Guide to principle 7

Professional services firm Deloitte and Group of 100, the peak body for finance executives from the major listed entities, have launched a guide to implementing principle 7 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations.

The third edition of the Principles and Recommendations set the benchmark for good corporate governance practices for listed entities in Australia. The updated principles take effect for an entity’s first full financial year commencing on or after 1 July 2014.

They introduce key recommendations and changes to Principle 7, further refining the recommendations to improve and strengthen risk management and increase the effectiveness of board oversight.

Four key recommendations, 7.1. to 7.4, have been substantially enhanced. Recommendation 7.1 focuses on the need to set up and manage a risk committee to oversee risk, and 7.2 on the need to annually review the risk-management framework.

The two new recommendations in the third edition are 7.3. and 7.4, with 7.3 recommending where a listed entity should disclose whether it has an internal audit function, how it is structured and what role it performs. Unlike recommendation 7.3 in the second edition, this will apply to financial statements for half yearly and quarterly reporting periods as well as year-end financial statements.

Recommendation 7.4 arose in response to an increasing focus by investors on a listed entity’s ability to create or preserve value. It is modified from principle 3 from the second edition to “act ethically and responsibly”, and is about assessing and managing economic, environmental and social sustainability risks.

To help guide companies with the implementation of the principle 7, Group of 100 and Deloitte have developed and launched a Better Practice Guide to assist members and businesses.

The guide highlights useful local and global approaches for entities to consider when implementing or reviewing the effectiveness of their risk management frameworks so they can better implement the Principles and Recommendations. However, it does not specify or adopt a particular model or approach.