Review of the Corporate Governance Principles and Recommendations: Draft 3 rd Edition

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1 Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: Fax: ey.com/au ASX Corporate Governance Council c/- ASX Limited 20 Bridge Street SYDNEY NSW November 2013 By mavis.tan@asx.com.au Review of the Corporate Governance Principles and Recommendations: Draft 3 rd Edition To the ASX Corporate Governance Council EY welcomes the opportunity to offer its views on the proposed amendments to the Corporate Governance Principles and Recommendations 3 rd Edition (Principles and Recommendations) as published by ASX Corporate Governance Council, and the proposed amendments to the Listing Rules as published by the ASX (both consultation drafts released in August 2013). As outlined in the ASX Corporate Governance Council s communique dated 16 August 2013, we are making a combined submission in relation to relevant items in both draft publications. We have taken the time to reflect on the views and feedback from our Partners and professional staff in relation to the consultation drafts and, in doing so, have considered comments and observations from talking to our clients during this period. We have therefore provided a number of comments as part of this submission on those areas relevant to our areas of expertise. Our response is set out in two parts: first, on the Principles and Recommendations themselves; and second, some more detailed comments on the related changes to the proposed Listing Rule 3.19B regarding the disclosure of on market purchases. We request that you accept this response as a private submission. We would be pleased to discuss these comments further with the ASX. Should you wish to do so please do not hesitate to contact Denis Thorn ( , denis.thorn@au.ey.com), Kenneth Weldin ( , ken.weldin@au.ey.com) or Joanne Avasti ( , joanne.avasti@au.ey.com). Yours Sincerely Ernst & Young

2 Page 2 PART 1: Corporate Governance Principles and Recommendations: General Comments In general terms we support the spirit of the ASX s approach to corporate governance over recent years, as reflected in its Principles and Recommendations. We believe that the underlying concept of encouraging listed companies to explain where they have not followed the Principles in full using the if not, why not basis is important but perhaps could be reinforced as part of this revision. We believe this flexible approach is better suited to the current challenges facing Australian businesses than would be achieved by a more prescriptive system. As such, the current language which accompanies the Principles and Recommendations around good practice rather than best practice is appropriate. Our comments below are intended to provide feedback and suggestions regarding some of the practical implications arising from how the revised Principles and Recommendations would be implemented as currently drafted. Principle 1: Lay Solid Foundations for Management and Oversight New recommendation 1.5: A listed entity should: (a) have a diversity policy which includes requirements for the board: (1) to set measurable objectives for achieving gender diversity; and (2) to assess annually both the objectives and the entity s progress in achieving them; (b) disclose that policy or a summary of it; and (c) disclose as at the end of each reporting period: (1) the measurable objectives for achieving gender diversity set by the board in accordance with the entity s diversity policy and its progress towards achieving them; and (2) either: (A) the respective proportions of men and women on the board, in senior executive positions and across the whole organisation (including how the entity has defined senior executive for these purposes); or (B) the entity s Gender Equality Indicators, as defined in the Workplace Gender Equality Act In general, we welcome the amendments to the gender diversity disclosure recommendation. In particular, we believe the new requirement to define senior executive will be helpful to investors who wish to compare gender diversity statistics across entities. Providing flexibility for an entity to report via their Gender Equality Indicators may reduce compliance loads for some entities. We believe the revised guidance regarding disclosure of achievement against measurable objectives is helpful, particularly the example gender diversity policy. We question the inclusion of this recommendation under principle 1 (Lay solid foundations for management and oversight). We suggest diversity considerations would sit more naturally under principle 7 (Recognise or manage risk), as a lack of diversity may pose a governance or commercial risk to an entity, or principle 2 (structure of the Board to add value) as diversity at Board level (and throughout the entity generally) should benefit the composition of the Board.

