ESG–Australia: Consultation Material for the 5th Edition of the Corporate Governance Council Principles and Recommendations Released

Entities may need to explain the assessment methodology used to determine the skills of its board of directors. As this process will ultimately need to be disclosed to the market, entities should consider whether they are currently relying on self-evaluation by directors and whether an independent and consistent method should be introduced.

This process will be relevant for determining the board skills matrix, and when undertaking appropriate checks before putting forward a director for election.

Best practice is to disclose the individual skills of each director, compared to a collective assessment of the skills of the board as a whole. Whilst this forms part of the non-binding commentary, we can likely expect a greater uptake in larger listed entities disclosing individual skills.

A notable departure from the 4th Edition of the Corporate Governance Principles' recommendation 1.5, which requires setting and disclosing measurable gender diversity objectives, is the inclusion of the word 'timeframe'. Accordingly, boards may be required to establish time-based targets and/or milestones for achieving a gender diverse board. 

In creating a timeline, boards should determine what can be achieved each reporting period, as the entity will be held accountable in explaining its progress towards this objective. However, this must be balanced with signalling to the market that the board is committed to gender diversity and has established strong targets.

Whilst gender diversity is central to this proposed recommendation, listed entities will be encouraged to discuss and be transparent about other attributes of its board, such as age, race, backgrounds and personal experiences of directors, which it considers adds value and diversity to its board. This helps to promote a broader outlook on diversity that extends beyond gender.

For entities in the S&P/ASX 300 index at the commencement of the reporting period, this recommendation endorses a 10% increase from the previous 30% minimum female director requirement established in the 4th Edition of the Corporate Governance Principles. In particular, the recommendation notes that a gender balanced board would include at least 40% women, at least 40% men and up to 20% any gender.

As the implementation of the proposed 5th Edition of the Corporate Governance Principles may not be applicable until after 2025, S&P/ASX 300 Index entities not currently meeting the recommendation should consider reviewing the board's current succession planning to achieve or make progress on this recommendation.

A significant change being proposed is the duty to disclose the outcomes of material breaches of the entity's code of conduct, whistleblower and anti-bribery policies. This will require disclosure of any escalation and disciplinary actions taken, as well as steps taken such as changes to the policy, compliance training or risk management. 

We expect that this recommendation will be heavily scrutinised during the consultation period given the privacy concerns involved. The Privacy Act imposes high standards for businesses handling sensitive personal information, and the Fair Work Act requires all employers to collect and appropriately store certain personal information about employees that should only be disclosed on a limited basis. Similarly, strict confidentiality requirements apply under whistleblower laws.

Matters that cannot be de-identified or would be contrary to law may need to be omitted from disclosure. This possibly will require entities to take greater care in preparing disclosures and confer with their privacy team or lawyers.

Listed entities may be required to engage further with key stakeholders. This may involve implementing and monitoring a stakeholder engagement program.

The proposed commentary under this recommendation suggests that stakeholder management may involve the board, or its relevant committee, investigating any serious workplace incident or customer complaints, compliance with modern slavery laws (and policy if applicable), and lobbying and donation activities.

The proposed commentary places a new emphasis on having regard to the interests of Aboriginal and Torres Strait Islander stakeholders, such as business partners, land owners, employees and customers. This may encourage entities to approve and monitor a Reconciliation Action Plan.

Listed entities may be required to disclose their internal review of the effectiveness and independence of their auditor. 

To aid security holders in perceiving auditor independence, listed entities may need to disclose how long the audit firm and partner have been acting for the entity. The Corporations Act already sets out rules regarding rotation of individuals who play a significant role in the audit for five successive financial years, which can be extended by the directors subject to a resolution and recommendation of the audit committee. Consequently, information regarding audit engagement partners should be available to publish within annual reports.

Entities may need to disclose a range of foreseeable risks, which extend beyond financial risks and include: cyber-attacks, protection of data, climate change and artificial intelligence.

Disclosures in an entity's operating and financial review in its directors' report and, if published, sustainability report may satisfy this requirement.

An entity should have reasonable grounds for making disclosures under this recommendation, particularly forward looking statements (e.g. forecasts). 

Entities may need to reconsider their remuneration practices based on the proposed recommendation to prevent bias in decision-making, by removing any securities or payment attached to an entity's performance, or any benefits given in connection with retirement (excluding superannuation) to non-executive directors (NEDs). 

Commentary suggests that it is possible that if this recommendation is not followed, the entity may be required to obtain security holder approval.

Listed entities may need to introduce powers that allow the board, subject to its discretion, to limit or clawback performance-based remuneration to senior executives after it has been paid, awarded or vested.

Entities would be required to disclose the type of matters that triggered the use of these provisions, the number of current and former senior executives impacted during the reporting period and their impact.

While this is recommended to be disclosed on a de-identified basis, disclosure on an identified basis in the remuneration report will satisfy this recommendation.