Public corporations must comply with governance principles. While the regulations are meant for companies traded on the ASX, private companies also can grow healthier by adopting the measures. Here are highlights of guidelines.
Every company traded on the Australian Securities Exchange (ASX) must comply with the revised Corporate Governance Principles and Recommendations with 2010 Amendments aimed at providing entities with several guidelines to help bolster their governance structure and satisfy investor demand for more certainty and transparency.
“If Not, Why Not” Reporting
The effective “if not, why not” reporting practices involve:
1. Identifying the recommendations the company has not followed.
2. Explaining why they were not followed.
3. Detailing how the alternative practices of the business meet the ‘spirit’ of the relevant principle.
4. Demonstrating that the company understands the relevant issues and has considered the impact of its alternative approach.
Although the guidelines are recommendations rather than requirements, publicly traded companies that choose alternative methods of governance must explain their actions to shareholders taking the “if not, why not” approach (see right-hand box).
Most of the recommendations can help run your private entity particularly if you answer yes to the two following questions:
- Do you plan to take your business public eventually? Much of the cost associated with becoming a listed company relates to preparing to comply with the ASX’s rules and regulations. Adopting governance that the Council recommends earlier than required can help spread the cost over multiple quarters. 2. Will your company need additional financing to support growth? Putting the Council’s governance recommendations in place can help convince a lender that the company has the appropriate “checks and balances” to protect itself and consequently to minimise the lender’s risk.
Adopting the guidelines can help equip employees and senior management with tools that will ultimately improve the company’s overall financial performance. For example, once risk is identified and understood it can be more effectively managed. Too often unquantified risk materialises as a loss. The Council’s recommendations can help companies better understand the inner workings of their operations and proactively address issues before they turn into problems that require significant time and expense to resolve.
The following lists the eight principles that the guide sets forth and some of the most noteworthy recommendations:
Principle 1 – Lay solid foundations for management and oversight
Recommendation: Disclose the process for evaluating the performance of senior executives.
Principle 2 – Structure the board to add value
Recommendations: The same person should not take the roles of chair and chief executive officer. Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.
Principle 3 – Promote ethical and responsible decision-making
Recommendation: Companies should disclose in each annual report the proportion of women employees in the organisation, in senior executive positions and on the board.
Principle 4 – Safeguard integrity in financial reporting
Recommendation: The audit committee should be structured so that it:
- Consists only of non-executive directors;
- Consists of a majority of independent directors;
- Has an independent chair who is not chair of the board; and
- Has at least three members.
Principle 5 – Make timely and balanced disclosures
Recommendation: Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and accountability for that compliance at the senior executive level. The policies, or a summary of them, should be disclosed.
Principle 6 – Respect the rights of shareholders
Recommendation: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings. Enterprises should disclose their policies or a summary of the policies.
Principle 7– Recognise and manage risk
Recommendations: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. The board should require management to design and set up an internal system to manage material risks and to report back to it on how well the risks are being managed.
The board should disclose that management has made that report and should disclose whether it has received assurance from the chief executive officer and the chief financial officer 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.
Principle 8 – Remunerate fairly and responsibly
Recommendation: The remuneration committee should be structured so that it:
- Consists of a majority of independent directors
- Is chaired by an independent chair
- Has at least three members.
Consult with your adviser to discuss how your business could benefit from adopting these governance principles.