As listed companies await the release of the Australian Securities Exchange’s (ASX) amended guidelines on corporate governance, an internal analysis found companies are improving governance reporting.
The ASX Corporate Governance Council’s (CGC) Principles of Good Corporate Governance and Best Practice Recommendations were issued in 2003 as a principles-based alternative to prescriptive regulation, but the results of a major review are set to be released this month, with implementation slated for 1 January 2008.
ASX analysis of the annual reports of 1,371 listed entities, released last month, showed that the overall levels of reporting improved in 2006.
According to Eric Mayne – chief supervision officer at the ASX and chairman of the CGC – increasing comfort with the ‘if not why not’ format was behind the improved reporting, where listed companies are not mandated to report compliance with the principles, but must explain their reasons if they choose not to.
“Overall reporting levels have risen in three successive years, underlining the desirability of Australia’s flexible, principles-based approach to corporate governance,” said Mayne. “Good corporate governance is a culture of transparency and is not restricted to simply adopting the recommendations. Good corporate governance also exists where entities adopt ‘if not why not’reporting. That is, where entities identify the recommendations they have not followed, explain why they have not followed them, and detail how their practices accord with the spirit of the relevant principle.”
While the ASX’s analysis found that overall reporting is improving, separate research found that fewer than half of the companies listed on the ASX300 are compliant with the exchange’s corporate governance guidelines.
The research, by Grant Thornton, found that the risk management elements of the principles (principle 7 covers recognising and managing risk) were poorly understood. “Few, if any, companies describe information on what systems are in place to identify risks, monitor risks and managed exposure to risks. These risks can ultimately have a direct or indirect financial impact and must be included,” Matt Adam-Smith, national head of assurance services at Grant Thornton said.
The problem is bigger lower down the ASX food chain, prompting suggestions that some companies may be hiding behind the ‘if not why not’ approach to the guidelines in a bid to avoid disclosure. That, Grant Thornton reported, may lead to more prescriptive regulation in the longer term.
“Looking more closely at those areas which allow for judgement and discretion as opposed to a straight forward ‘yes’ or ‘no’, we noted that the number of companies providing additional informative voluntary disclosures, especially among the mid-200, could be improved,” GT’s analysis read. “This is particularly the case in the areas of risk and internal controls (principle 7), where we noted few companies going the extra mile with detailed disclosures. While there is a high incidence of companies providing details of their non-compliance, it also raises the question of whether companies are hiding behind the ‘comply or explain’ option. The risk is for Australian publicly listed companies to become complacent, choosing minimum disclosure rather than truly demonstrating commitment to the ASX principles of corporate governance, as such an approach would potentially lead to a more prescriptive regime.”
While some have argued that the value proposition for increased disclosure of risks is yet to be properly proven, investors and ratings agencies are increasingly judging companies based on their risk and governance activities and reporting.
Mayne added that it is in the interests of listed companies to increase disclosure: “The more transparent listed entities are about their corporate governance practices, the better placed investors will be to make informed investment decisions. The best form of corporate governance is where there is substantive disclosure as opposed to disclosure that is seen merely as compliance with the form of the principles.”
“ASX, through its ongoing reviews of corporate governance statements in annual reports, plays an important role in educating listed entities on what good corporate governance disclosure is. ASX and the ASX Corporate Governance Council also recognise that corporate governance is evolving and will endeavour to ensure that the principles and recommendations remain relevant to the Australian business and investment communities.”