The newly released ASX Corporate Governance Principles and Recommendations contain a potent mix of new and increased expectations for company directors.

The changes comprise a mix of the obvious, an extension and expansion of the expectations of boards, a possible increase in potential director liabilities and an elevated governance and documentation regime within listed entities for internal counsel and company secretaries to help manage.

The final position that has been adopted takes into account the key recommendations arising from the Hayne banking royal commission report and applies them more broadly to ASX-listed entities. It focuses on the intersection between culture, remuneration, the division of responsibilities between board and management, as well as the timely information flow from management to the board of both financial and non-financial matters.

There is an expanded emphasis on having the right skills, knowledge and experience at board level, coupled with professional development for directors where gaps are identified.

Of most interest are the expectations underpinning the recommendation that listed entities should instil a culture of acting lawfully, ethically and responsibly.

The principles contemplate that listed entities should articulate and disclose its values including what is needed from its officers and employees "to preserve and protect its reputation and its standing in the community and with key stakeholders". Boards are expected to approve an entity's statement of values and charge the senior executive team with the responsibility of inculcating them.

At one level, the changes are less extensive than had originally been proposed. It had originally been proposed that a listed entity should "have regard to" its "social licence to operate" including operating in a "socially responsible manner". This controversial wording has been dropped from the final version.

While this is a welcome development, there remains a residual concern regarding the extent of responsibility under the final version. References to "social licence to operate" have been replaced with references to "reputation" and "standing in the community". The ASX Corporate Governance Council regards these concepts as synonymous. In other words, it does not consider this variation in wording to be material.

Accordingly, there is uncertainty as to how the "reputation" and "community standing matters" are to be dealt with, and whether there may be a consequential increase in potential liability of directors in circumstances where boards are perceived to have failed in their responsibilities (and where those responsibilities are clearly stated on the public record for all to see).

In particular, it remains unclear regarding the extent to which broader stakeholder responsibility is to coexist with the duties of directors to act in the interests of the company. There also remains some uncertainty regarding how this is to be applied in an objective way.

The challenge will be for listed entities to articulate their values and expectations in a manner that appropriately balances instilling the desired culture and guarding against the potential risk of liability for both the listed entity and its directors. One sometimes sees a listed entity enthusiastically embracing a corporate governance standard in circumstances where it subsequently wishes that it hadn't been so forthright

More broadly, the changes represent an expansion of the expectations of governance practices within listed entities.

For example, there are substantially increased gender diversity changes, through an expanded diversity policy expectation, an increased diversity review process and new disclosure obligations.

These comprise measurable gender diversity objectives, disclosure of improvement outcomes and actions taken. In addition, the top 300 companies listed on ASX should have women accounting for at least 30 per cent of their board members. This raises the bar beyond payment of lip service to diversity issues.

References to 'social licence to operate' have been replaced with references to 'reputation' and 'standing in the community'

Another example is that listed entities should ensure that its directors receive copies of all continuous disclosure announcements promptly after they have been made. While it has not been expressly stated, this implies a director will need to consider how to deal with any issues arising from disclosures which have been made without his or her express authorisation.

A third example is in the area of disclosure of climate change risk, where there is an expanded focus. There is no doubt that climate change issues are front of mind for some listed entities. These changes continue this trend. During the forthcoming AGM seasons, one can expect that shareholders will prominently challenge boards to respond to climate change and environmental risk questions to a greater extent than has previously been the case.

For those listed entities with a June 30 balance date, the changes will take effect with respect to the financial year from 1 July 2020. Listed entities are likely to closely watch the extent to which their peers early adopt the changes over the course of calendar year 2019, and the extent to which they can take guidance from them.

*This article appeared in The Australian on 27 February 2019 and is republished with its permission.    

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