Corporate Governance Australia

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Requirement

In relation to the information given, provide detailed guidance to the CFO on:
(a) whether or not Golden’s approach to Principle 7 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations is appropriate, and the measures the CFO should suggest the board put in place to best facilitate the recognition and management
of risk (Note: Include the role of the board in risk management.)
(b) how the CFO should respond to the chair’s email and any further action that may be required in relation to disclosure to the market
(c) whether the current board structure and composition supports the new direction of Golden and the best way for Golden to assess the appropriateness of its existing board.
Note: You are required to respond to the CFO being cognisant that the CFO is admittedly relatively green in his knowledge of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations.

Solution

Given Information:- 

"Golden Ltd (Golden), a gold mining company with a single operating mine, was listed on the Australian Securities Exchange (ASX) 20 years ago. Currently, the reported life of the mine is only five years. The uplift in gold price over the last year has elevated Golden into the ASX 500 which has rejuvenated the board of Golden and led it to make the decision to look for expansion opportunities. In recognition of this shift, the Nomination Committee at Golden has made two new senior appointments in the last three months — a new chief financial officer (CFO) and an executive director. This has increased the number of board members to five, and the board is now comprised of the following:
Name Tenure Experience

  • 1 Mr Smith (chair) Ten years Three years as chair, previously was the managing director.

  • 2 Mr New Less than one year Geologist with 30 years experience.

  • 3 Mr Numbers Two years Golden’s audit partner for five years before joining the board.

  • 4 Mr Legal Ten years Thirty-five years as a practicing lawyer.

  • 5 Mr Resource Two years Retired mining engineer.

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The CFO has significant experience as a senior executive of large listed companies and the executive director, a geologist with a wealth of experience in Africa, is new to Australia. The executive director commenced working in the business and leading the business development team immediately on appointment. The CFO commenced a month after appointment. The company secretary had hoped to be appointed CFO and with the disappointment of being overlooked, tendered her resignation and left Golden before the new CFO commenced. The board decided not to replace the company secretary to save some much needed working capital. As a result, the CFO became an ‘accidental company secretary’ on the first day of his new role as CFO.
To get up to speed, the CFO read the company’s previous years’ Corporate Governance Compliance Statements and its corporate governance disclosures on its website. The CFO is concerned to note that Principle 7, of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, 3rd Edition, is not being complied with, and that the whole board (of five members) had fulfilled the role of the Audit Committee by only having two extra meetings a year to focus on the financial reports. The board had reported in the previous year’s Corporate Governance Statement that it believed that management was far better equipped to manage the risks of the organisation and, as such, risk management was delegated to it. The chief executive officer explained to the CFO that this arrangement worked well in the past as it enabled him to get on with the job at hand rather than having to explain to a group of lawyers and accountants all sorts of mining risks and controls that they were unlikely to understand anyway.
In the first month after the executive director commenced his appointment, exploration activities were stepped up significantly and there was also a very promising find that could significantly increase the life of the mine. The CFO, in compiling board reports for his first board meeting, found out about this
discovery. He proceeded to query the chair of the board on what should be done to notify the market. The chair responded in a tersely worded email to advise that disclosure is the role of the company secretary and that the CFO should know the answer to that question. The chair also attached a slide
presentation, prepared for an investor briefing in the previous week, where the chair and the executive director provided updated information to a select group of investors on the life of the mine based on the discovery.
Knowing that you have recently completed Governance Postgraduate Diploma, the CFO has contacted you, asking for help." 

Part (a)

As per the principle 7 of ASX Corporate Governance Principles and Recommendations, it is mandatory that a listed company shall establish a profound and structured risk management framework along with a periodical review of the effectiveness of that framework. 
As per the facts given in the passage and the course of the events taking place inside the Company, Golden’s approach to Principle 7 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations has been clearly inappropriate to say the least. It was the management, as per the explanation provided by CEO to CFO, which took steps in the line of reasoning that impromptu actions would be enough for managing the risks. However, this is not the structure on which management of risks is based in any organization, more so, in a mining company. As the CFO, Mr. New, came to terms with the fact that above mentioned Principle 7 of ASX, has not fully complied with. He now has to draft measures and suggest the Board to put them in place in a best possible ways in order to facilitate and recognize the management of risks. As per the new principles of ASX Corporate Governance Council , the Board of a listed company is needed to have a committee to oversee the associated risk. Then these responsibilities and characteristics are listed as is expected of such a committee. 
It is important to note here that the new CFO is also acting as the Company Secretary , so he has to perform this role as well with added responsibilities. So, as per the Australian Corporations Act (CA) , the Company’s Constitution as well as the listing rules of Australian stock Exchange, the duties and responsibilities of a Company Secretary are: 

