ASX Corporate Governance: Changes, Impact, and Recommendations

This article discusses the changes in the 4th edition of ASX Corporate Governance Council's Corporate Governance Principles and Recommendations, their impact on listed entities, and recommendations for compliance. It explores the importance of values, culture, remuneration, and non-financial risk management. The article also highlights how these changes can benefit companies like Homeloans Limited.

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ASX CORPORATE GOVERNANCE
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Table of Contents
Executive Summary.........................................................................................................................3
Introduction and Purpose.................................................................................................................5
Discussion........................................................................................................................................5
Changes between Versions..........................................................................................................5
Explanations of Why Changes.....................................................................................................8
Evidence of Usefulness................................................................................................................9
Recommendations to CEO............................................................................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Executive Summary
The 4th edition of ASX Corporate Governance Council’s Corporate Governance
Principles and Recommendations (ASX CGCC’s GPR) stood published on 27/02/2019 after
consultation. The fourth edition has various changes to the third edition. The phrase “social
license to operate” is never appearing in ultimate 4th version. Rather, it was substituted referring
to “reputation” alongside the “standing in community.” Council has posited that it regards such
phrases as “synonymous” with the “social licence to operate” and more probable to be well
comprehended alongside applied consistently by a listed entity, its board beside the rest of
stakeholders. Version 4 also entail companies’ anticipation to serve to “reserve as well as
defend” respective “reputation alongside standing” in society as well as with vital stakeholder
including employees, customers, suppliers, regulators, law makers and creditors.” Council has
maintained that 4th version entails “every critical alterations regarding values alongside culture
projected in draft consultation.” A novel obligation has been introduced for companies to
articulate as well as disclose values of organizations and align them with their strategy, long-run
growth delivery and remuneration structures. The 4th version further list various novel
responsibilities of the board (intended to support strong governance and culture) including:
responsibility to define purpose of organization, align policies of remuneration with purpose of
entity, values, risk appetite, strategic objectives alongside a stronger emphasis on board’s role in
management oversight and where needed, challenging management. The fourth version further
encourages the board to monitor their strategy for managing risks (non-financial risk (NFR)
alongside financial risks) adequacy. This encompass guaranteeing that strategies effectively
sufficiently address emerging alongside contemporary risks including digital disruption, privacy,
conduct risk, cyber-security, climate change, sustainability, and data breaches. The fourth

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version has also identified remuneration as a “key culture’s driver” and an emphasis for
investors. The adjusted commentary has made it clear that where structures for remuneration are
being determined, an entity must consider both incentivizing executives as well as director for
pursuit of success and growth of the company and make sure that incentives do not reward “
conduct which is antagonistic to company’s risk appetite or values. Moreover, a company must
consider the implications of being viewed as paying extra by the community. The fourth version
further encourages the firms to enhance climate alongside additional NFR revelation by
emphasizing on substantial environmental alongside social risks which include by referring to
TCFD. Fourth version has also introduced a novel obligation for companies to ensure as well as
reveal full gender-diversity policies as well as set quantifiable objectives to achieve such a
diversity for senior executives as well as work in general. Such measurable objectives to
accomplish diversity in gender must be 30% for S&P as well as ASX 300 Index entities.

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Introduction and Purpose
This paper thus examines choses at least two substantive alterations between the 3rd and
4th version of the A ASX CGCC’s GPR, and produce a report to the CEO of small Australian
Company (Homeloans Limited) that explains these changes between the versions, the reason for
the occurrence of the changes and provide evidence regarding the usefulness of the selected CG
mechanisms changed, alongside explanation of theories adopted in the articles used. Finally, a
recommendation is presented to the Company CEO whether or not to comply with the alterations
with reasons.
Discussion
Changes between Versions
What has never changed is that the maintenance of the identical disclosure approach of
“flexible, non-mandatory “if not, why not” as in 3rd version. Final version has similar structure: 8
core principles; supporting recommendations, as well as commentary alongside guidance on
recommendations’ implementation.
First substantive change selected for analysis regards the need to tackle the issues of
governance emerging from meager culture and conduct. Specifically, in ultimate fourth version,
principle three has substantially been reworded to put a sturdier focus on values alongside
culture. It now states that listed companies need to implant as well as continuously reinforce a
culture crossways the organization of responsibly, ethically, and lawfully acting. This modified
principle is backed by three novel recommendations. These include articulating and disclosing
organizational values (3.1); whistleblower policy (3.3) as well as anti-bribery besides corruption
policies (3.4). Council acknowledged various submissions disagreeing with culture emphasis in
4th version based on “Principles beside Recommendation does not need to try to give prescription