3 Page 3 We note that by removing the gender diversity recommendation from principle 3 (Promote ethical and responsible decision making), the ASX appears to have removed the nexus between entity performance and diversity of perspectives. We suggest guidance to recommendation 1.5 should more fully contextualise the recommendation s inclusion within the corporate governance principles (i.e., articulate importance of diversity to shareholders) so the disclosure is not seen to promote diversity for diversity s sake. Whilst we support the new flexibility to choose to report by using the entity s Gender Equality Indicators, we note some practical challenges that may arise: 1. Misalignment of reporting periods: Under the recommendation, we understand that an entity is required to disclose its progress towards achieving its measurable objectives over the reporting period (i.e., the financial year of the entity). However, we note that the Gender Equality Indicators are to be reported based on a 1 April 31 March year (with the exception of remuneration disclosure, which may be reported for the financial year ending in the 1 April 31 March period). The differences in reporting periods may lead to a disconnect between reported outcomes against measurable objectives and reported diversity statistics which may be confusing to investors. Further, the requirement to report progress against measurable objectives in relation to the reporting period may duplicate gender diversity analysis already undertaken for Gender Equality Indicator disclosure. Where an entity chooses to report its Gender Equality Indicators, we suggest the entity be allowed to report progress towards achieving measurable objectives over the same period (rather than its reporting year) for clarity of disclosure and to reduce the compliance burden. We note that as the progress towards achieving measurable objectives is no longer required to be disclosed within an entity s annual report (i.e., it may be disclosed on the entity s website, for example), varying from the reporting period should not confuse investors. 2. Reduced scope of reporting for global groups: We understand that reporting against the Gender Equality Indicators is only required by Australian companies with 100 or more Australian employees (or more than 79 Australian employees if the company previously employed more than 99 Australian employees). Reporting of Gender Equality Indicators is made on an employing company basis. We understand there is no requirement for groups of companies to consolidate their reporting. Allowing an entity to rely on reporting against the Gender Equality Indicators may therefore: o Lead to segmented reporting by listed entities, with reporting made per employing company, providing no overall view regarding the listed entity s consolidated performance; o Exclude entirely employing companies with less than 100 Australian employees; o Exclude entirely foreign companies, which may represent a large portion of an Australian listed entity s workforce (i.e., international operations); o Exclude reporting for small head office holding companies, thereby potentially excluding key executive roles from reporting; o Distort the entity s true profile regarding gender diversity (e.g., strong diversity results for one company which is disclosable may mask poor diversity results in another company which is not reportable); o Lead to unmanageable disclosure requirements if entities are encouraged to recreate Gender Equality Indicator disclosure at a consolidated entity level (e.g., GEI 6 which is currently open-ended).

4 Page 4 More broadly, we note the setting of measurable objectives and the measurement of those objectives remains limited to concepts of gender diversity - the ASX did not take this opportunity to broaden the concept of measurable diversity objectives to concepts such as age, race, ethnicity or sexual orientation. Further, we note the revised guidance to the recommendation places far greater weight on gender diversity (rather than broader concepts of diversity) than the current guidance. Whilst we acknowledge the central importance of gender diversity, we would welcome the ASX more strongly championing broader concepts of diversity along with gender. We suggest companies should be encouraged, through guidance, to identify what other aspects of diversity are important to their business and disclose actions taken to identify, measure and achieve stronger diversity in those areas. We also note that pay parity analysis, that was encouraged by former recommendation 8.1 (Board to review remuneration by gender) has now been replaced with a more qualitative suggestion that boards should review whether there is any gender or other inappropriate bias in remuneration (new commentary to recommendation 8.1). This change may lead to less transparent quantitative disclosure around pay parity - we note the Gender Equality Indicator regarding remuneration is assessed on an employing company basis, as described above, and data is typically redacted prior to publication. Principle 2: Structure the Board to Add Value Box 2.1 the defining characteristics of an independent director We note with interest the discussion regarding tenure as an indicator of director independence set out below and similar recent comment on the topic by the Australian Shareholders Association. Examples of interests, positions, associations and relationships that might cause doubts about the independence of a director include if the director:...has been a director of the entity for more than 9 years. We acknowledge the comments made at the ASX Roadshows to discuss the proposed revisions regarding the long deliberations within the Corporate Governance Council over how and why to introduce the 9 year tenure comment. We believe that this is not the ASX s intention in the case of director independence but suggest that as drafted, it is possible that this is how it will be applied. As you will know, the Australian Shareholders Association recently set out its guidance on this matter suggesting a 12 year tenure as opposed to 9 years set out in the consultation draft. In each case we are not aware of any detailed research or evidence to substantiate either number and suggest that to have different guidance issued on this topic is potentially confusing to boards and investors alike.

