13 February 2007

ASX Regulatory and Public Policy Unit
20 Bridge Street (Level 7)
SYDNEY NSW 2000
regulatorypolicy@asx.com.au

Dear Sir/Madam

Principles of Good Corporate Governance and Best Practice Recommendations

The Group of 100 (G100), an organisation representing the interests of chief financial officers and senior finance executives of Australia’s major business enterprises, is pleased to provide comments to the review and the proposed changes to the ASX Corporate Governance Council’s “Principles of Good Corporate Governance and Best Practice Recommendations”.

The G100 believes that the CGC proposals should be subject to similar requirements as apply in respect of new regulations as supervised by the Office of Best Practice Regulation (OPBR) under the Commonwealth Government’s recently introduced requirements for best practice regulation.

Our comments, which focus on proposals relating to company obligations, are set out below.

Part A - Revised principles

PRINCIPLE 3

The G100 concurs with the amended Principle which specifically includes senior executives as well as trading by directors and employees in the securities of the company employing them.

PRINCIPLE 7

Recommendation 7.2
The G100 strongly endorses the objective of the proposed amendment to limit the sign-off to financial matters. However, the introduction of the term “financial reporting risks” may create some uncertainty about the scope and nature of the sign-off as the term is not defined or commonly used in existing literature or regulations. All material business risks may potentially lead to a material error in the financial statements and “financial reporting risks” is not a natural sub-set of the overall business risks. A preferable approach would be to express the sign-off requirement in terms of “the systems of risk management and internal controls to the extent that they relate to financial reporting …”

Recommendation 7.3
The sign-offs proposed would impose a significant financial and operational burden on many companies, particularly those which do not currently have a systematic process in place to assess the design and test the operational effectiveness of the internal controls over non-financial systems.

The G100 notes that the proposed amendments are more far-reaching in their scope than the requirements of other major jurisdictions. For example, the Sarbanes-Oxley sign-offs in the US are limited to the effectiveness of internal controls over financial reporting and the Combined Code requirements in the UK are limited to monitoring and reviewing the effectiveness of the system of internal controls which provides reasonable but not absolute assurance. For these reasons the G100 does not support the introduction of Recommendation 7.3 at this time.

Clarification is also required on the application of the concept of materiality to non-financial risks. For non-financial areas such as sustainability and corporate responsibility, the concept of materiality may be viewed from the perspective of what is material to the user/stakeholder, rather than the company. Viewing materiality from this perspective would be a significant departure from the existing concepts of materiality adopted by boards and audit committees when considering the risk/control environment.

Recommendation 7.4
Business risks associated with sustainability and corporate responsibility are part of every company’s overall business risk framework and are, therefore, within the scope of Recommendation 7.3. Furthermore, the introduction of mandatory sustainability reporting, in the absence of a universally accepted and well-defined reporting framework, would lead to variability in the quality of reporting and the use of different guidelines by reporting entities which would undermine the reliability and usefulness of the reported information.

The G100 considers that sustainability reporting should be encouraged, but not mandated. However, companies that elect to disclose such information should be required to disclose the reporting framework adopted and adopt a similar process for review and approval as that which is applied for financial information.

PRINCIPLE 9 : REMUNERATE FAIRLY AND RESPONSIBLY

The G100 strongly supports the CGC recommendation that equity-based compensation plans should only require shareholder approval if they involve the issue of new shares, and hence are dilutive. The Council’s proposal removes the perceived inconsistency between Recommendation 9.4 and Listing Rule 10.14. Equity-based compensation is properly a matter for boards to consider in determining overall executive remuneration and its components. Shareholders have the opportunity to express any dissatisfaction with the form and substance of equity incentive arrangements through their vote on the Remuneration Report.

Part B - Reporting on Material Business Risks and Corporate Responsibility/Sustainability Risks

Q1.  Is there a role for Council in assisting companies to report on risks relating to sustainability/CR? Why do you say that?

The G100 takes the view that reporting on sustainability/CR in Australia should be seen as a journey in the development of worldwide sustainability/CR reporting. Any involvement by the CGC should be limited to monitoring developments in practice. However, if the CGC prepares guidance, the G100 considers that it should only focus on overall material business risks.
 
