ASX consultation on Corporate Governance Principles

by Carol A Adams

Main points:

  • ‘Social licence to operate’ is inappropriate as a frame for determining climate change and other sustainability risks
  • Boards should identify sustainable development risks in their external environment
  • Climate change and sustainability risks should be on the Board skills matrix
  • Minimum gender targets for women should be enforced

The ASX (Australian Stock Exchange) issued a consultation on its Corporate Governance Principles on 2nd May 2018 which closed on the 27th July 2018 with 98 submissions received. Key matters of interest to me and addressed in my submission of 8th June related to: a lack of prominence of climate change and other environmental issues; a reference to ‘social licence to operate’; and, a proposal concerning gender diversity.

‘Social licence to operate’

I argued that a proposal to require companies to instill a culture of acting in a lawful, ethical and socially responsible manner (recommendation 3) should make explicit reference to environmental responsibility.  Boards are insufficiently focussed on climate change financial risk. I really did not like the proposal to acknowledge that a listed entity’s “social licence to operate” is one of its most valuable assets and that the licence can be lost or seriously damaged if the entity conducts its business in a way that is not environmentally or socially responsible.  Whilst the Australian Institute of Company Directors didn’t like it because of its subjectivity and fluidity I argued that the term infers a passive response to risk referenced against what actions ‘society’ will bear today, with no consideration of future generations and long-term risks to sustainable development and economic prosperity. This approach has allowed businesses to deplete natural resources, contribute to climate change and contribute to local and global economic inequities. Further, it does not recognise the opportunities that arise from considering sustainable development issues.

Corporate reporting and board processes

I argued that Boards should explain how they are considering and addressing risks from climate change and sustainable development issues which impact on their ability to create value in the long term – or say why this disclosure is not made. They should consider both risks and opportunities presented by climate change and sustainable development issues in developing their strategy. Companies should make explicit reference to the existence of sustainable development issues in the external environment which pose a risk to a company’s ability to create value for shareholders and other stakeholders in the long term (see Adams, 2017a and b which demonstrate that sustainable development issues are relevant to long term value creation).

My research (Adams, 2017a ) interviewing top company Board directors demonstrated that the impact of Board governance on long term value creation in response to climate change and sustainable development issues is enhanced when Boards have a framework to guide them. The Corporate Governance Principles should emphasise the need to take a long-term focus and be cognisant of a wider range of risks and opportunities and set strategy accordingly (see Adams, 2017a).

SDGs, Green finance and mandatory TCFD reporting

I argued that the Corporate Governance Principles should reference the relevance to business and investors of the Sustainable Development Goals and the recommendations of the Financial Stability Board’s Task Force on Climate related Financial Disclosure (TCFD) on long term value creation. Key global standard setters, including the GRI, IIRC, UN Global Compact, UNCTAD and the WBCSD, are providing guidance to companies on responding to the Sustainable Development Goals (SDGs).

‘Encouraging’ companies to report using these frameworks/standards through the Corporate Governance Principles will not have the impact necessary to avoid significant risks and meet investment levels required to reduce carbon emissions to a safe level. There is overwhelming evidence, from a substantial body of academic research on social and environmental sustainability related disclosures over a period of about three decades, that it is not until disclosure becomes a compliance requirement – which is enforced – that companies take appropriate action. There is substantial academic evidence that companies apply voluntary reporting recommendations and frameworks selectively and that they reference such frameworks and use corporate disclosures to manipulate public perception (see, for example Adams, 2004 ). There is also evidence that mandatory disclosures which are not enforced are not complied with (see, for example Adams et al, 1995 ).

The recent Corporate Governance Code consultation by the UK’s Financial Reporting Council and the UK Parliament’s second Green Finance Inquiry report explicitly called for input on Board involvement in these matters. The latter report has recommended that climate change risk reporting be mandatory for all asset owners by 2020 and enforced.

The recommendations of the Taskforce on Climate related Financial Disclosures should be made mandatory on an if not, why not basis, particularly for asset owners. A shift towards Green Finance, through disclosure of climate change related financial risks, is an essential step to reducing carbon emissions and securing long-term economic prosperity. The Corporate Governance Principles should be firmer in this respect.

Issues concerning the Sustainable Development Goals (SDGs), climate change, longer term focus have been raised and considered at the International Accounting Standards Board (IASB) in connection with the ongoing revision of their Management Commentary – A Practice Statement. It is appropriate that they are also explicitly considered in governance principles and related guidance. The UK’s Financial Reporting Council also included these issues in its consultation on revisions to its Corporate Governance Code which closed earlier this year.  A report published in June this year by the UK Parliament’s Environmental Audit Committee following its Green Finance Inquiry recommended that TCFD reporting became mandatory for asset owners .

Adams (2017b) published by the International Integrated Reporting Council and the Institute of Chartered Accountants of Scotland sets out an approach to developing a strategy to contribute to the Sustainable Development Goals aligned with the International <IR> Framework . It was endorsed by the Chartered Accountants of Australia and New Zealand (CAANZ) in their response to the Australian Senate Inquiry on the SDGs. The CAANZ submission, like many others, pointed to the need for appropriate governance structures at organisational/corporate level, as well as government level. This is necessary both in order to meet Australia’s obligations to contribute to the SDGs and also to address sustainable development issues impacting on the long-term success of business and take advantage of associated opportunities.

Climate change and sustainability skills on board matrices

With respect to recommendation (4.4) concerning  directors being required to disclose and validate their process with respect to decisions informing investment decision, my submission argued that they did not go far enough.  I did note, however, that it was pleasing to see the requirement in 2.2 that Boards consider including climate change and sustainability skills in Board matrices. In my research (Adams, 2017a) interviewing Board Directors, including Directors of ASX20 and ASX100 companies, about social and environmental risks and opportunities, I found a lack of awareness and a lack of consideration of such risks. This was particularly the case for Australian Board Directors relative to those I interviewed in South Africa who attributed their increase in awareness of social and environmental risks to having a framework to guide them – The King Code which makes integrated reporting mandatory.

Although having climate change and sustainability skills on the Board is important, it is not enough to ensure the associated risks are appropriately considered. For example, one Board Chairman of an infrastructure company with significant assets adjoining the ocean told me that that when a board member raised concerns about rising sea levels anticipated in the long term “We all laughed at him”. Such risks are potentially significant and ought to be considered in Board decision making.

Gender diversity

On the proposal to require ASX300 Boards to have a minimum of 30% of each gender by a specified date I argued that organisations without gender diverse boards are not selecting Board Directors from the entire qualified population and are therefore missing out on talent. Further, they are missing out on the different perspectives and different ways of thinking about risks, opportunities and strategic issues that a gender diverse board brings. Lack of gender diversity at the top perpetuates these problems through the organisation.  In research interviewing Board Directors (Adams, 2017a), male interviewees spoke about the ability of women to make connections between complex issues – a skill which is increasingly needed by Boards today.


Adams, CA, (2017a) Conceptualising the contemporary corporate value creation process, Accounting Auditing and Accountability Journal 30 (4) 906-931 Read here

Adams, C A (2017b) The Sustainable Development Goals, integrated thinking and the integrated report, IIRC and ICAS. ISBN 978-1-909883-41-3. Read here.

Adams CA (2004) The ethical, social and environmental reporting – performance portrayal gap, Accounting, Auditing and Accountability Journal 17(5): 731–757. Read here.

Adams CA, Coutts A and Harte GF (1995) Corporate equal opportunities (non) disclosure, British Accounting Review 27(2): 87–108.

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