Sigh of relief as new rules are toned down

ANDREW WHITE
FEBRUARY 28, 2019
The Australian
Corporate Australia has been pulled back from the brink. The new ASX Corporate Governance Rules released yesterday have abandoned much of what sections of corporate Australia feared would be overly prescriptive social engineering that would give fresh licence to activist groups.
The final principles and recommendations have been radically slimmed down — from 56 pages in last year’s draft to 35 in the final version released yesterday — in the process jettisoning pages of commentary on issues that companies should be required to report on.
Gone from the final version is any mention of a “social licence to operate” as well as calls for companies to have policies on recruiting from ethnically and socially diverse backgrounds. So too are prescriptions against “aggressive tax minimisation strategies”.
Critics saw it as, at best, corporate virtue signalling and, at worst, an attempt to use company governance for social engineering and to give licence to critics who want a say in how companies should be run. Replacing “social licence to operate” might look like a backdown, but chairman Elizabeth Johnstone says the recommendation for boards to consider matters of “reputation” and “standing in the community” are better ways to express the same ideas, without the risk of emboldening activists opposed to a particular industry.
“When we used that phrase, as many here have used it, it was used as shorthand … to convey that notion that an entity’s long-term sustainable success is dependent on maintenance of trust and confidence and good will,” she said. That sounds like common sense for any director to apply. But as the findings and fallout of the royal commission have demonstrated, it has too often been overlooked or taken for granted.
By removing such contentious items, the ASX Corporate Governance Council has preserved the appeal and usability of a document that traces its origins back to the first great convulsion of the new millennium in the dotcom crash. In the US that led to a black letter law solution in the Sarbanes Oxley Act that vastly increased the compliance burden of companies.
But Australia followed Britain in adopting a principles-based approach overseen by the council and promoted by the ASX.
It’s telling that Maurice Newman, who was chairman of the ASX when the governance principals were first adopted, was among the opponents saying this fourth version — in its draft form — went too far in prescribing the sort of issues companies needed to address.
Also fuelling concerns were the fact that the Australian Securities & Investments Commission and others appeared to want to give the principles more teeth.
As it stands the principles are not mandatory — ASX-listed companies don’t have to adhere to them but they are required to consider and report on their adherence to them on an “if not, why not” basis.
But there was a push to make them mandatory, including from ASIC, which made a submission that “we encourage the Council to consider whether some or all of the principles and recommendations should be made mandatory for larger listed companies”.
Even without some of the more contentious items, however, it is still a substantial update and one that is given added potency by the timing of its arrival.
In the past month the business community has been confronted with the findings and 76 recommendations of the Hayne royal commission.
This week the Australian Competition & Consumer Commission chairman Rod Sims declared his preference for punishment over talk of cultural change, and just yesterday Australian Prudential Regulation Authority deputy chairman John Lonsdale fired a warning to insurers that it would be “less patient, more forceful” and inclined to punish offenders.
APRA, ASIC and the ACCC have, to varying degrees, been preparing for a regulatory crackdown that could involve some serious court action.
ANDREW WHITEASSOCIATE EDITOR