5th edition, October 2004, Investment and Audit Committees: Best Practice Guide, 2nd Financial Services Association. edition, August 2001, Australian Accounting Research Foundation, Institute of Internal Chairman of the Board: A Role in the Spotlight, Auditors and Australian Institute of Company 40 2006, Australian Institute of Company Directors. Directors. The independence and objectivity of the auditor Evaluating Board Performance, 2007, is considered in Section 290, APES 110 Australian Institute of Company Directors. Code of Ethics for Professional Accountants, How to Implement a Board Performance Accounting, Professional and Ethical Standards Management System, 2004, Geoff De Lacy Board, June 2006 at www.apesb.org.au. and Anne De Lacy. Principle 5 How to Review and Assess the Value of Board Principles of Good Communications with Subcommittees, 2005, Geoff De Lacy. Shareholders, 2007, Australian Institute of Company Directors at The Greaves Case and the Responsibilities www.companydirectors.com.au. and Liabilities of a Chairman, 2006, Australian Institute of Company Directors. Company Shareholder Dialogue: Fresh Approaches to Communications between Corporate Governance and the Role of Companies and their Shareholders, 2004, the Company Secretary, 3rd edition, 2003, Discussion Paper, Business Council of Chartered Secretaries Australia at Australia, Australian Institute of Company www.csaust.com. Directors and Chartered Secretaries Australia Enhancing Board Performance, 2005, at www.bca.com.au. Chartered Secretaries Australia at www.csaust.com. Better Disclosure for Investors – Guidance There is a range of guidance available on Rules, 2000, Australian Securities and internal control. Frameworks for internal Investments Commission. control include the COSO Internal Control Integrated Framework at www.coso.org. Guide to Review of Operations and Financial Additional guidance is available through the Condition, 2003, Group of 100 at Institute of Chartered Accountants in England www.group100.com.au. and Wales – Internal Control, Guidance for Directors on the Combined Code at ww.icaew. Best Practice Guidelines for Communication co.uk and Australian/New Zealand Standard between Listed Entities and the Investment for Compliance – ANZ 3806 at Community, 2nd edition, May 2006, www.standards.org.au. Australasian Investor Relations Association. Guidance on the internal audit function is found Principles for Building Better Relations between in the Technical Information and Guidance Listed Entities and Analysts, March 2006, section at www.iia.org.au. Australasian Investor Relations Association and Financial Services Institute of Australasia. Principle 7 – Guide to Compliance with ASX Principle 7 – Recognise and Manage Risk, Guidance Note 8 – Continuous Disclosure: 2003, Group of 100 at www.group100.com.au. Listing Rule 3.1, June 2005, Australian Stock Exchange. Principle 8 Continuous Disclosure: Listed Public Companies Corporate Governance, A Guide for Fund and other Disclosing Entities, 2005, Chartered Managers and Corporations – Blue Book, Secretaries Australia at www.csaust.com. 5th edition, October 2004, Investment and Principle 6 Financial Services Association. 41 Executive Equity Plan Guidelines, 2007, Principles of Good Communications with Australian Institute of Company Directors, Shareholders, 2007, Australian Institute of Australian Employee Ownership Association and Company Directors at www.companydirectors. Australian Shareholders’ Association. com.au. Employee Share Ownership Plan Guidelines, Company Shareholder Dialogue: Fresh 2007, Australian Institute of Company Approaches to Communications between Directors, Australian Employee Ownership Companies and their Shareholders, Discussion Association and Australian Shareholders’ Paper, 2004, Business Council of Australia, Association. Australian Institute of Company Directors and Chartered Secretaries Australia at www.bca.com.au. Principle 7 Supplementary Guidance to Principle 7, 2007, The ASX Corporate Governance Council at www.asx.com.au. Frameworks for risk management include the Australian/New Zealand Standard for Risk Management – ANZ 4360 at www.standards. org.au and COSO Enterprise Risk Management – Integrated Framework, published by the Committee of Sponsoring Organisations of the Treadway Commission at www.coso.org. Comparative table of changes to the Principles and Recommendations Existing Principle/Recommendation Revised Principle/Recommendation Principle 1 – Lay solid foundations for management and No change oversight 1.1 Formalise and disclose the functions reserved to the 1.1 Companies should establish the functions reserved to board and those delegated to management. the board and those delegated to senior executives and disclose those functions. Box 1.1 Content of a director’s letter of appointment Box 1.1 Content of a director’s letter upon appointment 1.2 Companies should disclose the process for evaluating the performance of senior executives. 1.3 Companies should provide the information indicated in the Guide to reporting on Principle 1. Principle 2 – Structure the board to add value No change 2.1 A majority of the board should be independent No change directors. Box 2.1 Assessing the independence of directors Box 2.1 Relationships affecting independent status 2.2 The chairperson should be an independent director. 2.2 The chair should be an independent director. 2.3 The roles of chairperson and chief executive officer 2.3 The roles of chair and chief executive officer should not should not be exercised by the same individual. exercised by the same individual. 2.4 The board should establish a nomination committee. No change 2.5 Provide the information indicated in Guide to reporting 2.5 Companies should disclose the process for evaluating on Principle 2. the performance of the board, its committees and individual directors. 42 2.6 Companies should provide the information indicated in the Guide to reporting on Principle 2. Principle 3 – Promote ethical and responsible decision No change making 3.1 Establish a code of conduct to guide the directors, the 3.1 Companies should establish a code of conduct and chief executive officer (or equivalent), the chief financial disclose the code or a summary of the code as to: officer (or equivalent) and any other key executives as to: 3.1.1 the practices necessary to maintain confidence in • No change the company’s integrity 3.1.2 the responsibility and accountability of individuals for • t he practices necessary to take into account their reporting and investigating reports of unethical practices. legal obligations and the reasonable expectations of their stakeholders • t he responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Box 3.1 Suggestions for the content of a code of conduct No change 3.2 Disclose the policy concerning trading in company 3.2 Companies should establish a policy concerning trading securities by directors, officers and employees. in company securities by directors, senior executives and employees and disclose the policy or a summary of that policy. Box 3.2 Suggestions for the content of a trading policy No change 3.3 Provide the information indicated in Guide to reporting 3.3 Companies should provide the information indicated in on Principle 3. the Guide to reporting on Principle 3. Principle 4 – Safeguard integrity in financial reporting No change 4.1 Require the chief executive officer (or equivalent) and 4.1 The board should establish an audit committee. the chief financial officer (or equivalent) to state in writing to the board that the company’s financial reports present a true and fair view, in all material respects, of the company’s financial condition and operational results and are in accordance with relevant accounting standards. Existing Principle/Recommendation Revised Principle/Recommendation 4.2 The board should establish an audit committee. 