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Heed the Warning on Risk Management - ASX Principles Updated

· Steve Cusworth,ASX,Risk Management,Analysis,Risk

With the release in February of the updated ASX Guidelines on Corporate Governance Principles and Recommendations, risk management and appropriate oversight by Boards has again come back into the spotlight.

The Fourth Edition of the Guidelines come hot on the heels of the ‘Banking Royal Commission’ that exposed varying levels of poor behaviour and non-compliance and corporate Australia (not just the big banks) is busy assessing the damage and what they need to do – both to repair their reputations and to fix the underlying problems.

The new edition is more of an update as opposed to a major rewrite of the existing Guidelines but there are some key elements that have been called out, namely that listed entities should pay greater heed of their reputation in order to protect long term value for shareholders, embrace comprehensive reporting beyond financial statements and take a more proactive stance and offer guidance to the market on exposure to environmental and social risks.

Reputation comes from both a statement of values and delivery against those values. Empty rhetoric will please no one and in fact elevates reputational risk over time – yet stating nothing sets an artificially low bar and broadcasts that there may be something to hide. This could spill over into further regulator scrutiny and where failure to act could see direct intervention into an industry or even an individual firm with potentially catastrophic reputation and compliance impacts.

Comprehensive reporting carries its own risks as it becomes a benchmark to measure against – but sunlight is a great cleanser and listed entities should not be afraid of scrutiny if they are committed to the objectives of good governance.

Perhaps the most controversial of the updates, the requirement for greater disclosure around environmental and social risks may suggest an element of looking for all the possible areas that could negatively impact on an organisation and reporting against them. This is a worst-case approach and instead, with the appropriate tools and methodologies to impartially assess the types of risks that an entity may be exposed, the Board or the Risk Committee can then make an informed decision of what is material and should be declared.

Importantly, the updated Guidelines should be considered an opportunity for listed entities to improve their visibility of all risks and ensure they are on a proactive risk management footing. Even if they choose to ignore the recommendations, the rest of the community – politicians, regulators, media, customers - will hold them to account.

Steve Cusworth is the Managing Director at FPL Advisory.

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.