  1. Ensuring the compliance of the company towards its statutory obligations as per laws and regulations.

  2. Maintaining statutory records

  3. Ensuring the completion of statutory records as well as their reporting under the CA, ASX regulations.

  4. Ensuring the compliance under the Continuous Disclosure requirements of CA.

  5. Arrangements and coordination of board meetings and setting agenda to take decisions for taking direct actions.

  6. Advising ASIC/ASX declarations, addressing conflict of interests and assisting to the signing of contracts

  7. Performing their duties regarding corporate administration by taking proper actions.

  8. Preparing a company secretarial report and policies for ensuring proper corporate governance.

  9. Guiding Directors and management on various matters, processes and shareholders relations.

  10. Liaising with accountants, lawyers and other professional advisors regarding various corporate matters. 

Now, as far as the guidance to the CFO regarding the violation of Principle 7 of ASX , that is, Recognizing and Managing Risks, there are a number of aspects that are needed to be looked into. It is crucial on the part of investors to get sufficient information for making informed decisions regarding the investment risks. So, it is imperative for the Board and management to recognize and manage risks. Therefore, a failure by a listed company in doing so would not only damage its reputation but adversely impact its shareholders as well, including its employees, customers, suppliers, creditors as well as taxpayers. The sound risk management practices not only help to retain the reputation of the company but makes the value addition . So, these practices can go a long way in assisting and identifying and capitalizing on the opportunities for creating value. The board, therefore, of a listed company, is the most responsible body to decide the nature and extent of the risks.
In the present scenario, the gold mining company, Golden, will require its CFO to enable the Board to have an appropriate framework for identification and management of risk. In light of this fact, the role of management of Golden will come into play, which will help in designing and implementation of the required framework. The role of the Board is to ensure the risk appetite for the company as well as overseeing its risk management framework and making sure that the framework is sound and structured. So, the recommendations for the Board under Principle 7 are listed below:
1.    As per the Recommendation 7.1, the board should form a committee, in order to oversee the risk, will:

  • a)    Constitutes at least members and most of them are independent directors

  • b)    Be chaired by an independent director

  • c)    Disclose its charter and members

  • d)    Allow them to meet at the end of each reporting period.

2.    If the company fails to form such a committee to satisfy above, then disclose the processes that will be used to oversee the company’s risk management system.
As per the 2014 edition, it is imperative that the Board shall establish a separate committee having an independent chair with a majority of independent directors as far as risk management is concerned. The role of risk committee in terms of recommendations to the Board is prescribed in three areas:

  • The company’s adequacy for carrying out the processes required for managing risks

  • Occurrence of any incident that involves fraud or other breakdowns in internal controls.

  • The company’s insurance programs that concern to the company’s business and insurable risks.

It is also important to note that the risk committee should adopt a charter that confers on it all the necessary powers to perform that role, such as obtaining information, interview the management, internal and external auditors as well as seeking advice from the specialists. It should possess necessary technical knowledge and enough understanding of the industry. Under the Australian Corporation Act, any listed company is required to include the operation and financial review in its Director’s report. This report consists of discussion of the important internal and external risk sources that could otherwise adversely impact the company’s prospects for the future financial years.

The Recommendations under Principe 7.2 of ASX , requires that the Board or Committee should:

  • 1.    Review the company’s risk management structure on half yearly or annual basis to satisfy all the required procedures, and

  • 2.    Make a disclosure at the end of each reporting period as to whether such a review has taken place.

It is pertinent for the Board or Committee to disclose any insights it has incorporated from the reviews and the required changes it has made to its risk management system.
The Recommendations 7.3 under Principle 7 of ASX, a listed company is needed to disclose:

  • 1.    If it has constituted a system of internal audit function along with its function and structure as to what kind of role does it perform,

  • 2.    If in the event of absence of an internal audit, the processes it has employed for the purpose of evaluation and improvement of the effectiveness of risk management.

