ASX Social Licence to Operate

Following debate over the Australian Stock Exchange Corporate Governance Council’s proposal to include a “social licence to operate” in its Corporate Governance Principles and Recommendations, Kyrn Stevens looks at what is being proposed.

The council’s draft fourth edition of the principles and recommendations, released in May, was met with a strong debate.

Shareholder groups, big super funds and the Australian Council of Superannuation Investors made submissions supporting the proposal, while former heads of the Australian Stock Exchange (ASX), an investment banker, the new chair of AMP and the Australian Institute of Company Directors publicly opposed or expressed concerns about it.

Principle 3

The council is proposing significant amendments to Principle 3, changing it from “[a] listed entity should act ethically and responsibly” to “[a] listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”.

The proposed new commentary for Principle 3 says that a listed entity’s social licence to operate “is one of its most valuable assets and that it can be lost or seriously damaged if the entity or its officers or employees are perceived to have acted unlawfully, unethically or in a socially irresponsible manner”.

And that, “with appropriate training and reinforcement from senior management, a listed entity’s code of conduct can help to instil a culture of acting lawfully, ethically and in a socially responsible manner”.

A new recommendation 3.3 proposes a whistleblower policy that “encourages employees to come forward with concerns that the entity is not acting lawfully, ethically or in a socially responsible manner and provides suitable protections if they do”.

Other issues

The council says its proposed changes anticipate some of the governance issues identified in recent enquiries, such as the Hayne Royal Commission. Some of the other issues the draft fourth edition seeks to address include:

• an apparent slowing in the rate of progress in achieving gender diversity at board level (recommending a minimum of 30 per cent of directors of each gender);
• a recommendation from the Senate Economics References Committee for increased guidance around carbon risk; and
• anti-bribery and corruption policies.

There is a suggestion that entities that believe “they do not have any material exposure to environmental and social risks should consider carefully their basis for that belief and benchmark their disclosures in this regard against those made by their peers”.

Greater proposed guidance on the disclosure of climate change risk (also referred to as “carbon risk”), includes explaining the different types of climate change risk, and that listed entities with material exposure to climate change risk implement the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

The council is proposing greater guidance on a board’s skills matrix to “make sure it covers the skills needed… to address governance issues, including sustainability and climate change”.

It is also proposing that a listed entity’s diversity policy should “express its commitment to embrace diversity at all levels and in all its facets, including gender, marital or family status, sexual orientation, gender identity, age, physical abilities, ethnicity, religious beliefs, cultural background, socio-economic background, perspective and experience”.

The principles and recommendations apply to all entities listed on the ASX and each ASX-listed entity must provide a corporate governance statement on how they have been followed.

The principles and recommendations are also generally viewed as a governance benchmark for private companies, not for profits and other entities.

In response to the debate around the social licence proposal, the Governance Council chair Elizabeth Johnstone said that the “if not why not” framework of the principles and recommendations gave listed entities “the flexibility to adopt different governance practices to those recommended”.

“Any board that considers it has a more effective way to address a particular governance issue is free to adopt it,” she said.

Almost 100 written submissions were received on the consultation draft and all non-confidential submissions are available on the ASX website.

The council is expected to release the final version of the fourth edition of the principles and recommendations early in 2019, and they are due to take effect from 1 July, 2019.

About the author: Kyrn Stevens has executive experience across the non-profit, private, and government sectors, and completed an MBA thesis on social investing at Sydney Business School, University of Wollongong. He is a senior corporate affairs and marketing professional who has worked in legal services, for a federal regulatory authority, as well as for Australian Red Cross and in Indigenous health. He is also a non-executive director of the Fairy Meadow Community Bank Branch of Bendigo Bank. Contact him through LinkedIn: www.linkedin.com/in/kyrnstevens/