The ASX’s Corporate Governance Council has come under fire over the last few weeks over its supposedly “prescriptive” new governance rules for listed companies – but how would the proposed framework actually affect you and your clients’ investments in Australian shares?
Consultation for the new framework recently closed, having opened in May this year. The recommendations were made to address multiple concerns, among them corporate culture, whistleblower policies, anti-corruption measures, the slowing rate of progress in achieving board-level gender diversity and carbon risk.
A new approach to governance?
For some industry participants, though, the chief issue with the new principles is the emphasis on a listed entity’s “social licence to operate, and the need for it to act lawfully and in a socially-responsible manner in order to preserve that licence.” Part of maintaining said licence would, the ASX added at the time, involve addressing the views and interests of a “broader range of stakeholders than just its security holders.”
The main criticism appears to be that the specific ways this would be implemented represent regulatory overreach – the Australian Institute of Company Directors (AICD) submitted that the new rules risk moving the ASX’s governance principles from a “principles-based approach” to something more “granular and prescriptive.”
This could, in turn, lead to a view of corporate governance as a compliance matter rather than a “starting-point for consideration,” as the AICD put it.
Why these concerns matter
There isn’t enough room in a piece like this to detail all the specific recommendations the ASX has made to address its new vision for governance – you can read the draft here – but it’s clear the spectre of the Royal Commission looms large, both in the draft for consultation and in many of the responses to it.
In fact, in the original communique issued by the Council, chair Elizabeth Johnstone said the proposed changes both anticipated and respond to “the governance issues identified in recent enquiries, such as the Hayne Royal Commission.”
While it remains to be seen what the principles will look like in their final form, here are some key reasons as to why changes (any changes) matter: of the $1.6 trillion in superannuation money monitored in APRA’s quarterly super performance statistics, 23% was invested in Australian shares as at March 2018.
For the roughly $700 billion invested in SMSFs, ATO data shows about 29% was invested in Australian shares at the same period.
If critics of the changes are correct – that it would lead to significantly increased paperwork and a prescriptive governance regime that some listed companies would struggle to accommodate – it stands to reason that implementing the new framework could lead to an increase in expenses and a compression in returns for investors.
This of particular concern given that the ASX has lagged global markets for the past decade. The counter-argument, though, is that a more robust and standardised approach to governance could deliver more sustainable returns in the long term – as the ASX says in its revised rules, “good corporate governance promotes investor confidence, which is crucial to the ability of entities listed on the ASX to compete for capital.”
Under the hood
When considering all of the above, it’s worth noting that despite criticisms of specific recommendations, to the principles and recommendations made have an “if not, why not” approach. This means that while listed companies are recommended to adhere to the rules, it isn’t mandatory – however, where they do not, they will need to explain why.
This has led to arguments that companies which take an “alternative approach” to the ASX’s governance principles may be censured by the market. It’s not easy to determine whether this is the case until the new principles are finalised, but one thing it will facilitate is a greater level of information being available to shareholders about the governance practices of Australian companies in which they’re invested.
Ideally, you and your clients will have a clearer picture of what specific Australian stocks look like from a governance perspective, and can make better-informed decisions about whether to invest in them (or in products that invest in them).
When you consider that 92% of the 1037 Australians surveyed by the Responsible Investment Association of Australasia (RIAA) in November 2017 expected their super (and other investments) to be invested “responsibly and ethically,” having more information available on governance is likely to be an important educational tool for your clients.
Of course, all involved stakeholders will first need to ensure the new principles work as intended.
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