The internal audits in any organization are important because it helps it in achieving its objectives by using a systematic and disciplined approach for the evaluation and improvement and effectiveness of its risk management framework. Whenever, an internal audit function exists in a company, the head of that system shall be given a direct reporting line to the Board or the committee is required to bring the requisite degree of independence as objectivity to the role.
The Recommendation 7.4 under the Principle 7 of ASX Corporate Governance Council , any listed organization is needed to disclose whether it has any solid exposure to economic, environmental as well as social sustainability risks and if in case, it makes the disclosure, then how does it intend to manage those risks. The way any listed entity carries out its business activities, whether with sustainable approach, it can impact on the society and environment in a long run. The listed companies are expected to be aware of the increasing calls even around the world for all the businesses to address issues of economic, environmental as well as social sustainability. Not only this, there is an increasing demand on the part of investors, especially institutional investors for acquiring greater degree of transparency on these matters because it will them in a proper assessment of the investment risks. However, for meeting this recommendation, it doesn’t necessarily require a listed entity for publishing a sustainability report. 
The CFO, in the present scenario of Golden, is also advised to highlight the Australian Corporate Government and lay down certain actionable plan for the Board of Directors of the company. So, the corporate governance refers to the framework of rules, relationships, procedures, systems as well as processes that are used within it. It involves the overall mechanisms that greatly influence as to how the objectives of the company are achieved, monitored and assessed. The vital structures of the effective corporate governance always encourage companies to make value addition via entrepreneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved. The practices used in corporate governance have continuously been evolving on account of the changing circumstances. As is the case and need, there can be no single sufficient model for good corporate governance, which in itself cannot prevent corporate failures or for that matter poor corporate decision making. Therefore, the Australian companies are always required to be able to compete globally and along with that maintaining and promoting the investors’ confidence both in Australia as well as overseas.
The business organizations face a wide range of risks  and each one of them is equally capable to cause serious loss of reputation or they could lead to even bankruptcy. So, it is extremely imperative for these businesses to have an extensive framework of risk management department. The different types of risks that any listed entity confronts while conducting its business activities are:

  • Strategic Risk: the businesses always need to graft a comprehensive and well thought-out plan. However, with the change technology and processes, this plan could sometimes look outdated. So, this situation could entail that the company could face a strategic risk.  So, in such a scenario, the company strategy becomes less effective and finally it struggles to achieve its goals. The reasons for this could be many – technological up gradation, innovative processes, new powerful competitor, changes in customer demands, rise in the cost of raw materials.

  • Compliance Risk: this type of risk generally arise when the necessary laws and regulations that are strictly applicable to the businesses are not complied with. The fact that the laws do also face changes all the time, which means a risk is always associated in terms of additional regulations in the future. So, as business expands, the company needs to comply with the new rules that were not present earlier.

  • Operational Risk: it refers to the failure on the part of a business entity to carry out day to day operations, such as technical glitches, server outages or due to the poor performances by people or processes. That is, anything that interrupts a company’s core operational function falls under this type of risk.

  • Financial Risk: the financial risk basically concerns with the money flowing in or out of company’s business, thereby a definite possibility of financial loss. The situation of having a lot of debt is an alarming situation for a company as it increases the financial risk. If the interest rates rise up sharply, then the company has to pay more interest than before. These risks rise when businesses go international.

  • Reputational Risk: this type of risk is most elementary for all regardless of any industry a business entity belongs to. If the reputation of a company takes a hit, then it sees an immediate loss of revenue because customers find it hard to trust     you and along with that the employees may get demoralized and could leave the company.      

Part (b)

As we have discussed earlier, the CFO also has to perform the duties and responsibilities of Company Secretary. So, as per The Australian Corporations Act (Act) , Section 1 (c), it is required on the part of company secretary to ensure the completion and lodgment of statutory forms and returns. He needs to report the company’s financial statements under CA, ASX or other regulating authority in terms of half yearly and annual accounts, annual returns as well as any change in the position of Director or secretary. So, the CFO will have to discuss all this matter to the Chair in his email.
As per the ASX Guidance Note 8 – Continuous Disclosure: Listing Rule 3.1 , once any business entity gets hold of any information and on account of that any reasonable person would always expect to have material effect on the value addition of prices and securities, then in such an event the company is required to tell ASX about the information. So, it is very critical to comply with the Listing Rule 3.1 because the integrity and efficiency of ASX market depends on it. If in case the listed company found to have breached this rule then it is also in violation of Section 674(2) of Corporations Act. It is considered as an offence and as per the financial services civil penalty provision, the entity can be fined up to $110,000. If a concerned officer is found to have involved in such a breach, then under Section 674(2A) of Corporations Act , he/she shall be punishable by a fine up to $200,000. He/she may also be asked to pay damages whoever suffers loss. It is important to note here that if any officer or employee of a listed company gives or authorizes someone to furnish materially false or misleading information to ASX, under listing Rule 3.1, then he is said to be committing a criminal offence under section 1309 of the Corporations Act. 

