For some months now we have been looking at the implications of ESG reporting.
The first of these blogs, “Sustaining Trust: Unravelling the Importance of Social Licence to Operate in ESG Practices”, dealt with the “S” component (Social criteria), the “E” component (Environmental criteria) was discussed in both “Does the Mining Industry Need to be Re-Invented” and “Rehabilitating Old Mines and Quarries”.
Now it is time to discuss the “G” component – “Governance criteria”. The governance criteria are concerned with the leadership of a corporation, executive remuneration, audits, shareholder rights, and internal controls.
In Australia the ASX Corporate Governance Council develops and issues principles-based recommendations on corporate governance practices to be adopted by ASX listed entities. Under the listing rules ASX listed entities are required to benchmark their governance practices against the Council’s recommendations and, where they do not conform, to disclose that fact and the reasons why (“if not, why not”).
The Council has issued 8 principles, which, while being non-prescriptive, are recommended to achieve good governance outcomes and promote investor confidence in the market.
To make this a little more fun, let’s look at the 8 principles like superheroes!
1. Lay solid foundations for management and oversight:
Picture this – a corporate empire with a rock-solid foundation. The ASX Corporate Governance Council suggests that a listed entity should clearly define roles, responsibilities, and periodically review their performance. It’s like having a superhero team with well-defined powers and epic teamwork!
2. Structure the board to be effective and add value:
Our next stop is assembling the Board Avengers. The council advises having a board of an appropriate size with the right skills and knowledge. Imagine a boardroom where every member is a superhero, bringing their unique powers to the table.
3. Instil a culture of acting lawfully, ethically, and responsibly:
Time to talk about instilling a culture of acting lawfully, ethically, and responsibly. Think of it as creating a league of ethical superheroes within the organization. With capes of integrity and shields of responsibility, they’re ready to conquer the corporate world!
4. Safeguard the integrity of corporate reports:
Every superhero needs a sidekick, right? In the corporate realm, that’s the process to verify the integrity of corporate reports. It’s like having a trusty sidekick ensuring everything is in tip-top shape. No villains can sneak through this watchful eye!
5. Make timely and balanced disclosure:
Imagine corporate disclosure as a superhero making timely and balanced appearances. Like The Flash, they swoop in with information that can impact the securities’ value. Fast, balanced, and always on time – that’s the key to keeping the corporate universe in harmony.
6. Respect the rights of security holders:
Respecting the rights of security holders is akin to forming a Justice League for shareholders. They get the right information and facilities to exercise their powers effectively. It’s all about empowering the shareholders to be the heroes of their investment journey!
7. Recognise and manage risk:
No adventure is complete without managing risks. Establishing a sound risk management framework is like having the Risk Avengers on standby. They periodically swoop in, assess the risks, and keep the corporate city safe from unexpected threats!
8. Remunerate fairly and responsibly:
Last but not least, let’s talk about remuneration. It’s about paying directors enough to be superheroes and designing executive remuneration to align with the creation of value. Think of it as the Payday Avengers – ensuring everyone gets their fair share for a job well done!
The Council also makes the point that these principles should not be solely considered the remit of listed entities – all organisations, including not-for-profits and government-owned corporations will benefit from implementation of these principles.
Principles of good corporate governance are essentially impossible to distil down to a one-size-fits-all mandate, so much debate ensues.
Inevitably, the debate normally spends most time on what is supposedly not working. Of course, the Principles are not perfect, and many of the smaller listed companies and the initial public offerings still pay lip-service only to the Principles. But they are still very useful.
Because they are non-prescriptive they act as a benchmark for all types of entities and even other countries. The “if not, why not” flexibility for companies not to adopt a recommendation and tell investors allows companies to respond to the changing business environment while also allowing them to refine their governance as appropriate.
Nevertheless, more work needs to be done to encourage small and micro-cap listed companies to adopt these recommendations; too many use their “size” as an excuse. For example, the “why not” part of the deal needs more scrutiny from the investment community.
As stated in earlier blogs on these ESG criteria, the increasingly important Millennial and Gen Z generations take good corporate citizenship very seriously – we need to get it right.