As the shadow of the Hayne Royal commission continues to loom over the financial services industry, insurers should be preparing for another change in the governance and compliance landscape which promises to further heighten the demands being made of Australia’s leading financial institutions. The ASX released its updated Corporate Governance Principles & Recommendations this week, and while the spotlight is shone most brightly on ASX listed entities, the ramifications reach further, affecting all insurers covering the directors and officers of such entities.
The ASX Corporate Governance Principles and Recommendations – what’s new?
The current conversation around corporate governance continues to gain momentum and draw the attention of Australia’s boardrooms and living rooms. As a result, regulators and leading industry bodies are moving away from aspirational goals and lofty platitudes, instead imposing tangible benchmarks in search of measurable outcomes (backed by serious consequences for entities failing to reach these standards).
The fourth edition of the ASX Corporate Governance Council’s Corporate Governance Principles & Recommendations has followed this trend. The 8 Principles, enlivened by the accompanying 35 Recommendations (up from the third edition’s 29), set out suggested corporate governance best practice for listed entities to meet the expectations of investors and regulators.
While the Principles and Recommendations are not strictly mandatory and lack the legal enforcement mechanisms that accompany legislation, they apply to all ASX listed entities unless the entity can provide legitimate reasons why a particular Principle or Recommendation cannot reasonably be implemented within the entity. This underlying precept is termed “if not, why not?”, and compels all listed entities to publicly disclose reasons for why it has not complied with a given Principle or Reason.
The most consequential of these expand upon Principle 3, or ‘Instil a culture of acting lawfully, ethically and responsibly’. In its revised form, the Recommendations expanding upon Principle 3 require a listed entity to:
- (3.1) articulate and disclose its values;
- (3.2) (a) have and disclose a code of conduct for its directors, senior executives and employees; and (b) ensure that the board or a committee of the board is informed of any material breaches of that code;
- (3.3) (a) have and disclose a ‘whistleblower’ policy; and (b) ensure that the board or a committee of the board is informed of any material incidents reported under that policy; and
- (3.4) (a) have and disclose an anti-bribery and corruption policy; and (b) ensure that the board or a committee of the board is informed of any material breaches of that policy.
The other noteworthy changes and omissions in the fourth edition include:
- the omission of the controversial “social licence to operate”: vociferous pushback from stakeholders saw the phrase as included in the original draft of the 4th edition dropped and replaced with less subjective references to “reputation” and “standing in the community”;
- an increasing emphasis on the governance pertaining to environmental and social risks, outlined in a revised Recommendation (7.4); and
- a 30% target for female directors on boards of listed entities as a definitive, measurable objective for all ASX 300 entities as part of the revised Recommendation (1.5).
The changes to Principle 3 in particular highlight a continuing trend towards an objective, quantifiable approach towards corporate governance – not dissimilar to the recommendations of the Hayne Royal Commission. Corporate governance now ought to instil accountability at an institutional, board and individual director level, as well as clear-cut regulations that measure performance. In particular, the focus on boards maintaining informed oversight over all aspects of conduct risk within the organisation will dovetail with the Hayne Recommendation that all financial services providers be subject to the BEAR standard (or, the Banking Executive Accountability Regime, the subject of an upcoming article to appear as part of Insurance Law Tomorrow’s six part series, ‘Insurance After Hayne’, examining the impacts of the Royal Commission on the insurance industry).
Implications for insurers – 2 key takeaways
In addition to the changes that will be imposed upon all ASX listed entities, insurers will be uniquely affected given the industry’s strong ties servicing the ASX 300. As the obligations placed on directors and management become increasingly more onerous, the risks associated with non-compliance and directors falling short of their duties increase in equal proportion. Directors and Officers and Management Liability policies should be re-examined to ascertain whether the coverage of pricing is appropriate.
For Australia’s listed insurers, maintaining their own house and reviewing how to make corporate governance policies comply with the newly raised standards demanded by regulators and the community will remain a priority. The Hayne Royal Commission has raised the bar for what is expected of Australia’s financial services sector, and the ASX release has only amplified the emphasis that is being placed on corporate governance for listed companies.