What directors and company secretaries should be thinking about now
When the ASX released the draft Fifth Edition of the Corporate Governance Principles and Recommendations this week, it described the changes as an “evolution, not redesign.”
At first glance, that appears accurate. The familiar eight Principles remain. The “if not, why not” reporting framework is unchanged. Much of the drafting has simply been reorganised. But beneath that continuity are several important shifts in governance philosophy that boards should not overlook.
This is not merely a tidy-up exercise. It reflects how governance has evolved since the fourth edition was released in 2019, incorporating significant legislative reform, changing investor expectations, and lessons learned from the Hayne Royal Commission, mandatory sustainability reporting and increased scrutiny of board effectiveness.
For directors and company secretaries, the draft offers a clear indication of where governance expectations are heading.
1. Governance is becoming less about policies and more about judgement
Perhaps the most striking feature of the draft is its move away from prescriptive governance requirements towards principles-based oversight.
Throughout the document, detailed procedural requirements have been replaced with broader expectations that require boards to exercise judgement.
Examples include:
- replacing mandatory board skills matrices with broader capability assessments;
- removing the prescribed three-year independence cooling-off period;
- moving detailed independence indicators into explanatory guidance;
- shifting from policy disclosures towards evidence that boards actively oversee organisational culture.
The message is clear: the ASX increasingly expects boards to explain why their governance arrangements are appropriate, rather than simply demonstrate compliance with a checklist. This is a positive change, but it should be accompanied by clearer ASX guidance on what constitutes a meaningful explanation, since without it there is a risk of longer disclosures rather than better ones. For company secretaries, this places greater importance on the quality of board decision-making and governance disclosures.
2. The “if not, why not” framework becomes more meaningful
One of the most significant structural changes may also be one of the least obvious. Several recommendations currently contain built-in alternatives for companies that do not establish specific committees such as nomination, audit or risk committees. Those alternatives disappear. Instead, companies will need to explain why their alternative governance arrangements satisfy the underlying Principle.
This reinforces the original intent of Australia’s corporate governance framework. Good governance has never required identical governance structures. It requires boards to demonstrate that their chosen governance arrangements are effective.
While this change strengthens the integrity of the Principles, it will inevitably require smaller listed companies to produce more robust governance disclosures.
3. Removing duplication makes the Principles stronger
One of the strongest aspects of the consultation draft is what it removes. Since 2019, Australian governance regulation has expanded significantly through reforms covering whistleblower protections, electronic communications, poll voting, sustainability reporting and executive remuneration.
Rather than reproducing these statutory obligations, the draft appropriately removes recommendations that now duplicate legislation. This makes the Principles shorter, clearer and more focused on governance rather than compliance.
In my view, this is one of the most sensible reforms in the consultation paper. Corporate governance guidance should complement legislation, not repeat it.
4. Board composition receives a significant refresh
Several proposals relating to board composition deserve close attention. The proposed removal of mandatory board skills matrices represents a shift away from form towards substance. Boards will instead need to assess whether they collectively possess the skills, knowledge and experience required to govern effectively, and to disclose both the assessment process and the outcome. Similarly, diversity reporting evolves beyond numerical targets.
While the 30 per cent gender objective for ASX 300 companies remains unchanged, boards will now be expected to explain how diversity is incorporated into succession planning, including diversity of thought, experience and perspectives.
These changes reinforce that succession planning is no longer simply a nomination committee activity; it is becoming a strategic governance responsibility.
5. Independence becomes more nuanced
The draft also proposes three important changes to director independence.
Most notably:
- the removal of the three-year cooling-off period;
- increasing the shareholder influence threshold from 5% to 10%; and
- relocating detailed independence indicators into explanatory material.
Collectively, we do not consider these changes an improvement. Without objective benchmarks, boards will need to exercise considerably more judgement when assessing independence, and investor confidence that boards can independently oversee management depends on that judgement being demonstrably robust. Removing recognised reference points risks reducing consistency across the market and increasing scrutiny of board decision-making.
This is likely to become one of the more debated aspects of the consultation.
6. Culture and remuneration continue to evolve
The draft reflects a clear shift towards governance of organisational culture. Rather than asking whether companies have whistleblower or anti-bribery policies, the ASX now focuses on whether boards actively monitor culture and receive reporting on material breaches of key governance policies.
Similarly, the introduction of remuneration adjustment mechanisms acknowledges the growing expectation that boards should have the ability to reduce or recover executive incentives where circumstances warrant.
The remuneration proposals are not particularly surprising and reflect international trends that have been developing for several years. More contentious, however, is proposed Recommendation 3.1, which would require boards to “have regard to security holders and other stakeholders” in supporting long-term sustainable value. Directors’ duties under the Corporations Act 2001 (Cth) are owed to the company, and introducing broader stakeholder language into a governance Recommendation risks creating ambiguity about whether directors are meant to balance competing stakeholder interests rather than exercise judgement in the company’s best interests. Stakeholder impact is undoubtedly relevant to good governance, but it sits more naturally within risk management under Principle 7 than as a freestanding cultural obligation under Principle 3.
What boards should do now
Although implementation is proposed for financial years commencing on or after 1 July 2027, that timeframe should be reconsidered. Given the cumulative effect of recent regulatory change, including the staged introduction of mandatory sustainability reporting, entities would benefit from at least one further full reporting cycle, pointing to a commencement date of 1 July 2028. In the meantime, boards should begin considering the practical implications now.
Company secretaries should expect to review:
- board and committee charters;
- governance statements;
- independence assessment processes;
- succession planning frameworks;
- remuneration policies;
- governance reporting; and
- board evaluation processes.
Many organisations will already satisfy the substance of the proposed Principles. The challenge will be demonstrating that effectiveness through governance reporting.
Final observations
Overall, the draft Fifth Edition represents a thoughtful and pragmatic evolution of Australia’s governance framework. Its greatest strength lies not in introducing new governance obligations, but in modernising existing expectations and removing unnecessary duplication.
The consultation will undoubtedly generate debate, particularly around independence, sustainability disclosures for smaller entities and the removal of several long-standing governance conventions are also likely to be debated. However, the broader direction is difficult to dispute.
The draft recognises an important reality. Strong governance is no longer measured by the number of policies a company publishes. It is measured by the quality of board judgement, the effectiveness of oversight and the transparency with which boards explain their decisions.
Author: Daniel Petravicius, Senior Company Secretary, Governance