Q2. Of the two options presented for better reporting on sustainability/CR risks captured by Principle 7 which is your preferred option? Why is that your preferred option?

Option A is preferred. As practice develops the need for guidance, not forming part of the Principles, may evolve. If this were to occur, once experience with the voluntary approach has been gained, providing guidance could be viewed as an initial step towards the future development of a Principle.
 
Q3. Do you consider that there are other areas of the Principles where Council should provide further guidance in relation to sustainability/CR issues, for example Principle 3? What areas are these and why?

No. As expressed above, the main reasons include:

  • the practical difficulties in the absence of a properly defined framework;
  • the possible extrapolation to a United States Sarbanes-Oxley Section 404 type requirement; and
  • cost in executive time, professional advice and processes.
Q4. If you are a listed company what sort of information would you anticipate disclosing under Option A and B?

The G100 is a representative body only and is not in a position to express a particular view on this question on behalf of the entire membership.
 
Q5. If you are a listed company what is the likely impact on your company resulting from the options outlined above? Please describe this impact.

The members of the G100 are in different sectors/industries and, accordingly, are likely to be affected differently. Indeed, many members are presently reporting on social responsibility and sustainability issues. The following would be considered general impacts affecting listed companies:

  • Increase in regulatory compliance costs/resourcing requirements.
  • Addition to internal audit and management monitoring control scope to provide adequate assurance on effective operation of internal control environment addressing sustainability and CR risks.
  • There would be a need for new processes to be written together with a review of assurance processes that enable the proposed Principle 7 sign-off. There is archival evidence that companies, including Australian companies, are withdrawing from US registration because of the complexity, detail and costs of complying with the US requirements.
Q6. If you are a listed company is there likely to be an increased regulatory burden on your company resulting from the options outlined above? Please describe any increased burden.

Member companies have indicated that sustainability/CR reporting would increase their regulatory burden. As the proposed requirements are in effect quasi-regulations, the G100 considers that the proposals should be assessed to establish the impact on business and individuals or the economy as outlined in the Federal Government’s OBPR, best practice regulation requirements.

Within the suggested requirements of the OBPR the following are identified as additional areas of compliance costs:

  • Education of staff within the company.
  • Acquisition or development of equipment and/or systems.
  • Further detailed record keeping and monitoring the recording system.
  • In general, but in particular within the larger organisations, enforcement will incur costs such as supervising, possible external audit staff costs and/or additional internal audit staff to ensure there is a fair and reasonable statement made to boards and in the public domain.
  • Publication to third parties will initially create large costs depending on the mode of dissemination but there are additional concerns that it will develop in detail along the same lines as Remuneration Reporting.
     
Q7. If you are a listed company what are the estimated costs including compliance costs to your company resulting from the options outlined above? Please describe these costs.

To place a dollar cost value on increased compliance will depend on each company’s business and size. Additional costs will include:

  • increased internal resources to collect, collate, monitor and manage the non-financial data including additional internal control systems and resources;
  • additional systems to be internally developed or purchased;
  • in the event that external assurance is required costs attributable to the added assurance procedures such as the increased demand for qualified personnel in a number of disciplines.

The G100 is concerned about the magnitude of compliance costs incurred by Australian companies. The G100 believes that proposals to impose additional regulations should be subject to a rigorous cost-benefit analysis. For example, the potential order of costs incurred to comply with new regulations is revealed in a survey for the major accounting firms by CRA International (Sarbanes-Oxley Spring 2006 Survey). Findings of this survey indicate that for companies having a market capitalisation greater than US$700 million the average costs of compliance were US$13.6 million in the first year and US$9.9 million in the second year.
 
Q8. If you are a listed company are you in favour of posting sustainability information on a web-based exchange? Would you be willing to pay an annual fee for using such an exchange?

No. Members have indicated that information can be, and is, disseminated on the company website, through the annual report to shareholders and in other ways.
 

Should you wish to discuss any part of the foregoing please do not hesitate to contact me or Russell Philp (02 9969 0093).

Yours sincerely

Tom Honan
National President