‘As communities develop higher expectations, boards have to educate themselves’: ASX Corporate Governance Council

Back in 2002 when the Australian Stock Exchange established its Corporate Governance Council, requiring all publicly listed companies to report on their governance practices in the annual report, Elizabeth Johnstone, council chair, says it was quite groundbreaking.

Almost 20 years later and the ASX Corporate Governance Council’s Principles and Recommendations, a guidance framework that works on a comply-or-explain basis, is in its fourth iteration (published in 2019). During that time, new issues have come to the forefront of corporate governance and companies are facing new expectations.

The current edition suggests companies consider making the disclosures recommended by TCFD and also mentions modern slavery for the first time – issues that Johnstone says show how even the idea of what good governance means is fluid.

‘Western countries are unlikely to send six and seven-year-old children back down the mines, but that used to be normal,’ she explains. ‘It’s an example I use to highlight how societal expectations of what good governance is are not static; they are evolving.’

In Australia, the most profound governance example in the last 12 months relates to ‘a mining company that destroyed significant indigenous sites,’ notes Johnstone, and though she doesn’t specifically name Rio Tinto, she adds that ‘we saw the departure of a number of people in the most senior positions of that company.’

These are not just issues where society’s expectations have changed from 100 years ago. Many companies fail to keep pace with what society expects of them, with Johnstone pointing to workplace behavior as another example, where what is acceptable has shifted dramatically in recent years. ‘The standards around workplace behavior – whether it’s bullying, sexual harassment or something else – are evolving,’ she says. ‘They’re not static. And people are being held to account.’

The modern director

If the idea of what constitutes good corporate governance is constantly evolving, and if the expectations of directors in any number of risk areas is continually evolving, what Johnstone says remains the same is the fact that directors must ‘adequately educate themselves and then hold executives to account to ensure there is effective compliance. That principle remains the same even if the context evolves.’

The job of a modern board director is not an easy one, says Johnstone.

One of the principles the ASX Corporate Governance Council is focused on is how a company board should be structured in order to be effective and provide value.

Recent years have seen a growing focus on board diversity, with a push to limit tenure and make space for new younger, more diverse members to join corporate boards. A big part of that is about bringing new skills onto boards so they can adequately assess emerging risks and better guide management. What that doesn’t mean, however, is that board members have to be specialists in any one area.

‘We certainly would not say that every board has to have an AI export expert on it, [for example],’ stresses Johnstone. ‘But I think what we would say is that one of the challenges for a contemporary listed company director is to be intelligent enough and energetic enough to be able to quickly get up to speed on things that influence the risk he or she is making decisions about inside his or her particular company.’

This applies across all risk areas, of course, with Johnstone citing blockchain, the importance of indigenous sites or modern slavery issues in the supply chain, where a company might be implicated in an entirely different jurisdiction from the one in which it operates.

‘It actually doesn’t matter what the context is,’ says Johnstone, adding: ‘It’s a tough job to be a modern director of a listed company. The continuous learning, the continuous development required as a director means you need to get up to speed on things that five years ago you may never have heard of. It’s certainly not a simple retirement post. It never was.’

Societal change

Given the ever-shifting nature of the risks companies face – and the ever-increasing number of codes and principles companies are asked to sign up to or follow – Johnstone says it has been important for the ASX Corporate Governance Council to keep its principles useful.

‘For many companies there is the question of how much you can connect the dots between these different requirements,’ she explains. ‘That’s why we’ve kept our documents as simple and as practical as we can. At the end of the day, it is not about doing something for the sake of doing it: you do it for a purpose. And the purpose is to promote not just investor confidence but also the confidence of all the people in the picture.

‘Stakeholders – whether they’re shareholders or employees or suppliers – all the people in the stakeholder group are critical. And that’s where we get down to the basics of what we understand [good] corporate governance to be.’

What it is about is societal change, she continues: ‘Ten years ago, if I had started a conversation about modern slavery in most boardrooms, across most jurisdictions, people would ask, Why are you talking about that? But today there’s a profound understanding that somewhere in your supply chain, if you are not vigilant, you might unintentionally be using slave labor. The same goes for other issues, too.’

Although the ASX Corporate Governance Council doesn’t use the phrase ‘social license to operate’ in its principles, Johnstone says this idea very much goes hand in hand with what good governance is. ‘As communities develop higher expectations, boards have to educate themselves about these issues and the expectations around them in order to address them,’ she concludes.