THE NARROWING of an ASX corporate governance principle should lead to more meaningful risk assessments from companies and make it easier for lawyers to advise their clients on risk disclosures, according to a risk management expert.
The ASX Corporate Governance Council has suggested removing the need for CEOs and CFOs to report to their board on the “efficiency” of their risk management process under Principle 7 of the ASX’s Principles of Good Corporate Governance and Best Practice Recommendations, and instead just requires adherence to board policy on “financial reporting risk”.
“I find it interesting that the proposals for change are actually narrowing the requirement to sign off in relation to risk,” said Michael Coleman, the national risk manager of KPMG Australia. “I think it is a good thing. I think that what we previously had was too broad.”
Principle 7.2.2 of the existing Recommendations says the CEO and CFO should state to the board in writing that “the company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects”.
The new Recommendation 7.2 says CEO and CFO statements given under 295A of the Corporations Act should be “founded on a sound system of risk management and internal control which implements the policies adopted by the board in relation to financial reporting risks, and that the system is operating effectively in all material respects”.
The change would make it “easier for boards to understand what the corporate governance guidelines are expecting of them and their risk management”, Coleman said.
Coleman said the draft Guidelines also better define the board’s role in establishing company policy on risk management and internal controls.
“That was always something that was very difficult for boards to comment upon because it was a fairly broad definition of risk management or risk identification,” he said. “And it was also very, very difficult for boards to comment on the efficiency of their risk management processes.”
He said lawyers had been forced to advise their clients “to be very careful” about how they dealt with Principle 7. “Of course the lawyers [say]: ‘if you make too many statements that are positive and then something goes wrong then you’re going to find yourself in deep trouble’.”
By narrowing the definition, and removing “the almost impossible comment about efficiency”, Coleman said we are likely to see more meaningful statements made by companies on the risks they face.
Submissions on the draft changes to the Guidelines are due by 9 February.