Last week the ASX Corporate Governance Council hit the right mark when issuing its new, fourth set of the Principles which should guide corporate behaviour in Australia.
The Council is made up of 19 business groups or associations and so as Council Chair Elizabeth Johnstone explained, it can hardly be written off as a left-wing pressure group. The point was made because last year there was a vociferous reaction in some quarters to the draft principles – specifically the use of the term ‘social licence to operate’ in terms of the issues businesses should pay heed to.
Some high-profile individuals argued that this was social engineering and not what business should be about. Yet the final version of the principles – while taking out that seemingly -contentious phrase – still makes clear that modern companies have to take account of reputation and ‘community standing’ in their operations. The wording may have changed but the point has not. Business cannot simply concentrate on making profits to the exclusion of other issues.
The first edition of the ASX Principles and recommendations came out in 2003, with further updates in 2007 and 2014. They are updated periodically to address the changing environment in which business operates and so in recent years there has rightly been much more emphasis on culture, values and trust. The 4th edition really should be read through the prism of the Royal Commission, with its myriad examples of poor conduct in these respects.
The 8 core Principles and 35 specific Recommendations of general application intended to give effect to these principles remain non-mandatory and companies act on an “if not, why not” basis, which KPMG supports. The alternative is a US-style Sarbanes–Oxley type of law, a much more rigid approach to corporate governance.
In our view, the Council has got it about right. The recommendations will act as an impetus to assist boards and executives in enhancing their ability to carry out their responsibilities to investors and the broader community, enabling the rebuild of corporate trust.
But we could certainly have lived with the retaining of the social licence phrase. The term, now some 20 years old, has increasingly been adopted and applied in a range of industry contexts to describe the changing nature of company–community interactions and the level of acceptance / trust afforded to the entities’ operations.
Social licence to operate has historically been a key risk for the mining and metals sector. However, it is clear that many sectors, such as banking, insurance and finance, energy, food and grocery, consumer products, real estate, media and entertainment could benefit from considering Social Licence to Operate as a necessary part of doing business.
KPMG strongly supports the move from repurposing Principle 3 from “Act ethically and responsibly” to “Instil the Desired Culture”, as it shifts the focus from how individuals should act, to how an organisation should have a culture which is appropriate. This is aligned with the focus on culture of ASIC, APRA and the Hayne Royal commission. It also goes to the trust conversation that considering Social Licence to Operate typically generates.
Pleasingly, the updated Principles now explicitly call out the need for Boards to consider the broader views of external and internal stakeholders, not just shareholders. The accompanying guidance now includes: “the need for the entity to preserve and protect its reputation and standing in the community and with key stakeholders, such as customers, employees, suppliers, creditors, law makers and regulators.”
This reflects what is happening in the market. KPMG’s survey of 600 directors, with the Australian Institute of Company Directors, published earlier this week, found that customers and employees are the now the two most important stakeholders, for most organisations.
We are seeing an increasing openness and willingness to have a dialogue between an organisation and its critics. Even those that were instinctively labelled as “alternative” or “radical” are now seen as stakeholders worth engaging. Developing a deep understanding of all the voices within and outside your organisation requires a willingness to listen to a broader range of stakeholders, including the most vulnerable. It also calls for sensitive, expert qualitative and quantitative research that goes well beyond a ‘tick the-box’ or compliance exercise.
It is also noteworthy that the latest edition adds a new corporate reporting recommendation which will require boards to re-think their reporting strategies, portfolios and approach to ensuring the integrity of their corporate reports. Recommendation 4.3 singles out integrated reporting principles as a basis for producing a stand-alone report or the directors’ report, including the OFR, in the annual report.
While the Principles and Recommendations specifically apply to ASX listed entities, they are also highly relevant to private, not for profit and government boards, to the extent that they reflect a contemporary view of appropriate corporate governance standards.
Organisations can no longer view trust as an asset that they can buy or re-build after a crisis, but one that must be earned and maintained on an ongoing basis. Boards of all sectors are increasingly aware that fundamentally, trust is about relationships, not solely reputation. The updated edition of the Corporate Governance Principles reinforces that truth.