6.1 The ASX Corporate Governance Council and 'If Not, Why Not'

6.1 The ASX Corporate Governance Council and 'If Not, Why Not'

Core Principle: Corporate governance in Australia operates under a co-regulatory, market-based disclosure model. Rather than imposing rigid, uniform statutory mandates on every listed company regardless of scale, the Australian Securities Exchange (ASX) Corporate Governance Council establishes principles and recommendations governed by the flexible "if not, why not" reporting framework under ASX Listing Rule 4.10.3. Listed entities retain the freedom to adopt alternative governance arrangements suited to their operational maturity, provided they fully disclose and justify their departures to the capital market.

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1. Genesis, History, and Authority of the ASX Corporate Governance Council

Corporate governance in Australia underwent a fundamental transformation at the turn of the millennium. The catastrophic collapses of prominent Australian corporations in 2001—most notably HIH Insurance, One.Tel, and Harris Scarfe—coincided with major international corporate governance failures, including Enron and WorldCom in the United States. While the United States responded with the highly prescriptive, statutory command-and-control framework of the Sarbanes-Oxley Act of 2002 (SOX), Australia adopted a hybrid regulatory architecture combining statutory reform (Corporate Law Economic Reform Program Act 2004 - CLERP 9) with market-led self-regulation.

In August 2002, the Australian Securities Exchange convened the ASX Corporate Governance Council (the Council). The Council was designed as an independent, multi-stakeholder body bringing together peak business, professional, and shareholder associations to formulate a comprehensive framework of corporate governance principles and recommendations.

Composition of the Council

The Council does not consist of government bureaucrats; rather, it reflects a broad consensus across the Australian business and financial community. Its 21+ member organisations include:

• Professional Accounting Bodies: CPA Australia, Chartered Accountants Australia and New Zealand (CA ANZ), and the Institute of Public Accountants (IPA).
• Director and Governance Institutes: Australian Institute of Company Directors (AICD) and the Governance Institute of Australia.
• Institutional Investor Groups: Australian Council of Superannuation Investors (ACSI) and the Australasian Investor Relations Association (AIRA).
• Legal and Market Bodies: Law Council of Australia, Financial Services Council (FSC), and the Australian Shareholders' Association (ASA).

The Evolution of the Principles

The Council periodically updates the Corporate Governance Principles and Recommendations to reflect evolving market expectations, international standards, and insights from royal commissions:

• First Edition (March 2003): Introduced the core framework of 10 overarching principles and 28 recommendations under the "if not, why not" regime.
• Second Edition (August 2007, updated 2010): Streamlined the framework into 8 principles and introduced recommendations regarding board diversity and female workforce participation.
• Third Edition (March 2014): Strengthened requirements regarding risk management, internal audit, and the disclosure of economic, environmental, and social sustainability risks.
• Fourth Edition (February 2019, effective 1 January 2020): Placed heightened emphasis on corporate culture, lawful and ethical behaviour, whistleblower protections, anti-bribery policies, and board skills matrices, directly responding to the findings of the 2018–2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Hayne Royal Commission).

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|                       EVOLUTION OF THE ASX CORPORATE GOVERNANCE PRINCIPLES                       |
+-------------------+--------------------+--------------------+-----------------------------------+
| 1st Edition (2003)| 2nd Edition (2007) | 3rd Edition (2014) | 4th Edition (2019/2020)           |
| * 10 Principles   | * 8 Principles     | * 8 Principles     | * 8 Principles (35 Recomms)       |
| * Post-HIH/Enron  | * Diversity focus  | * Risk & ESG focus | * Culture, Values, Whistleblowing |
| * "If Not, Why Not"| * Risk management  | * Internal audit   | * Anti-Bribery, Virtual Polls     |
+-------------------+--------------------+--------------------+-----------------------------------+

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2. The "If Not, Why Not" Regulatory Mechanism

The Mechanics of ASX Listing Rule 4.10.3

The recommendations formulated by the Council do not have the direct force of statutory law. A failure to follow a recommendation does not constitute a breach of the Corporations Act 2001 (Cth). Instead, the framework derives its regulatory authority through the ASX Listing Rules, which are enforceable contracts between the ASX and listed entities backed by statutory force under section 793C and section 1101B of the Corporations Act.

Under ASX Listing Rule 4.10.3, an entity admitted to the official list of the ASX must include in its annual report (or publish on its website with a cross-reference in the annual report):

"A corporate governance statement disclosing the extent to which the entity has followed the recommendations set by the ASX Corporate Governance Council during the reporting period. If the entity has not followed all of the recommendations the entity must identify those recommendations that have not been followed and give reasons for not following them."

This reporting architecture is universally known as the "if not, why not" approach.

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|                        THE "IF NOT, WHY NOT" DECISION FRAMEWORK                                 |
+-------------------------------------------------------------------------------------------------+
| 1. BENCHMARKING: Entity compares governance against Council's 35 Recommendations               |
|                                                                                                 |
|        +-----------------------------------+-----------------------------------+                |
|        |                                   |                                   |                |
|        v                                   v                                   |                |
| [ADOPT RECOMMENDATION]           [DEPART FROM RECOMMENDATION]                  |                |
| Disclose compliance in           Provide comprehensive "If Not, Why Not"       |                |
| Corporate Governance             justification in Statement:                   |                |
| Statement & Appendix 4G          * Identify specific recommendation departed   |                |
|                                  * Articulate commercial/operational rationale |                |
|                                  * Detail alternative governance safeguards    |                |
|                                  * Outline future transition/adoption timeline |                |
+-------------------------------------------------------------------------------------------------+

Mandatory Rules vs. Flexible Recommendations

To succeed in CPA examinations, candidates must distinguish between mandatory listing requirements and flexible recommendations:

Why Flexibility Is Essential: Market Heterogeneity

The Australian capital market is characterized by extreme heterogeneity. It hosts multi-billion-dollar global banking and resource conglomerates (e.g., BHP, Commonwealth Bank) alongside hundreds of small-cap junior exploration entities, early-stage biotechnology startups, and closely held technology firms with market capitalizations under $30 million.

Imposing an identical, rigid corporate governance blueprint across all entities would introduce acute structural distortions:

1. Disproportionate Compliance Burden: Establishing separate audit, risk, nomination, and remuneration committees populated entirely by non-executive directors would exhaust the financial and managerial resources of a micro-cap explorer.
2. Commercial Value Destruction: In an entrepreneurial startup, the founding inventor or chief technologist may be essential as Executive Chair. Forcing immediate separation of the Chair and CEO roles could derail commercial strategy.
3. Form Over Substance: Rigid statutory rules encourage mechanical "tick-box" compliance, where companies recruit compliant independent directors who lack the technical expertise required to govern a specialized enterprise.

The "if not, why not" model accommodates diversity by allowing an entity to adopt governance structures aligned with its scale, industry complexity, and developmental lifecycle.

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