Applying governance codes

Identify the framework before applying a rule

The guide uses three different levels of guidance. The G20/OECD Principles of Corporate Governance 2023 provide an international policy framework. The UK Corporate Governance Code 2018 addresses company governance in its defined UK listing context. The ASX fourth edition, published in 2019, sets out recommendations for ASX-listed entities.

They share concerns about accountability, reliable information and effective boards, but their details are not interchangeable. A recommendation about committee composition in one code cannot automatically be presented as a statutory rule in another jurisdiction. The first step in a case is to identify the entity, date, applicable instrument and particular issue.

The 2018 UK Code applied to premium-listed companies for accounting periods beginning on or after 1 January 2019, including relevant overseas-incorporated companies. This is the historical scope used here. Later UK codes and changes to listing categories are outside this lesson.

Principles, provisions and explanations do different jobs

A principle states an intended governance outcome. More detailed provisions or recommendations help organisations implement it. The UK approach allows an explanation for departure from a provision; the ASX approach similarly requires disclosure and reasons where recommendations are not followed. Separate legal and listing-rule obligations still need to be met.

A useful explanation identifies the departure, the organisation's circumstances, the alternative arrangement and why it addresses the underlying concern. If temporary, it should explain the intended timing of change. Boilerplate language such as 'our board considers its practices appropriate' gives readers little basis for evaluation.

Use the OECD framework to locate the problem

The guide's 2023 OECD framework spans six areas: the institutional framework; shareholder rights and equitable treatment; investors and intermediaries; disclosure; boards; and sustainability and resilience. These provide a way to organise a governance diagnosis without assuming that the OECD text itself creates a directly enforceable company obligation in every country.

A barrier that prevents overseas shareholders from participating meaningfully belongs in a rights-and-access analysis. An asset manager voting without considering a conflict raises an investment-chain issue. A board publishing unsupported environmental targets raises disclosure, oversight and sustainability questions together.

The categories can overlap. Good analysis explains the connection instead of forcing each fact into only one box. It also distinguishes the remedy needed at company level from a gap that may require action by a regulator or policymaker.

Concept sources: G20/OECD Principles of Corporate Governance 2023 — the 2023 edition is the primary source named in the supplied guide, including its new sustainability-and-resilience focus.

Turn an OECD issue into an actionable response

Elmbridge's controlling investor sells a service business to the company. Minority investors receive only a short notice, the valuation assumptions are withheld, and the board includes several representatives of the seller. The central issue is not merely that a related party is involved. It is whether the transaction is assessed and approved fairly, with adequate information and protection against abusive self-dealing.

A useful response would identify the conflict, establish an independent assessment process, disclose material information and follow applicable approval requirements. It would also consider how minority investors can challenge a breach. Saying only 'improve transparency' leaves the mechanism unexplained.

If Elmbridge also announces an emissions target, a separate analysis asks whether the target has a credible basis, relevant measures and progress reporting. A future ambition should not be presented as a present achievement. The board should connect the commitment to strategy, investment decisions and the risks it is willing to accept.

Read the ASX principles as a connected system

The guide's eight ASX principles move from roles and board capability through culture, reporting, disclosure, investor participation, risk and remuneration. The following table is an original case-analysis aid; consult the fourth-edition source for the exact recommendations and commentary.

The point is not to memorise a slogan and stop. Explain the fact that creates a weakness, the principle it threatens and how the proposed action changes the decision process.

Capability includes diversity, succession and time

Under the guide's ASX framework, a board skills matrix helps identify existing capability and gaps. Selection should address the organisation's needs rather than simply reproducing the networks of current directors. Induction and continuing development help directors remain effective after appointment.

Diversity is more than a statement of support. The fourth edition includes measurable gender-diversity objectives and related disclosure; for relevant ASX 300 entities it specifies an objective of at least 30% of directors of each gender within a stated period. This is the historical recommendation used in the guide, not a claim that every Australian company is subject to an identical statutory quota.

The UK 2018 Code emphasises a formal appointment process, succession and annual evaluation. It includes annual director re-election and, for FTSE 350 companies, externally facilitated board evaluation at least every three years. The chair's tenure beyond nine years is addressed with limited-extension and explanation provisions. These details should be applied in their own framework rather than merged with the ASX approach.

Compare independence and committees carefully

The ASX fourth edition recommends a majority-independent board and an independent chair separate from the chief executive. The UK 2018 Code recommends at least half the board, excluding the chair, be independent non-executive directors, with the chair independent on appointment. These are different calculations.