5 Page 5 Principle 7: Recognise and Manage Risk Recommendation 7.1 Risk Committees We note discussions at the ASX Roadshows regarding the proposed revisions to the recommendation that the board of a listed entity should form a risk committee or include within the responsibilities of an audit committee the responsibilities normally undertaken by a risk committee. On this topic our observation is that it is common for many listed entities to share the responsibilities over risk across any one of a number of different committees finance, investment, governance, health & safety or audit or in fact for it to be retained by the board as a whole. We would caution that the creation of a separate committee per se is not automatically the answer in recognising and managing risk. In line with our general comments regarding if not, why not we would suggest the wording of this recommendation does not lead companies down the path of feeling they must create a separate committee. Instead emphasis should be placed on sufficient disclosure regarding how the Board as a whole (with or without a discrete committee) recognises and manages risk linked to the organisation s strategic objectives and supporting operating models. Recommendation 7.4 Economic, Environmental and Social Sustainability Risks We note the current discussions within the Integrated Reporting landscape and the expectation that an integrated reporting framework may be finalised early in As such we would expect that this will remain a topic of interest for many stakeholders and that companies will continue to develop and progress their thinking and reporting in this area going forward. These efforts around integrated reporting will clearly have an influence on how listed entities will choose to address Recommendation 7.4. As part of this we would expect that the concept of materiality will be important consistent with existing guidance in this space such as the Global Reporting Initiative as well as risk management in its broadest sense to ensure reporting effort focuses on those matters identified as being the most significant. Principle 8: Remunerate Fairly & Responsibly Amendments to Principle 8 (Remuneration) and associated recommendations / guidance A listed entity should endeavour to pay remuneration that is sufficient to attract, retain and motivate high quality directors and senior executives and that is aligned to the creation of value for security holders. As the ASX is taking the opportunity to review the wording of Principle 8, we suggest a few amendments that would, in our view, better articulate the intention of the principle as we understand it. We suggest pay is replaced with offer remuneration opportunities as we assume the intended focus of the first half of the phrase is on structures rather than outcomes. The linkage between remuneration and value creation for security holders is challenging for companies to demonstrate. Instead we suggest the second half of the phrase be reworded to read and deliver remuneration that is aligned to the long-term interests of security holders.