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of culture” and that “regulation emphasis needs to be on behavior rather than culture.” However,
the Council has explained that the variations stayed reserved in the ultimate version since they
were regarded “fundamental’ and essential in tackling the issues raised relating to conduct and
government in the latest inquires as well as to trust rebuilding. The Council further stated that the
4th version encompass “all of the core vicissitudes regarding values and culture projected in
consultation draft” with certain “drafting variations” including the pronouncement contrary to
including the phrase “social licence to operate” in ultimate version 4.
Second substantive change regards the remuneration. A change has been made in respect
of Principle alongside its supporting recommendations to effectively align pay for executive with
the risk appetite and values of the organization. The recommendation 8.1 commentary currently
identifies the company remuneration as a key culture driver and an emphasis for investors.
Therefore, as the companies sets its remuneration, the commentary currently specifies that it has
to consider the need for such a structure to remuneration to incentivize directors and executives
to pursue the entity’s success and growth and also the organization should ensure that such
incentives do not reward “conduct which contradicts the values or the risk appetite of the entity.
Moreover, the commentary highlights that the entity need to consider the repercussions of being
viewed by society to be excessive compensating. Similarly, a commentary as outlined in
recommendation 8.2 currently posit that performance-oriented payment (executives) need to be
interrelated precisely to itemized targets of performance, allied to the medium, long and short-
run objectives of performance alongside need to stay consistent with entity’s purpose,
circumstances, strategic goals, risk appetite and values. Further, it posits that discretion has to be
reserved wherever necessary, to deter performance-oriented compensation rewarding conduct
which contradicts the company’s risk appetite or values.

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The third substantive change relates to the ESG risks or the environmental, social and
governance risks. Version 4 now replaces the “economic sustainability”, “social responsibility”
and “environmental sustainability” definitions with “environmental risk alongside social risks” to
cover a wide array of risk. In the final version 4, recommendation 7.4 posits that a “companies
need to reveal whether or not it has any substantial exposure to social risk or environmental
risks, if yes, disclose how it is managing or intend to manage such risks.” This commentary has
further been broadened to posit that companies that choose to broadcast their integrated Report
(IR) according to the IIR Council’s IR Framework or a sustainability report according to a
recognized global standard might meet recommendations via the cross-reference to such a report
(nevertheless never required). In regards to risk linked particularly to climate change, this
commentary is encouraging benchmark of company disclosures against rivals as well as “to
ponder if they have substantial exposure to risk of climate change by referring to
recommendations of TCFD and if yes, to consider making such disclosures as TCFD
recommends.
The fourth substantive change in the version 4 relates to NFR by focusing on “should we
do it.” Besides a bold emphasis on values beside culture, version 4 has a robust focus on NFR
management. For instance, this commentary is introduced within recommendation 7.2 which
makes it precise that one of integral roles of the BOD of a listed company is monitoring the
sufficiency of companies’ framework for non-financial and financial risks management. This
encompass the board satisfying itself that the framework address emerging and contemporary
risks (cyber-security, digital disruption, conduct risk, data breaches, climate change, privacy and
sustainability) sufficiently. This approach to risk is noted in the commentary footnote as being
consistent with the APRA’s Prudential Inquiry approach into the CBA that posited that conduct

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risks remains a risk of unethical, inappropriate or illegal behavior on the part of employees or
management of the organization. The management of conduct risk goes passed the stringently
permitted within regulations alongside law (can we do it?) to take into consideration of whether a
given action stays ethical or appropriate (“should we do it?”).
Explanations of Why Changes
According to the ASX CGC Chair, Johnson Elizabeth’s comments on these changes, it is
indicated that the reviewed Principles alongside Recommendations occurred to discourse the
“evolving matters regarding trust, culture, values, hastened by the latest instances of conduct by
certain listed companies dwindling below the expectations and standards of the community.
The changes in respect to governance arise from the realization that the listed entities
have serious and poor culture and conduct. Thus, there was a need to emphasize more on culture
and values of the organization. The entities were never instilling and reinforcing their cultures
across the organization of responsibly, ethically and lawfully acting. Therefore, it was good for
this change to be effected so that the entities could articulate and disclose their values, improve
their whistleblowing policies as well as have effective anti-bribery alongside corruption policies
in place. These changes were thus fundamental and essential in addressing the conduct and
governance issues observed in recent inquiries as well as trust rebuilding.
In regards to changes in NFR premised on inclusion of the board to monitor the
sufficiency of both financial and NFR management framework, it arose from the laxity of board
to ensure a strong NFR management despite emerging risks that not only affects the company
but also the society. Therefore, it was included due to the rising patterns of such emerging risks
which cannot be achieved by purely focusing on laws and regulation but needs to ensure that the
actions are ethical and appropriate.