For audit committees, the ASX recommendation is at least three non-executive members, a majority independent, chaired by an independent director who is not the board chair. The UK 2018 provision calls for independent non-executive members, normally at least three, with a two-member provision for smaller companies; the board chair should not be a member. Relevant financial experience and collective sector competence matter alongside the headcount.

Mandatory requirements must also be checked. The ASX Listing Rules impose particular audit-committee obligations on entities within specified indices. An explanation under the recommendations does not override a separate mandatory listing rule. Similarly, the ability to explain a code departure does not permit a company to disregard legislation.

Reporting integrity extends beyond audited numbers

The guide's ASX discussion connects audit-committee oversight with chief executive and chief financial officer declarations before the board approves financial statements. It also addresses verification of periodic corporate reports that are not externally audited or reviewed. A sustainability report or investor narrative should not escape scrutiny merely because it is outside the financial audit.

The UK 2018 framework asks the board to consider whether the report as a whole is fair, balanced and understandable. It also addresses risk assessment, review of controls, going concern and longer-term prospects. These are related but distinct tasks. A going-concern assessment does not automatically provide a complete explanation of the business's longer-term resilience.

An original way to test a report is to ask whether a reader could reconcile its positive story with the risks and evidence elsewhere. If the opening pages claim dependable growth while the financial notes disclose serious customer concentration, the board should consider whether the overall communication explains the relationship clearly.

Culture must reach the board through evidence

Values and conduct policies should influence behaviour, not sit separately from business decisions. The ASX framework includes whistleblower and anti-bribery policies, with material incidents or breaches reaching the board or an appropriate committee. The UK 2018 Code similarly connects purpose and values with culture and mechanisms for the workforce to raise concerns.

Workforce engagement can take different forms under the UK framework, including a workforce director, an advisory panel or a designated non-executive director, with explanation of effective alternatives. The purpose is to make the workforce's perspective available to the board; choosing a mechanism does not prove that concerns are heard or acted on.

The UK Code also addresses significant shareholder opposition. Where 20% or more of votes are cast against a board recommendation, the 2018 provision calls for explanation and follow-up, including an update within six months. This is distinct from Australia's two-strikes remuneration mechanism. Similar percentages or voting situations must not be treated as the same process.

Risk and pay should reinforce the same strategy

A board cannot credibly say that safety is essential while rewarding executives solely for output regardless of incidents. Remuneration arrangements should support strategy, values and appropriate risk-taking. A committee needs to understand how measures can be manipulated and how outcomes will be assessed over time.

The UK 2018 Code includes discretion over formulaic outcomes, recovery or withholding provisions, longer-term shareholding arrangements and consideration of workforce pay. Its treatment of non-executive remuneration also differs from executive incentives. The guide's ASX discussion similarly distinguishes remuneration policies for executives and non-executives and addresses hedging of equity-based rewards.

For a case answer, explain the behavioural mechanism. A bonus based only on new contracts may encourage unsuitable sales or unrealistic promises. Adding a quality measure helps only if it is reliable, material to the award and not easily overridden. Committee independence, clear policy and transparent reporting support the design but do not replace an assessment of the incentives themselves.

Build a focused recommendation

Elmbridge has five directors: the chief executive, finance director, founder-chair and two external directors. One external director owns the company's principal service provider. The audit committee consists of the chair and finance director. Management publishes a presentation describing an unsigned project as contracted revenue.

Separate the issues: independence needs assessment; the audit-committee arrangement falls short of the relevant benchmark; and the market statement needs immediate review through the disclosure process. Recommend a suitable committee structure and skills, conflict handling and verification of the project claim. Do not suggest that appointing one additional director automatically fixes the reporting problem.

Then state the governing framework and any information needed before a final conclusion. Is the entity ASX-listed? Does a mandatory index-based rule apply? Which relationships are material? What exactly has been agreed with the customer? A strong response is specific without inventing missing facts.

Sources and further reading

Study-guide reading: CPA Australia, Ethics and Governance, fourth edition, November 2023, Module 3, printed pages 178–195 and 206–214, including the UK Code appendix.

• G20/OECD Principles of Corporate Governance 2023.
• ASX Corporate Governance Principles and Recommendations, fourth edition, February 2019.
• UK Corporate Governance Code, July 2018. Use this edition for the guide's comparisons, not the later code.