6 Page 6 Revised recommendation 8.1 Role of the Remuneration Committee The role of the remuneration committee is usually to review and make recommendations to the board in relation to... The entity s remuneration, recruitment, retention and termination policies for senior executives. We note the commentary under recommendation 8.1 on page 30 of the consultation draft states the recruitment policy for senior executives should fall within the remit of a remuneration committee. We suggest that a company s recruitment policy is an issue for management (i.e., not the Board), and that, in general, a remuneration committee s role should be limited to articulating the entity s recruitment strategy and approving the contractual arrangements applying to very senior company executives. The word policy implies a degree of operational focus which is beyond the Board s remit. In determining the scope of a Remuneration Committee s role, as documented in its charter, the committee should not assume the role of management but rather limit itself to governance issues. (We note, by way of example, the ASX Limited s Remuneration Committee charter currently states the committee s role is to consider changes to recruitment strategy). In particular, we would expect a Board to focus on the company s succession strategy for senior executive or key roles. If the intention of the commentary was to promote focus on issues of succession, we suggest amending recruitment to read succession would be helpful. New recommendation 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of nonexecutive directors and the remuneration of executive directors and other senior executives and ensure that the different roles and responsibilities of non-executive directors compared to executive directors and other senior executives are reflected in the level and composition of their remuneration. We suggest the wording of the old recommendation 8.3 contained more appropriate drafting than the proposed wording. We are concerned the recommendation, as currently drafted, suggests comment should be made on internal relativities of remuneration between non-executive directors and executive directors/senior executives by applying value judgements regarding roles and responsibilities. The role of a nonexecutive director is fundamentally different to that of an executive. As such, comments regarding relativities of remuneration quantum and structure would be unhelpful. We suggest deleting the second half of the recommendation, beginning with and ensure that to the end. We further note the guidelines for executive remuneration, presented in the table on page 31 of the consultation draft, have been revised to be much more specific. In our opinion this guidance is now too prescriptive. For example, we note the guidelines state performance-based remuneration should take into account individual and corporate performance and should be linked to clearly specified performance targets. The determination regarding the level(s) at which performance should be assessed (e.g., individual, team, business unit, division, group) is a company-specific issue that should be determined in

7 Page 7 accordance with the company s overall remuneration strategy and specific business objectives. It will not be appropriate for all companies for executive remuneration to be measured at both individual and corporate levels. Further, we note many companies are not able to disclose details of performance targets in respect of key executive remuneration due to commercial sensitivity. It is accepted market practice (in Australia, as well as other markets such as the United Kingdom) that where targets are commercially sensitive specific disclosure should not be made (although where possible, disclosure may be made retrospectively). New recommendation 8.3: A listed entity should: (a) have a clawback policy which sets out the circumstances in which the entity may claw back performance-based remuneration from its senior executives; (b) disclose that policy or a summary of it; and (c) disclose as at the end of each reporting period: (1) whether any performance-based remuneration has been clawed back in accordance with the policy during the reporting period; and (2) where performance-based remuneration should have been clawed back in accordance with the policy during the reporting period but was not, the reasons for this. We agree with the ASX that disclosure regarding clawback policy is best made via the corporate governance guidelines, rather than in response to legislation (as proposed by the previous Government). We are generally supportive of the new recommendation, particularly as it will allow entities to determine for themselves what events should trigger a claw back of performance-based remuneration, and how that claw back should be effected. However, we believe that the guidance regarding how the clawback policy should be documented is too prescriptive. We do not agree that clawback policy should necessarily be a stand-alone policy, nor that executive contracts should generally include reference to the policy. How a claw back policy is best documented should be determined on a case-by-case basis by the entity. For example, where a company already includes clawback provisions in its short-term incentive and long-term incentive plan offer documentation, that company should not be required to create a separate policy nor revise contracts as long as the company is comfortable that, from a legal perspective, clawback could be actioned if triggered. We further note the operation of clawback may differ between incentive arrangements and individuals, typically due to the risk-profile of the remuneration or role. In light of this, a general or contractual clawback policy may not be appropriate. We are unclear what situations are envisaged that may give rise to disclosure against recommendation 8.3(c)(2) and suggest further guidance in respect of this aspect should be included (if the wording is retained). The only scenario we could identify was situations where the clawback policy of a company was found to be unenforceable is the purpose of this recommendation to draw out disclosure regarding legal effectiveness?

