Case studies

The draft’s Principle 2 and Recommendations 2.1–2.3 address several aspects of board composition.

Principle: Identify what is being assessed and for what purpose

Applying this principle would support separate assessments of capability, diversity, and independence. Skills, knowledge, and experience concern capability; diversity concerns differences in composition; independence concerns relevant interests and relationships. Each assessment needs appropriate criteria and evidence.

For example, the draft could clarify whether experience, perspectives, and gender support diversity of thought, are separate composition objectives, or both. It could also state that directors’ skills, knowledge, and experience are considered together. This would avoid “collective” being read as referring to teamwork attributes.

The draft sets out Principles, Recommendations, and Explanatory Material. Recommendation 1.1 concerns the roles and responsibilities of the board and management.

Principle: Determine what the arrangements are for

Applying this principle would help clarify the function of each part of the framework. A Principle could state what the arrangement should achieve, a Recommendation could identify a supporting practice, and Explanatory Material could explain its application.

For example, Recommendation 1.1 could specify a disclosed board charter setting out the roles and responsibilities of the board and management, and the matters reserved for the board. This would identify a practical means of giving effect to the Principle’s distinction between those roles.

Recommendation 2.4 concerns director independence and board judgement.

Principle: Use clear concepts and examine their relationships

Applying this principle would support distinguishing three questions: whether a director is classified as independent, what proportion of the board is independent, and whether the board can exercise independent judgement.

For example, the explanation could recognise that a director classified as non-independent can exercise objective judgement, while a director classified as independent may have a bias or conflict concerning a particular matter. It could then explain how independence, alongside other practices and qualities, supports the board’s judgement.

The first sentence of Recommendation 3.1 presents a duty as something the board “should” do.

Principle: Use clear concepts and examine their relationships

Applying this principle would support making both the status of the duty and the person to whom it applies clear. For example, the sentence could be removed, with any necessary explanation identifying who is required to do what and the source of that requirement.

The Explanatory Material for Recommendation 4.2 refers to internal and external assurance, while the glossary defines “assurance engagement” by reference to external providers.

Principle: Use clear concepts and examine their relationships

Applying this principle would support clarifying the relationship between those terms. For example, the explanation could distinguish the wider range of assurance activities from the defined category of assurance engagements, so readers can tell which activities each provision covers.

Recommendations 1.3 and 1.4 specify different evaluation frequencies: periodic evaluation for the board, its committees, and individual directors, and evaluation of senior executives at least once in each reporting period. The draft’s Principle 1 uses “regular” for both.

Principle: Take circumstances into account

Applying this principle would support wording that accommodates the different roles and review intervals. For example, the Principle could refer to evaluation at intervals appropriate to the relevant role, while the Recommendations retain their specific frequencies.

The ASX framework uses an “if not, why not” approach to explaining departures from its Recommendations.

Principle: Explain the adopted arrangements and give reasons for their design and use

Applying this principle would support asking entities to explain how their arrangements contribute to the relevant ASX Principle. For example, an entity following a Recommendation could explain how it applies the practice and why it is suitable and effective. An entity departing from a Recommendation could explain its reasons, the arrangement used, its contribution to the Principle, material risks and mitigation, and its duration and review.

The explanation could also distinguish an ongoing alternative from an unresolved shortfall. An ongoing alternative would identify when or in what circumstances it will be reviewed. An unresolved shortfall would identify the limitation, the action being taken, and the timeframe. Direct links to the relevant disclosures would help investors assess these explanations.