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In respect of changes to ESG risks’ disclosure, the occurrence was due to the realization
of the need to include and capture a broader range of risks pertaining to the improvements to
environmental, governance and social risks.
The changes to remuneration arose from the need effectively align executive pay with the
risk appetite and values of the organization. Version did not identify remuneration as a central
driver and focus for investors. Thus, there was a need for a company to set remuneration by first
considering the need for compensation structure to incentivize executives alongside directors to
hunt success and growth of the company, as well as ensure that such incentives do not reward
conduct which contradicts the risk appetite and value of the entity. This change also arose from
the fact that communities had been viewing some entities to be paying extra which was
unethical.
Evidence of Usefulness
The usefulness of the changes can be understood by applying it to the case of the
Homeloans Limited. In regards to focus on non-financial risk management, being a bank,
Homeloans Limited, has been facing a large downside effects due to poor management of this
NFR. NFR in a bank can relate to compliance failures, technology, misconduct and operational
challenges (Allini, Manes Rossi and Hussainey 2016). Thus, Homeloans Limited is seeking for
an integrated nonfinancial risk management approach to decrease the risk of additional failures,
meet the expectations and requirements of stakeholders and lower costs through an enhanced
governance framework. The changes to the third version have done exactly this by putting more
focus on management of NFR whereby the board is mandated to monitor NFR management
framework’s adequacy and take integral role in its management. Thus, Homeloans Limited will
benefit from compliance by building a governance model with enhanced line of defence where

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the board plays a key role. The Homeloans Limited board has not been routinely considering
nonfinancial risk management. Thus, inclusion of the board will mean frequent meetings devoted
to risk control which will give auditable evidence of suitable risk-taking as well as risk-
management decisions aligned to regulatory as well as legal accountability of the board (Ahmed
and Manab 2016).
The focus on ESG risk disclosure is also useful in the Company. At the present, investors
increasingly want greater ESG disclosure (Lokuwaduge and Heenetigala 2017). The demand
from these investors for ESG disclosure is on the rise with many investors regarding CSR
essential when making investment rising. Nonetheless, the Company is never meeting these
demands but with the changes, the Bank can take advantage and comply with these revisions to
meet the demands. This will help the bank attract more investors and hence create a competitive
edge (Sherwood and Pollard 2018).
The aftermath of GFC (2007-2009) led to significant public frustration in respect of
executive remuneration, specifically in baking industry. Thus, the need for regulated practices of
remuneration became important. The changes to third version has appreciated this need and
proposed an alignment of the risk appetite and rewards by promoting an effective risk
management as well as discouraging extra risk-taking. A healthy banking industry and economic
activity alongside a change in executive remuneration will thus result when the CEO complies
with the changes and align pay for executive with the risk appetite and values of the organization
(Swanepoel and Smit 2016).

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Recommendations to CEO
The CEO should accept and comply with the changes for the betterment of the
organization. The Company will benefit by aligning its executive and director’s remuneration
structure proposed by version 4. This is because it will ensure a better culture and attract
investors into the Company. This will be achieved by ensuring effective conduct which reduces
risk appetite and ensure good values in the company.
The CEO should also comply because the inclusion of board to management of both non-
financial and financial risk management will minimize the risk of the organization. The CEO
will now enjoy the full support and close working relationship with the board to monitor the
sufficiency of the financial as well as non-financial risks management framework. This will help
the organization effective manage the emerging risk beyond the legal requirement through
increased ethical and appropriate conduct.
Conclusion
The paper has demonstrate the four substantive changes in the final version 4. These
changes relate to remuneration, ESG, NFR management, and governance. Justification for the
changes has been demonstrated in the report by explaining why they occurred. The usefulness of
these changes have also been explained and a final recommendation why the CEO should
comply with the changes also presented.

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References
Ahmed, I. and Manab, N.A., 2016. Moderating role of board equity ownership on the
relationship between enterprise risk management implementation and firms performance: A
proposed model. International Journal of Management Research and Reviews, 6(1), p.21.
Allini, A., Manes Rossi, F. and Hussainey, K., 2016. The board's role in risk disclosure: an
exploratory study of Italian listed state-owned enterprises. Public Money & Management, 36(2),
pp.113-120.
Lokuwaduge, C.S.D.S. and Heenetigala, K., 2017. Integrating environmental, social and
governance (ESG) disclosure for a sustainable development: An Australian study. Business
Strategy and the Environment, 26(4), pp.438-450.
Sherwood, M.W. and Pollard, J.L., 2018. The risk-adjusted return potential of integrating ESG
strategies into emerging market equities. Journal of Sustainable Finance & Investment, 8(1),
pp.26-44.
Swanepoel, E. and Smit, A.M., 2016. The impact of executive remuneration on risk-taking in the
banking industry, 11(2), p. 12-56.