8 Page 8 PART 2: Listing Rules: Insertion of new listing rule 3.19B (disclosure of on-market purchases) On-market purchases by or on behalf of employees or directors 3.19B If an entity, a child entity, or anyone else to whom the entity or a child entity has directly or indirectly provided funds for that purpose, purchases +securities on-market under the terms of a scheme that provides for the purchase of +securities by or on behalf of employees or directors, the entity must give ASX the following information no more than 5 business days after the purchase: 3.19B.1 The total number of +securities purchased. 3.19B.2 The average price per +security at which the +securities were purchased. 3.19B.3 If all or any of the +securities were purchased on behalf of a director or a related party of a director: -the name of the director; -if they were purchased on behalf of a related party of a director, the name of the related party; -the number of +securities purchased on behalf of the director or related party; and -the average price per +security at which the +securities were purchased on behalf of the director or related party. We are supportive of greater market transparency regarding on-market share acquisitions and therefore, subject to our comments below regarding the necessity of linking disclosure to schemes benefiting employees/directors, support the introduction of rules 3.19B, 3.19B.1 and 3.19B.2. We do, however, have some concerns regarding practical implementation of the rules, as highlighted below. We understand from statements made at the ASX Roadshows to discuss the proposed revisions that the driver behind the proposed new rule 3.19B is market liquidity and transparency, rather than disclosure of director (and related party) remuneration arrangements. If the purpose of the new rule is increased transparency regarding on-market purchases by the entity or its agent, we are unclear why the disclosure obligation has been linked to schemes benefiting employees /directors; the requirements for a nexus to employee share schemes appears unnecessary. An additional observation is that rule 3.19B notification may lead the market to an inflated view regarding the number of securities that will be delivered to employees generally under an employee share scheme in any given period. We note it is common practice to recycle securities held in an employee share trust where fewer securities than held by the trust are required to satisfy a particular award. This may mean that a disconnect, in terms of timing, arises between the rule 3.19B notification and the eventual delivery of securities to employees. We do not support the introduction of proposed rule 3.19B.3 as we believe (i) the market is already provided with sufficient information regarding the acquisition of securities by directors (and related parties of the director) via rule 3.19A2 (3Y) notifications. Additionally, from a practical perspective, it is not always possible to identify how many securities (and at what price) have been acquired on behalf of an individual director (or related party). Further detail regarding these concerns is presented below.

9 Page 9 Practical issues regarding disclosure of purchases for employees/directors generally As noted above, we have concerns regarding the practicalities of the new reporting obligation. We note the new rule is to become effective from 1 January In our opinion, unless the new rule is accompanied by extensive guidance which addresses, at minimum, the issues identified below, the timetable of 1 January 2014 is too aggressive. Given the significance of the new rule and the variety of factual situations to which it could apply, more clarity is required around precisely when disclosure requirements will be triggered and what must be disclosed. In particular, we wish to highlight two key practicalities that may arise if the disclosure obligation remains connected to employee share plans: 1. Many companies use an employee share trust to purchase securities in connection with employee share plans. These trusts are independent legal entities, and in many cases the trustee is a corporate trustee unconnected with the entity. Typically, powers of the trustee are such that the trust could purchase securities in the entity without any direction from the entity to do so. Where securities are purchased on-market by a trustee, the entity would not receive any automatic notification of the purchase. In practical terms, this would mean that a notification obligation would be triggered for the entity, outside of the entity s control. We note it would be possible to put in place contractual notification requirements for the trustee to inform the entity of any purchase (or track through settlement notifications) but suggest implementation of such arrangements prior to 1 January 2014 would be challenging. Additionally, 5 trading days may be insufficient for such information flows. We further note the accuracy of the information disclosed by the entity would be entirely reliant on the accuracy of the information supplied by the trustee. We assume in this situation the entity would not be responsible for any inaccuracies of information released to the market clarity around this point in guidance would be helpful. 2. Where a broker or a trustee of an employee share trust is instructed by the entity to purchase securities to satisfy awards made under an employee share plan, in order to minimise the impact on security price it is typical for purchases to be effected over several trading days (particularly where trading volumes of the particular security are small). Multiple purchases may be made at varying security prices. It is unclear from the current drafting of new rule 3.19B whether: A single notification per instruction is required, and if so: at what point in time the 5 day clock begins to run; and whether disclosure of the weighted average security price would be acceptable; A single notification per trading day is required, and if so whether disclosure of the weighted average security price would be acceptable; or A notification in respect of each purchase is required. We suggest, for simplicity, guidance should clarify that a single notification per trading day is required, and that disclosure of the weighted average security price will be sufficient.