The information that a listed entity needs to disclose that affects the price or value of its securities is referred to as market sensitive information. So, the following are the types of information needed to disclose under Listing Rule 3.1:

  • A transaction that brings about comprehensive change in the nature or scale of company’s operations.

  • A mineral or hydrocarbon discovery.

  • A mineral acquisition or disposal

  • Granting or withdrawal of material license.

  • The entry or termination of material agreement.

  • Ensuing of a material lawsuit.

  • The improved earnings of the entity as against market expectations.

  • Appointment of a liquidator, administrator or receiver;

  • The commission regarding an event of default of a material financing facility

  • The act of under subscriptions or oversubscriptions as far as issues of securities are concerned.

  • Furnishing a notice of intention regarding a takeover.

  • The change or tampering in the rating being applied by a rating agency.

So, for the above purposes, the information goes beyond just the matters of fact as it also includes the matters of opinions and intentions. Also, the information is just not limited to its source within the entity or that it is financial in character, but Listing Rule 3.1 lays the ground rule that the company must have to disclose all the information from any source or any character that entails material effect on the price or value of its securities.
The Exception to Rule 3.1 is listed under Listing Rule 3.1A as:
3.1A.1: Following five situations are applicable as far as information is concerned:

  • It would be considered a breach of law if the information is disclosed anywhere else;

  • If the information consists of incomplete proposal;

  • If the information is composed of supposition or is insufficient;

  • If it is generated for the internal management;

  • It is trade secret

3.1A.2: If the ASX has formed any view regarding the confidentiality of the information.
3.1A.3: if a reasonable person would not expect the information to be disclosed.

Part (c)

The current composition of the Board of Golden certainly does not constitute or fulfill all the recommendations as per the ASX guidelines. However, there is no strict regulation that requires a specific composition as far as Company Boards in Australia  are concerned. But there is a soft regulation that comprises of self-codes of practice. These soft regulations are listed under Principles of Good Corporate Governance and Best Practice Recommendations, released by ASX Corporate Governance Council released in 2003 (‘the ASX Recommendations’).   
As per the Principle 2 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, a listed company should be comprised of a Board of an appropriate size, composition, skills as well as commitment in order to enable it to discharge its duties effectively and efficiently. A better performing and efficient Board is very important for the dispensation of proper governance in a listed company. The board should be such that it should represent the best interest of its security holders rather than some individual stakeholders or interest groups. The Board should be of sufficient size so that it could meet the business and stakeholders’ requirements.

The ASX Corporate Governance Council came up with the following recommendations as far as composition of the Board and independent directors or non-executive directors are concerned:

  • Recommendation 2.1: the Board should comprised of at least three members and majority of the Board members should be independent directors.

  • Recommendation 2.2: The Board should be chaired by a chairperson who should be an independent director;

  • Recommendation 2.3: The Board should disclose the names of directors considered it.

  • Recommendation 2.6: The listed company should have a provision for inducting new Directors and provide professional development opportunities for them to develop skills and knowledge in order to perform their roles as directors effectively;

  • Recommendation 4.2: The board should establish an audit committee;

  • Recommendation 4.3: The audit committee needs to be primarily composed of independent and only non-executive directors.

  • Recommendation 9.1:  The board should provide disclosure regarding company’s remuneration policies.

  • Recommendation 9.2: The board should form a remuneration committee that consists mostly of independent directors, chaired by an independent chairperson .

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The ultimate aim of the Board of any business entity should be to ensure robust governance arrangement as well as appropriate oversight. The best ways with which Golden should assess the appropriateness of its existing Board  are as follows:

  • Framework for appropriate board structures.

  • Plan all the necessary activities well in advance.

  • Carrying out meetings regularly and efficiently.

  • Regular assessment of the performance of Board and directors.

  • Effectively utilizing the board sub-committees.

  • Planning of Board succession.

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