4.2 The audit committee should be structured so that it: • consists only of non-executive directors • consists of a majority of independent directors • is chaired by an independent chair, who is not chair of the board • has at least three members. 4.3 Structure the audit committee so that it consists of: 4.3 The audit committee should have a formal charter. • only non-executive directors • a majority of independent directors • an independent chairperson, who is not chairperson of the board • at least three members. 4.4 The audit committee should have a formal charter. 4.4 Companies should provide the information indicated in the Guide to reporting on Principle 4. 4.5 Provide the information indicated in Guide to reporting See Recommendation 4.4 on Principle 4. Principle 5 – Make timely and balanced disclosure No change 5.1 Establish written policies and procedures designed 5.1 Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior requirements and to ensure accountability at senior management level for that compliance. executive level for that compliance and disclose those policies or a summary of those policies. Box 5.1 Continuous disclosure policies and procedures Box 5.1 Continuous disclosure policies 43 5.2 Provide the information indicated in Guide to reporting 5.2 Companies should provide the information indicated in on Principle 5. the Guide to reporting on Principle 5. Principle 6 – Respect the rights of shareholders No change 6.1 Design and disclose a communications strategy to 6.1 Companies should design a communications policy for promote effective communication with shareholders and promoting effective communication with shareholders and encourage effective participation at general meetings. encouraging their participation at general meetings and disclose their policy or a summary of that policy. Box 6.1 Using electronic communications effectively No change 6.2 Request the external auditor to attend the annual 6.2 Companies should provide the information indicated in general meeting and be available to answer shareholder the Guide to reporting on Principle 6. questions about the conduct of the audit and the preparation and content of the auditor’s report. Principle 7 – Recognise and manage risk No change 7.1 The board or appropriate board committee should 7.1 Companies should establish policies for the oversight establish policies on risk oversight and management. and management of material business risks and disclose a summary of those policies. 7.2 The chief executive officer (or equivalent) and the 7.2 The board should require management to design and chief financial officer (or equivalent) should state to the implement the risk management and internal control system board in writing that: to manage the company’s material business risks and report – 7.2.1 the statement given in accordance with best to it on whether those risks are being managed effectively. practice Recommendation 4.1 (the integrity of financial The board should disclose that management has reported to statements) is founded on a sound system of risk it as to the effectiveness of the company’s management management and internal compliance and control which of its material business risks implements the policies adopted by the board – 7.2.2 the company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects. Existing Principle/Recommendation Revised Principle/Recommendation 7.3 Provide the information indicated in Guide to reporting 7.3 The board should disclose whether it has received on Principle 7. assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. 7.4 Companies should provide the information indicated in the Guide to reporting on Principle 7. Principle 8 – Encourage enhanced performance See Principle 1 – Lay solid foundations for management and oversight See Principle 2 – Structure the board to add value 8.1 Disclose the process for performance evaluation of For senior executives see Recommendation 1.2 the board, its committees and individual directors, and For directors see Recommendation 2.5 key executives. Principle 9 – Remunerate fairly and responsibly Now Principle 8 9.1 Provide disclosure in relation to the company’s 8.1 The board should establish a remuneration committee. remuneration policies to enable investors to understand (i) the costs and benefits of those policies and (ii) the link between remuneration paid to directors and key executives and corporate performance. Box 9.1 Disclosure of remuneration policies and See Section 300A of the Corporations Act and AASB 124 44 procedures Related party Disclosures. 9.2 The board should establish a remuneration 8.2 Companies should clearly distinguish the structure of committee. non-executive directors’ remuneration from that of executive directors and senior executives. Box 9.2 Content of executive remuneration packages Box 8.1 Guidelines for executive remuneration packages Box 8.2 Guidelines for non-executive director remuneration 9.3 Clearly distinguish the structure of non-executive See Recommendation 8.2 directors’ remuneration from that of executives. Box 9.3 Guidelines for non-executive director See Box 8.2 remuneration 9.4 Ensure that payment of equity-based executive 8.3 Companies should provide the information indicated in remuneration is made in accordance with thresholds set the Guide to reporting on Principle 8. in plans approved by shareholders. 9.5 Provide the information indicated in Guide to reporting See Recommendation 8.3 on Principle 9. Principle 10 – Recognise the legitimate interests of See Principle 3 – Promote ethical and responsible decision stakeholders. making See Principle 7 – Recognise and manage risk 10.1 Establish and disclose a code of conduct to guide See Recommendation 3.1 compliance with legal and other obligations to legitimate stakeholders. Standing up for shareholders Australian Securities Exchange, Exchange Centre, 20 Bridge Street, Sydney NSW 2000. Telephone: 02 9227 0000 www.asx.com.au/supervision/governance/index.htm ISBN 1 875262 42 3