10 Page 10 Practical issues regarding disclosure of purchases for identified directors (and their related parties) As noted above, we do not view the introduction of proposed rule 3.19B.3 as practical or necessary. It is common market practice for employee share trusts to hold securities on an unallocated basis for employees/directors, in connection with employee share plans. Where the employee share plan is not a plan under which employees are allocated shares (e.g., it is a rights plan, an option plan, or a share appreciation rights plans, loan plans), securities are not allocated to an individual employee until vesting or exercise of the employee awards, as appropriate. The purchase of securities on an unallocated basis may also be at lower levels than the total number of securities that may be required to satisfy outstanding awards. The level at which securities are purchased will typically reflect the entity s view as to the rate of awards that will lapse due to cessation of employment, and the entity s view regarding the level of performance-based vesting anticipated. We are unclear: how an entity will determine when securities are purchased on behalf of an individual director (or a related party of the director), and the number of securities which must be disclosed, where securities are purchased on an unallocated basis. where a large purchase of securities is effected over several separate purchases (which may span several trading days) in respect of both employees and directors, how the security acquisition price in respect of the director will be determined (i.e., how will it be determined on which day, at which price, securities on behalf of a particular director were obtained). In light of the above issues, we do not believe the proposed rule 3.19B.3 is practical, as entities will not be able to provide the market with information that accurately reflects share acquisitions on behalf of directors (or their related parties) at the time the purchase is made by the trust. If, via guidance, the ASX was to clarify that acquisition refers to the point in time when securities become allocated to an individual director (or their related party), we note rule 3.19A2 (3Y) would already capture this event. Further: Any securities held by an employee share trust at the end of each financial year are disclosed in the entity s accounts as treasury securities; The shareholder approval requirement in current listing rule provides the entity with an opportunity to explain the key terms and conditions of the equity plan under which the securities may be delivered to the director (or related party of a director). The new rule 3.19B market notification requirement will not provide the entity the same opportunity to explain the scheme to investors. The lack of context around rule 3.19B disclosures may cause security holders to misinterpret the level of benefits being delivered to employees (e.g., the stretching nature of any applicable performance hurdles may not be readily evident). We believe the current disclosure obligations in respect of directors security interests provide sufficient market transparency. General comments We note that whilst we support increased transparency, introducing a new disclosure requirement regarding on-market purchases by the entity or its agent may have unforeseen consequences.

11 Page 11 In respect of disclosures made in connection with purchases connected with employee share schemes, any requirement to make a market notification may inadvertently alert the market to changes to the entity s capital management strategy more generally, which may be sensitive information. For example: If the market is notified there has been a large acquisition of securities by an employee share trust (operated in connection with an employee share plan), but no vesting date is imminent, the market may take the view the entity is signalling its security price will shortly rise as it will be seen to be adopting a capital management strategy in relation to employee share plans of hedging its costs by purchasing securities to satisfy future vestings at a low security price. For example, if at the same time each year there is disclosure in respect of a large purchase of securities to satisfy employee share scheme vestings, investors will come to expect the purchase. If one year the purchase does not occur and instead a rule (3B) notification is made as securities were instead issued, the market may infer the Board has inside information not typically held at that point in the calendar. (We note insider trading rules prevent securities being purchased on-market where inside information is held by the Board, but do not similarly restrict new issues of securities). Further, market expectations regarding large purchases may drive security sales (or short term purchases and sales) due to the expected positive impact on security price of the company s purchase. We suggest the ASX carefully consider whether the new disclosure requirement may inadvertently lead to price sensitive information being inadvertently disclosed by the entity.