Getting Principle 7 Ready 

While the most recent changes to the ASX Corporate Governance Principles and Recommendations have been effective from 1 July 2014, many of those changes will come home to bite for the first time as part of the 14/15 reporting season. We have been working with clients to help them to early-adopt and get ready for their disclosures to the market.

Of particular interest is ASX Principle 7 which asks boards to ask themselves whether they consider that their risk framework is sound, considerations on risk appetite as well as imposing if-not, why-not reporting on internal audit.

There will be many interpretations of what “sound” means. Some will be taking a view that sound is “ISO 31000 compliant”, or maps well against a selected maturity model. While this is a solid foundation, in our view it doesn’t necessarily address what is being asked either in intent or substance and can leave organisations exposed. Our standing advice is that the relevant test is whether the risk framework is effective, which is a more pointed question. Listed companies will want to be clear on their framework and approach to this question and put a sustainable process in place. There is still time. Talk to us to find out more.

Internal Audit gets a disclosure trigger this year, and our standing advice is that analysts will be looking to see that this is more than a token effort. We’ve worked with the Institute of Internal Auditors to develop their model guidance on this area, and this can be found within the client-only section of our website here. If you need assistance with function design, sourcing or model disclosures, give us a call.

The latest Recommendation’s also puts the question back into the debate as to whether a separate risk committee is required. Our standing advice is that the committee structure needs to be fit for purpose, and there is a structured series of questions that should be answered before forming a view on this.

Irrespective of structure the designated committee needs to consider a range of issues, in particular, the soundness of the risk framework, and whether the organisation is operating within risk appetite set by the board. More on this below.

Lastly there is a somewhat cryptic discussion of sustainability risks. This is a tentative step towards consideration of external risk impacts rather than only focusing on the impacts internal to the organisation. Our advice is that steps towards integrated and streamlined reporting that considers value in a broadest sense including extended forms of capital and social license will be time well spent.

Call us if you need assistance.

As a member of the ASX Corporate Governance Council for the current and previous editions and co-author of the Council's official guidance on Principle 7, Todd is very well qualified to help listed entities achieve meaningful results that address both the form and intent of the Principles and Recommendations.  With a focus on risk effectiveness, we can help you put something in place that is pragmatic and sound.